With a recession officially started, businesses must prepare for various scenarios by creating a forecast.
Businesses must apply practical, unemotional and qualitative thought processes to consider the experiences endured during the shutdowns, how they may be impacted and the steps that must be taken to survive and potentially prosper during this downturn.
Previous installments of the How to Prepare for a Recession series outlined the initial steps that businesses must take and the essential ratios that businesses should pay attention to.
In this installment, learn how to create a metrics-driven forecast with flexible inputs to consider various scenarios to see what potential outcomes might come from considering different assumptions. The process of creating this forecast with sufficient granularity opens many business owners’ eyes to basic but often overlooked fundamentals. A robust forecast that creates indicators of change (good or bad) puts businesses in a better position to be proactive with sales and operating strategies to weather and take advantage of oncoming economic storms.
HOW TO CREATE A BUSINESS FORECAST
When starting a project with clients, GHJ’s Growth Planning and Strategic Advisory team’s first step is to examine the business as a whole:
- Analyzing product, customer and distribution behavior for trends in market opportunity, sales, margins and value drivers
- Reviewing historical data for the past several years, to the extent it is available, and creating unit and pricing information by each of the above measures
- Building out a forecast using this data to inform how the future can unfold
- Beginning with unit growth by channel, product and/or customer, then layering in anticipated pricing data
- Building variables into this forecast model that can be used to drive different possible outcomes based on varying inputs
By doing this, owners can see which products and services create the most profitability for the business — not only in margins, but also in accounting for associated overhead costs such as sales compensation, rent and other expenses that impact overall earnings.
When costing out products and services, owners should consider any potential geographical challenges, whether political, logistical or otherwise. It is also important to consider alternative sources. How will that play out in your forecast, and how will it ultimately impact the business?
WHY FORECASTING MATTERS
A good business forecast can identify forward-looking signals. It enables business leaders be proactive to a coming challenge instead of scrambling to find a solution to a previously foreseeable problem when it arises. The utility of a robust model in a recessionary environment cannot be overstated.
Forecasting how to position a business in a recession highlights any risks and opportunities to assist the owner in making informed decisions about what direction to take. For example, if a business sells a discretionary product, it may be beneficial to forecast how a slowdown in final purchases might impact the business’s customer purchases or even their customers’ viability to survive a downturn.
As strategic thought is given to how a downturn could play out, some variables that should be considered include:
- Materials supply shortages
- Inflationary price pressures on inputs or labor
- Demand changes from customers
The next installment of this series will look at utilizing the forecast to determine potential outcomes of different scenarios to highlight risks and opportunities. To learn more about forecasting or preparing for a recession, contact GHJ’s Growth Planning and Strategic Advisory team.