Our forensic team discuss Covid19 business forecasts
COVID-19 has, undeniably, challenged if not changed our approach to forecasts. Specifically in relation to business valuation, whilst before the pandemic forecasts were in the ‘nice to have’ category, especially where a business was reasonably stable, they are now in the ‘must have’ category.
In the past we would request forecasts if the company was in the habit of preparing them, and then place varying degrees of weight on them depending on how robust we concluded the forecasts to be. If forecasts were not prepared it was relatively commonplace and overall no big deal.
Forecasts are more important than ever
Previously we haven’t pushed for forecasts where these are not prepared. If a business isn’t in the habit of preparing forecasts, how do we know if they are reasonable and can be relied upon? We usually test the ability of a company to forecast by looking at how accurate prior forecasts turned out to be.
Future performance of a business is now unlikely to resemble prelockdown trading
But in the current climate we can no longer take this position. One thing that is certain in the current lockdown situation is that the future performance of a business is unlikely to closely resemble its prelockdown performance. If the company is unable to prepare forecasts itself we are having to give it a go.
Whilst we are now pushing for forecasts, we are not expecting these to be accurate. After all…
Who on earth knows?
Forecasting is inherently challenging. The Office for Budget Responsibility (OBR), engaged by the government to prepare forecasts on the UK economy, and the Office for National Statistics frequently update their growth forecasts, even in stable times.
In its March 2020 update, the OBR stated in respect of COVID-19 that “neither the size nor the duration of this effect are possible to predict with any confidence”.
A number of listed companies (including Visa, Twitter and Expedia) have withdrawn their 2020 forecast information.
If both the government and companies with sophisticated finance departments are unable to reliably forecast the impact of COVID-19 why are we asking for this information from our clients?
If a business valuation needs to be undertaken we need a start point for quantifying the impact of the pandemic. Whilst a business can return to its former glory there will be a lasting impact of COVID-19 , either through a reduction in working capital or an increase in debt taken on to keep the business afloat during a lean patch.
The key players in a business are probably going to have a better understanding than we will of the impact of the pandemic, even if this understanding is as simple as saying sales will fall by up to 50% for 6-12 months, variable costs will decrease and overheads will remain constant. This is a least a starting point.
The COVID-19 outbreak is an event that is creating material uncertainty in many walks of life.
Assuming that you and your clients are not prepared, or able, to put your current cases on hold (for an unknown period of time), we are all having to proceed on the basis of material uncertainty regarding future and forecast performance.
We try to counterbalance this uncertainty by scrutinising the information that is available, making sensible assumptions and preparing a range of calculations where appropriate.
This article was originally published in Forensis Summer 2020.