When preparing for different scenarios, business leaders should review the forecast to understand company risks and opportunities and make informed decisions.
The last installment of the “How to Prepare for a Recession” blog series took a look at business forecasts: what they are, why they matter and how they are created. Once a business forecast has been created, the next step is using it to prepare for various scenarios.
WHAT INPUTS SHOULD BE TESTED?
In order to make the best use of the forecast, the model should accommodate a variety of inputs. The most important value of a forecast is its ability to identify the potential outcomes of a variety of scenarios.
Common inputs used when creating a model include:
- Product unit-volume growth rates
- Increased or decreased number of project bids (and the change in staff to support these projects)
- Pricing increases
- Customer losses and gains
- Channel changes, such as a switch from direct-to-consumer (DTC) sales to a distributor model or vice versa
- Material cost increases or decreases, including delivery (e.g., container cost price increases seen during the shutdowns)
- Working capital or liquidity shortages (which will be covered in the next blog post in this series)
- Significant short-term product sales opportunities (companies sold a lot of masks and testing kits during the height of the pandemic, as one example)
If your model is effectively constructed, the outcomes of testing a range of potential changes to these inputs will highlight where you should focus your attention in order to mitigate potential downside outcomes, enhance certain product sales or reduce costs.
HOW DO THESE TESTS HELP WHEN MAKING DECISIONS?
Forecast models can reveal the units required to meet anticipated demand, the requirements of creating those units and the resulting profit and loss. This ensures an output that shows working capital, liquidity and potential capital requirements, depending on the inputs.
In the next installment of this series, learn more about working capital requirements and how much cash to keep on hand — the newly prepared business forecast is essential to making this calculation. To learn more about forecasting or preparing for a recession, contact GHJ’s Growth Planning and Strategic Advisory team.
