Planning to the right run rate can protect and build the value or the net worth of your company
Speaking with a business owner this week, she was sharing her company revenue forecast of $95M for 2020 which included the impact of Corona-geddon. My question to her was this...."have you set your forward looking materials and supplies purchasing levels and your labor requirements to this full year forecast or have you reset them given your current run rate?" Her answer was, "we're planning to this $95M revenue rate."
My response was that if this forecast is based on looking at their year to date actual performance and extrapolating this out for the balance of the year, this may be over inflating the real run rate they should be planning to. I reminded her that her business year to date performance is clouded by the first 3 months of 2020 in which her business had a strong start and no COVID impact. It wasn't really until May that her business began to feel COVID impact and her May, June and July performance numbers are meaingfully different than the Q1 performance. If I look at the real, new run rate for her business which factors much of the early 2020 pre-COVID results out and use that as the basis for a forecast, I came up with a business closer to $85M in the next 12 months.
The next question I posed is what product and service mix changes her projections were assuming because these too could be impacted by the Q1 numbers. Sure enough, as we talked it through, she agreed that she had to rethink the revenue mix of the next several months because some of her lower margin products are potentially going to be a higher percentage of the mix.
So although her $95M revenue forecast for 2020 may be close (because of the first few months being of no to little COVID impact), she didn't have in mind that her new business run rate may be closer to $85M and potentially at lower margins than normal. This is a very different level by which her team should be planning materials, supplies and labor.
Working with your team now to truly understand your run rate and product/service mix is critical to protecting and possibly building the value or worth of your business today and the future valuation you might one day receive. Use this time to build your company forecasting and planning muscle to ensure you're planning your business resources to the proper revenue and profit run rates. Be careful extrapolating out your YTD performance because Q1 was COVID free!
