COVID-19 certainly created a great deal of uncertainty for most companies and, though the economy is now on an upswing, the reach of the pandemic remains. Companies—both those who were negatively impacted by COVID-19 and those who benefitted from the pandemic’s tailwinds (grocery and healthcare services, for instance)—still face significant challenges in forecasting both revenues and additional expenses related to supporting that growth. While the worst may be over, the reality is that the uncertainty it is caused is here to stay for the remainder of 2021, and likely into 2022.
In complicated times like these, it is tempting to throw up your hands and simply not focus on forecasting—after all, if the experts are having a hard time doing it, who could blame a business owner for putting it off? But, despite the difficulty, this is the wrong decision. A lack of rigor in forecasting revenues often causes paralysis in planning and prevents management teams and lenders from taking needed actions.
Restructuring professionals live every day in a world of significant uncertainty. We understand the need to forecast based on the best available information and to build sensitivity analyses around the range of potential outcomes to understand how each eventuality could impact the business and guide real-time decision making. This vital work also forms the foundation for productive engagement with lenders, customers and suppliers, and sensible forward planning.
Having watched the evolution of forecasting activities and related discussions throughout 2020 and during the first quarter of 2021, we have some observations that we believe are valuable and can be applied in Q2 and the remainder of the year.
Develop Cash Preservation Strategies That Can Be Executed Today
Forecasts and the accompanying qualitative assessments around their likelihood can drive early engagement with lenders and other stakeholders. This will enable the development of mutually beneficial strategies for the quarters ahead that can and should be implemented immediately. Examples of these strategies include:
- Modification of cash interest and principal payments to match likely cash flows; lowering cash out in the near-term and gaining agreement to a method for tacking onto the back end.
- Lease abatement or deferrals with current rent reduced in exchange for higher rent down the road or an extended lease duration.
- Vendor payment terms enhancements to keep liquidity in the company longer.
- Accelerated customer payments in exchange for discounted pricing.
Plan for Multiple Scenarios, Including Changing Lender Attitudes
During the pandemic, lenders adopted a mindset of working with borrowers, becoming more flexible and willing to “kick the can down the road.” However, now many companies have taken on significant obligations or deferred obligations because of these accommodations. Lenders will begin to call back their funds and companies need to begin thinking about how to repay them.
Companies need to think about this as they develop cash flows, accounting for stakeholders’ expectations. This will both allow companies to operate with stability, as well as deleverage balance sheets to build back equity value for investors.
A critical piece of adapting to lenders’ shifting attitudes amid uncertainty is the development of financial performance models in several different post-COVID scenarios. Lenders will be particularly interested to see what cash flow and debt service capabilities look like under varying conditions. What might these numbers look like if the company confronts a major issue in its supply chain? What might they look like if the U.S. is able to rapidly ramp up COVID vaccinations and the economy experiences a swift recovery?
When developing scenarios, it is important to include well thought-out action plans for “downside” or even “worse case” scenarios. This lets the lender know that regardless of the challenges, the company and its advisors are able to meet them head-on.
Think Beyond the Short-Term
Lenders are much more receptive to bad news today than ever, thanks in large part to the government’s regulatory support and the money that has been pumped into banks to prop up economic recovery. This can make it tempting to keep operating in the day-to-day short term. But it is important to remember that these conditions will not last forever, and conversations with key stakeholders must be supported by high-quality financial forecasts. These forecasts must identify near-term cash needs and define a realistic and credible near, medium and long-term financial outlook for the business.
In the short term, it is critical to understand your liquidity situation. If you don’t have enough cash-on-hand to invest in the business, decisions can become binary very quickly. However, if the company can get to a cash neutral position in which external sources of liquidity are not needed, we have seen lenders willing to be accommodating until the pandemic is over.
Most importantly, remember that constant recalibration is the name of the game and an important discipline – daily, weekly, monthly. Assessments will constantly change, especially during these uncertain times, and that is okay as long as you are capturing and responding quickly to emerging trends.
You Need Expert and Trusted Advice Sooner Than You Think
Even before there is real, immediate distress, companies should consider bringing on a trusted advisor who is well-versed in communicating challenging stories to third parties in a credible way. This can help you push through any obstacles and build consensus around a common point of view. An experienced outside advisor is also necessary to work with you to, metaphorically speaking, install guard rails and make sure all scenario modeling and forecasting stays within a prescribed lane.
Management teams and Boards of Directors are often afraid of the consequences of disappointing their lenders. An advisor can help you get past this emotional and intellectual barrier so you can be as transparent and truthful as possible, even if the short-term outlook is grim. This approach also applies in getting real about cost-cutting measures and contingencies.
In looking at business models and growth plans, one of the key questions that must be asked is: “Do we have the people and skills we need to deliver on the forecast and work through the current environment?” This can be an emotional issue, especially during COVID, so an understanding but firm touch from a neutral third party is necessary. An outside advisor can play a pivotal role in helping management make tough but necessary decisions about operations and workforce, and to identify and fill skills gaps.
In the market today, all banks, customers and suppliers are dealing with and adjusting to the realities of the economy. Having a well thought out and cohesive forecasting model that quickly and clearly communicates a company’s story to stakeholders is critical. Not only does it optimize the chances of finding support from outside parties who may have a vested interest in the ongoing success of a business, but it can also drive dialogue and play a key part in finding ways to fine-tune the business relationship, thus helping all parties in the long term.
Despite the challenges presented by the current environment, a rigorous and realistic approach to revenue forecasting using the best available information and judgment is essential business practice. Paired with a careful focus on actions you can take today to shore up liquidity, these are best practices to keep key stakeholders on your side as we all navigate through recovery from the economic impacts of the pandemic.