A myriad of economic issues, political uncertainty and the return of dwindling liquidity – let alone an unabating pandemic – make the budgeting process especially challenging. PE sponsors want to have as much confidence as possible in their portfolio companies’ near-term plans and 2021 budgets. Lenders are increasing their scrutiny of sponsor investments and the underlying plans by management, as financial institutions raise reserves and look to mitigate losses. These pressures are coinciding into a “make it or break it” moment this September for most.
History has taught us that proactivity in planning and budgeting, above all other factors, is the common thread amongst the winners who emerge from a crisis or prolonged period of lower productivity and higher input costs. Applying this theorem to the current “infected” economy, suggests PE sponsors who proactively support management during business disruptions and proactively plan for a variety of future scenarios will rise to the top. Conversely, as observed during bust cycles in 2009-2011 and again in 2014-2015, management teams and PE groups with reactionary approaches faced markedly longer recovery periods and often endured more pain than if they had taken a pre-emptive strategy.
Of course, planning and budgeting even when done far in advance, must be performed correctly, with reliable data, and informed assumptions – a daunting task during a period of economic upheaval and uncertainty. The “base case,” which is the starting point for modeling, must also make sense – for many businesses today, last year’s budget (or even last month’s budget) is not a good starting point. In a sense, the entire calculus of determining the right levels of resources and funding across any given business’s footprint has been irreversibly altered. Returning to “normal” actually means returning to “acceptable levels of profitability” not “returning to the way things were before”.
Smarter and more forward-thinking sponsors are leaving past budgets where they belong – in the past – and taking a fresh start. Now armed with up to 8 months of “Covid era” data on customers, inventories, suppliers and logistical cycle times, it is possible to improve forecasts and make more intelligent decisions about labor, plants and offices, capex funding needs and new sales strategies. In addition, by taking a clean sheet of paper in the budgeting process, PE sponsors will be in a position to accelerate some or their original investment thesis value creation plans that are often difficult to get at within a 5-year holding period, for example eliminating legacy systems, integrating separate business divisions, and automating inefficient processes.
As we confront the challenges of the fourth quarter of 2020, we do not need to struggle over whether or not to revise a company’s budget. The decision should be clear – a proactive approach is the best course of action rather than waiting to the point where there are no more options.
For more information, contact Dan Ginsberg (917) 669-3717 or email him at firstname.lastname@example.org.
We hope that all emerge from this global crisis healthy, and stronger for having weathered this trying period. We look forward to gathering once again in the near future.