At the beginning of the year (or your fiscal year) you set a budget, based on a certain run rate of sales to expenses. Whatever you run, you will guesstimate your sales and the expenses required to make those sales.
But right now, that kind of forecasting is out the window across industries. Due to the coronavirus crisis, many businesses are seeing a big drop in sales and revenue year over year from 2019 to 2020. Forecasting the rest of the year is very difficult; most businesses, including the insurance industry, are so heavily reliant on the public. And it’s impossible to accurately guess business trends when consumer sentiment is so up in the air.
News on a vaccine is also fluid. Some scientists are optimistic there could be one later this year, but most researchers caution there may not be an approved vaccine until the latter part of 2021. We also don’t know if future waves of infection will cause economic shutdowns again.
All of these factors make it extremely challenging to accurately guess what a realistic sales volume could look like. At Brokers International, that has caused us to take a very conservative view of forecasting.
But just because there’s less certainty right now doesn’t mean you should operate blindly without a budget based on data.
5/10 Exercise
Something I’ve always done at Brokers, and that we’ve continued doing since the current crisis hit, is what I call a 5/10 exercise.
For this process, prepare a normal budget, as if all of your inputs were stable and normal. With that in hand, do a second, but this time assume your sales are off by 5%. Then another, but with your sales down 10%. Then 15%, 20%, and so on.
For example, take the first four months of this year. We had roughly two months of normal business, and then we had two months where business became anything but normal. To begin with, let’s assume nothing changes; flatline the final eight months and project the whole year. After running that scenario, do it again. This time use the last six weeks; take whatever percentage you’re off by and use that as the benchmark going forward.
Make multiple budgets based on these forecasts.
Run a worst-case projection, assuming you can’t open back up for the rest of the year; look at the numbers then. You know you have bills that are constant. They don’t stop, but your revenue does. Assuming your expenses stay the same but you’re bringing nothing else in for the rest of the year, you can project what your debt level will be.
As business opens back up and you see increasing revenues, you can change your formula based on that week by week. By updating your model every week based on the previous week’s sales figures, you should be able to get a relatively accurate rolling forecast.
Expense Management
When sales revenues are so difficult to predict, it’s increasingly important to take stock of expenses. Make a list of the “have to haves,” the non-negotiables, the things you need in order to keep your business open.
At Brokers International, we buy fruit for our employees every week and give it to them for free. It’s a small thing to do, but it’s appreciated by the employees. But right now, we’ve had to discontinue that, because every dollar counts.
What needs to be replaced, and what can wait? What do you need to buy, and what might be some new necessities — like masks, sanitizer, a deep-cleaning service two or three days a week. Sit down now and do all of that math.
It’s an unfortunate reality that in order to keep the business running, you sometimes have to let people go. You have to decide who the critical employees are, the ones who keep the lights on.
But if you do have to make those kinds of hard decisions, make sure you really explore all of your options. Have you applied for PPP money? Consider temporary wage reductions or mandatory unpaid vacation time as alternatives to layoffs. And if you do need to let people go, take time to see what you can do for furloughed employees to help them land softly. Is there anywhere locally you can try to help find temporary work for those employees?
These are hard times, and we’re all working through this crisis together. If you need help forecasting for your business during this crisis, send me a direct message. Helping brokers and businesses is what I do best.