Debt Crisis: Forecasting to Survive the Pandemic

Written by Trovata Team
October 27, 2020

Forecasting in an Unpredictable Economy

“The COVID-19 pandemic has triggered deep and rapid disruption to businesses worldwide. Regardless of size, sector or region, falls in demand, supply and productivity are impacting liquidity, and many companies are worried about being able to meet their outgoings.” –Grant Thornton

Under normal circumstances, CFOs use cash flow forecasts to model the organization’s financial future and keep an eye on potential problem areas. During the COVID-19 crisis cash forecasting has become a crucial tool for CFOs facing a myriad of questions surrounding liquidity, lines of credit and the business’s financial position.

Many business leaders have begun to adopt scenario planning techniques to anticipate the continued effects of the pandemic. Scenario planning allows a business to tailor forecasts to answer ‘what if’ questions about changing revenue streams, potential closures, emerging COVID hot spots and government regulations.

Scenario Planning to Avoid a Debt Crisis

Scenario planning will not act as a silver bullet for businesses facing a cash crisis, but this tool can be applied to alleviate the unpredictability that comes with operating a business during a pandemic. Here are three steps business leaders can take to implement scenario planning in their business.

  1. Determine Forecast Inputs

“The challenge for companies is that collecting data for crisis management and scenario planning is very different from the ‘normal’ process. A far wider range of internal and external data is typically needed, sitting across a large number of sources, from ERP systems to emerging customer trends or new supply chain factors (i.e. extended lead times).” –PWC

Typically businesses have used historical data to build their forecasts. However, the COVID-19 pandemic has made this difficult as businesses have little to no historical data to work with.

Many CFOs have been forced to get creative, identify the new trends impacting their business and reassess their forecast inputs. Forbes contributor, Stephen Wunker,  recommends using the “PESTLE”  framework for identifying the factors that changed your business function and consumer behavior.

debt crisis
PESTLE is one approach to surface implicit assumptions NEW MARKETS ADVISORS

This holistic approach is a great starting off point for gathering data to include in a scenario plan, as it forces leaders to re-evaluate the needs of the business and develop an all encompassing path forward.

  1. Develop Scenario Based Forecasts

“We recommend that you start by framing your rapid response with the four most relevant and distinct future scenarios, spelling out the specific risks and opportunities in each case. Focused trend research, ideally with the aid of digital trend sensing technologies, is a key first step.” – Deloitte

To start, businesses should identify the top four most pressing scenarios. Is your business being strangled by a broken supply chain? Are you being restricted by social distancing guidelines?

Once the CFO has decided on key data inputs and four target scenarios the data can be modeled through the businesses forecasting models. It is important to understand the assumptions made by the existing models and the finance team and challenge them to see if these assumptions hold in a COVID business environment.

  1. Take Action

“Effective scenario planning requires flexibility. One of the major benefits of the strategy is that it allows you to see how a single idea might play out across multiple hypothetical futures. You can use this tool as a way to develop ideas that will win even when unexpected changes occur, but you’ll need to continue to adapt your plans with changing trends.” –Stephen Wunker, Forbes

While scenario planning is not a crystal ball, it can enable business leaders to anticipate the effects of different solutions. By analyzing the results of the forecast, a CFO can decide whether it is best to prevent a cash deficit by applying for a line of credit, or negotiating with lenders.

Lastly, “black swan” events like COVID, and natural disasters are unfortunately becoming more and more common. Once the economic storm brought on by the pandemic has passed, it will be important for CFOs to take the time to reflect on their response to the pandemic. Which decisions worked well? Which plans did not? This reflection will allow businesses to develop a framework for combating future disruptions.

Staying Ahead of the Digital Curve

With many businesses facing new challenges, it is crucial that CFOs take full advantage of their team’s time and the latest technology. However, too many organizations are unable to utilize scenario planning because of the human and financial resources required to create and analyze the forecasts.

“Not enough companies can adapt to quickly changing circumstances. Executing strategy going forward entails an organization that can adapt and move at the speed of how strategy evolves. Executives recognize this: about 40% indicate that they plan to implement agile practices, build a culture of innovation and engage in more inorganic transactions in the next three years.” –EY

Financial digital transformation has provided business leaders with new tools that can increase the efficiency and accuracy of the forecasting process. Trovata combines API connections, AI and machine learning to allow CFOs to quickly create custom cash forecasts, on demand.

When it comes to scenario planning, or forecasting in general, speed is key. Trovata’s low-lift, low-cost tool is giving CFOs the tools they need to make quick and confident decisions. With no onboarding, real-time cash insights and automated reporting, Trovata is providing business leaders the tools to navigate the effects of COVID-19.

Want to learn more about how Trovata is helping CFOs automate their cash management? Click here for a guide for CFOs on how to lead on digital transformation.

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