While 2020 has been a year of strange firsts, the coming year is likely to be stranger still. Even as Europe’s public corporations continue to grapple with the economic and health shock of COVID-19, the pandemic makes the business outlook for 2021 almost impossible to forecast with any certainty. Yet corporations and investors cannot operate without a sense of what lies ahead. That means corporate executives need to anchor their strategic and tactical decision-making in some approximation of the future, even if that’s provisional and evolutionary.
The most effective leaders will seize this moment, recognizing it as an opportunity to renovate their forecasting, budgeting, and financial planning processes. Although the COVID-19 crisis affects each individual economic sector differently, continued uncertainty all around means every sector shares a need for greater responsiveness, cost control, and—above all—an exacting focus on cash. Now is the time to move beyond budgets based on rules of thumb and metrics focused on the past toward financial plans and investor guidance derived from predictive analytics and scenario modeling.
Traditional business planning and budgeting are usually linear processes, in which last year’s numbers (and to a lesser extent, those of prior years) form the foundation of future extrapolations. This approach, though, is wholly unsuited to current conditions. Because 2019 was an exceptionally strong year for some businesses and 2020 is turning out to be an unprecedented anomaly, companies cannot use either year as the starting point for their planning—not if they want to be credible.
Conventional planning and budgeting also tend to have a strong internal focus. External forces and factors come under consideration but bear much less weight. This year, external forces will have an outsized impact on the outlook for 2021 and beyond. The most heavily weighted considerations, of course, concern COVID-19. Moves by various governments to address the pandemic—including vaccine development, restrictions on business and social activity, and financial support for businesses and households—will affect everything from demand and revenue forecasts to funding plans. Those moves will also make market developments harder to forecast and more subject to change than ever before. To compensate for the high level of uncertainty, well-prepared companies will update their forecasts more frequently than before, and, consequently, will leave room to add further detail as more information comes along.
There are a number of lessons learned from prior crises that we recommend bearing in mind when setting up 2021 budgets—even if the company is not in a restructuring situation.
- The worst case may become the real case—both in terms of top-line and cost assumptions, as “what can go wrong, will go wrong”.
- Action planning is often too optimistic, both in terms of speed and magnitude of the impact and the actions taken—instead, “plan for the worst and hope for the best”.
- A company’s restructuring plan may not address the fundamental structural challenges—it often only focuses on the easy-to-achieve (operational) measures.
- Speed of restructuring/transformation is often not fast enough.
- No board has ever cut too deep, but too many companies would acknowledge that they have not cut deep enough.
- Financial restructuring is often addressed too late—limited financial leeway restricts both strategic and operational options and weakens competitive positioning.
In light of this, companies must organize four key activities now to enhance their 2021 budgeting process:
- Scenario planning through advanced data analytics
- Tight cost management and zero-based budgeting
- Keeping a close eye on cash
- Rethink communication to external stakeholders