Adjusting Forecasts in a Down Economy: How to Set Expectations
Up-to-date goals and expectations are critical to staying solvent and successful in a volatile economy.
For many businesses, projections from the beginning of this year no longer remotely apply to their current operations.
In response, businesses must revise their financial forecasts amid the economic fallout from the coronavirus.
This means reconciling your financial forecasts from the beginning of the year with the current outlook.
As inventories bloat and sales slump, calculate which costs to cut and recalibrate your approach to profitability. Since the recovery timeline is uncertain, it’s best to brace for a prolonged slowdown.
Use this article to learn how to adjust financial expectations for success in a down economy.
Adjust to a Unique Recession
The economic shutdowns on both national and local levels due to coronavirus are entirely novel.
Business and consumer confidence plummeted simultaneously, taking both supply and demand with them.
The impact of those changes has created a crunch for the U.S. and global economy, since it is powered by demand for services. Revenues are sliding, costs are rising, and credit lines are being drawn.
Meanwhile, general policy tools such as interest-rate cuts and fiscal stimulus have done little to enliven markets.
Economic inactivity is the reality until health authorities say it’s safe again – and businesses must plan accordingly.
Expect financial dislocations in your industry, revenue, and cost fluctuations, as well as opportunities to capitalize on the upheaval.
Revise Down Forecasts
The impact of coronavirus is widespread but felt uniquely by each business.
To remain solvent, businesses must revise the forecasts, KPIs, and targets set at the beginning of the year.
It’s important to react quickly to shrinking profit margins.
As demand drops and prices fall, margins may fall but so too can costs. You must understand clearly where your profits and losses are coming from.
Start by assessing how expenses have shifted due to shrinkage in supply and demand.
You may be able to favorably renegotiate contracts with suppliers and contractors, while other costs may have increased. Be realistic about cost-cutting and remember that expenses may shift in months to come.
Reassess revenue projections with an eye for each stage of the sales funnel. For example, if you aren’t able to invest as much in inbound marketing such as content marketing or paid search ads, that impact may funnel up to your revenue generation.
Analyze profitability by product and customer to see where revenue is expected to hold, increase, or erode in the coming months. Then create new KPIs, sales targets, and forecasts based on these expectations.
Aim to Increase Revenues
Businesses must get creative about revenue generation in a down economy.
For example, as competitors suffer liquidity issues or fall short of customer expectations, you can hire salespeople and increase marketing to gain those unserved customers.
Research shows that maintaining or increasing ad output during a slowdown enables you to outsell businesses that cut back. Short-term techniques like sales and price promotions work to attract savings-conscious consumers.
It’s equally important to maximize your current customers.
Implementing a rewards or loyalty program is an effective way to generate profitable upsells and cross-sells.
By showing your customers that you care, you guard them against the competition. Similarly, good customer service is core to earning revenue from both new and current customers.
Balance Cost Reductions with Future Investments
While most businesses are cutting back to save cash, it may be wise to invest in the future.
This is because interest rates are at an all-time low and everything you need to operate is dropping in price.
If your margins and revenue projections allow it, consider:
- Expanding capacity
- Exploring new markets
- Making acquisitions
- Improving operating processes
Look for ways to cut back while improving operations. For example, creating lean processes is effective because it both lower overheads and frees up capital.
Training also is best done during slack periods. Upgrading the skills of your employees with on-the-job instruction or free online classes can pay dividends later.
Companies that develop better processes, products, or investments during a recession can emerge stronger on the other side.
Avoid Overcorrection as Economy Recovers
Experts say that recovery will likely be quick but not instantaneous.
Instead of a V-shape, the recession may take a U-shape as the economy drags along before picking up again.
Companies will need time to restore inventory, supply chains, and normal staffing levels after months of inactivity. People’s confidence and spending habits may also change, leaving them less inclined to spend.
You’ll need resources to operate when the economy stabilizes, but overestimating your productivity or revenue in the early days of recovery could be disastrous.
For example, if you laid-off most of your employees, the delay and cost of rehiring your workforce will be sizable.
Meanwhile, service providers may have disappeared which can further disrupt your ability to run at capacity.
It’s best to be conservative when estimating post-recovery revenue, and realistic about costs and time needed to get back up to speed.
Adjusting Forecasts in the Coronavirus Economy
Accurate financial forecasts and targets help you stay solvent in tough times. Adjust forecasts to inform your business strategy and improve your revenue.
Be sure to look for available loan forbearances, tax delays, and stimulus payouts your company qualifies for. Spending every dollar with intent is the best way to weather the storm.