How To Manage Your Financial Forecasting In An Uncertain Market
Editor’s Note: This article is based on an interview we did with Wendie Michie, CEO of Zoomforth–a microsite building platform for enterprise customers. You can watch the original conversation above or keep reading for a recap of what we learned.
The last few years have been a true test of a business's ability to navigate successfully through uncertain conditions. In our experience working with 7-figure SaaS companies, we’ve seen consistently that companies with sound financial reporting and forecasting practices have been able to operate more effectively and generate better outcomes than SaaS companies operating without these essential tools.
We recently had a conversation with Wendie Michie, CEO of Zoomforth, and she walked us through the processes she followed to steer her company through the pandemic successfully, including utilizing good financial reporting and forecasting that facilitated key decision making.
Prioritize Pricing and Cash Flow
Wendie focused primarily on cash flow and pricing when creating her forecasting scenarios. The main question she asked herself was, “If this key performance indicator goes up/down, what will happen to cash flow?” She categorized her scenarios based on the following outcomes:
Optimistic
Realistic
Pessimistic
This is important for a volatile market, as it allows a company to respond with agility to any market condition. Wendie did both accrual-based forecasting and cash flow forecasting.
Accrual-based forecasting builds its analysis off of when revenues are earned and expenses are incurred rather than when it enters or leaves the bank account. So say the purchase of an annual contract, for example, is worth $1200. An accrual-based model would count that as $100 of revenue per month to spread it out evenly amongst the contract duration.
Cash flow forecasting helps you understand the timing of when cash is coming in and out of your business, which helps make timely financial decisions.
Say you just signed a contract worth $1500 in revenue, for example, but the customer has 60 days to pay the invoice. You have $1000 of expenses due within the next 30 days. Accurate cash flow forecasting lets you know this new revenue won’t be available to cover your expenses, so you will need to use another source of funds.
You need to see your business from a 360-degree perspective to prepare for uncertain times.
We were intrigued by how Wendie used manual models made in Google Sheets to compliment her forecasting in Quickbooks.
Different headcount assumptions were challenging for her to model because you need to create a new scenario each time in Quickbooks. Wendie was able to do this because of her background in financial services, but this is an error-prone and time-consuming methodology for most CEOs.
Our core ethos at Flight Financial is to offer a suite of services that reduce the need for such manual processes. We give you more efficient financial data optimized within easy-to-digest reporting to improve the quality and speed of your financial decisions.
Analysis of Pricing
Product pricing was another area that came into sharp focus. They had to reflect on if they needed to change how they priced their product. Clients were squeezed on their budgets because no one knew what the effects of the pandemic would be long-term.
A lot of the financial modeling Wendie did was around the pricing of their product, guided by the following two questions:
“If I price this differently, what does this do to the renewal outcome?”
“What does it do to new business?”
It was difficult, Wendie mentions, to have utter confidence in the forecasts due to the extreme degree of market uncertainty that lay ahead. However, she had faith in the underlying cost-based numbers, which allowed her to comfortably forecast using different pricing models.
By modeling her assumptions and looking at how potentially changing their approach to pricing might impact their financial performance, Wendie was able to visualize potential scenarios and use these insights to inform her decision-making.
Inject Compassion into Cost Analysis
Another idea that stood out to us was the idea of the kindness economy, which is a concept popularized by Mary Portas. The crux of the idea is that there should be a triple bottom line within an organization, with the following prioritization:
People
Planet
Profit
That translates to a culture that values people in all ways, from staff to customers, and puts them above the brute pursuit of profit. People want to feel valued as individuals and be treated as more than replaceable cogs in a machine.
Wendie has formulated Zoomforth’s operational culture around the idea that people and the planet come before profit. This was a crucial guiding principle that allowed her to steer her organization through volatile market conditions successfully.
Financial decisions affect the people within your organization. The pandemic made businesses show their hands regarding actually having compassion for their team versus using compassion as a buzzword. Some cost decisions to make when facing an uncertain market include:
Cut discretionary spending
Cancel non-essential third-party apps
Freeze new hiring
Release probationary hires
The guiding question for her and her team was, “will customers renew their annual contracts, or will we have to focus on generating new business?”
They asked themselves this question on a month-to-month basis and let the answer dictate their need for further cuts.
Since Zoomforth’s customer is the global enterprise looking to expand and optimize their digital footprint for revenue, they were lucky that the lockdown led to more leads. Still, they would not have been able to navigate the cost cuts they made without the compassionate mindset of the CEO and reliable financial forecasting that enabled them to visualize the potential impact of different decisions.
The CEO Mindset in the Face of Uncertainty Makes a Difference
Wendie stressed that she saw navigating the financial uncertainty of the pandemic as an immense responsibility. She was strongly guided by the fact that every decision she made had an emotional impact on the people involved. If morale dipped too low, effectiveness would drop too.
Wendie’s response to being asked about her mindset while navigating the pandemic shows the importance of open and honest company culture. Since its inception, all of Zoomforth’s financial decisions have been made with complete transparency.
This means that transparency was not a new thing they had to deploy in a climate of fear and uncertainty. Instead, they could lean on their culture of transparency for strength as everyone turned inward to support each other on a human-to-human level.
For example, in every quarterly all-hands meeting during the pandemic, their first agenda item was “is my job safe?”. This allowed them to address the elephant in the room while also ensuring that, if any roles needed to be cut, everyone would have the context as to why.
It is essential to make the people who are represented by the numbers in a financial forecasting scenario feel like they are valued components of a team rather than pieces on a chessboard controlled by the C-suite.
Final Takeaway: Understand Your Cash Flow
When we asked Wendie to share one final piece of advice for financial forecasting, her answer was to understand your cash flow. She referenced a popular phrase: Turnover is vanity, profit sanity, cash is king.
If you don’t know your cash flow at all times, it is tough to seek investment strategically and spend efficiently. You have to understand cash flow when it is time to pay bills and taxes and if it makes sense to raise money or take on debt to finance your business. Flight Financial can take this off your plate and give you peace of mind that your cash flow forecasting is in safe hands, which frees up your valuable time.
We have a semi-automated monthly approach covering dynamic budgeting, cash flow forecasting, and scenario analyses. Our monthly business review process looks at your results and updates expectations accordingly. This includes actionable insights to help you take your business where you want it to go.
With all that being said, there are so many things in life more important than money. We make sure your business is on a sound financial footing so that you have the time and mental clarity to focus on the things that truly matter to you.
Schedule a call here to learn more.