Financial Forecasting in Economic Uncertainty

"Planning and forecasting are only accurate when based on a long, stable operating history and a relatively static environment. Startups have neither."

— Eric Ries, The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses

Right now, we are in tumultuous times. Old assumptions are broken, new opportunities arise, and many have the rug pulled out from underneath them. How you handle uncertainty is different from stable conditions. Add to that the intrinsic uncertainty built into the thesis for emerging technology services, and merging technology services founders have increased demands on being agile and flexible in growing their businesses

Fortunately, today's technologists have a body of knowledge to help them navigate these uncertainties. Many principles from Lean and Agile teach us how to create adaptable strategies, allowing us to make “good enough” decisions with limited information. In this article, we will lay out some basic principles you should understand.

A Macroeconomics Primer

You must know which macroeconomic indicators to monitor to build a financial forecast that can survive economic fluctuations. Understanding these is essential to building an informed forecast. While several indicators are relevant to the technology and professional services industries, some are absolute musts for your forecasts.

Real GDP Growth Rate

The real GDP growth rate measures economic performance. An increase in GDP typically signals robust consumer spending and business investment, which tends to drive up demand for technology services. 

For example, according to available data, the U.S. experienced a real GDP growth rate of 3.1% in the third quarter of 2024. This is a sign the economic environment may be shifting to a more favorable one for tech companies.

Inflation Rate

Inflation affects purchasing power and operating costs. A high inflation rate can increase expenses for technology services companies, impacting profit margins. Declining interest rates may ease cost pressures but require vigilance in pricing strategies.

Central or Federal Bank Interest Rates

Interest rates set by central banks influence borrowing costs and investment decisions. Lower interest rates stimulate investment, but founders should consider the possibility of rising rates in the future.

Establishing Baselines During Uncertainty

The next step is to gather and establish a baseline dataset you can analyze. This is easier said than done during economic uncertainty since past data may have very limited relevance. As a founder, there are some steps you can take to compensate for this:

Collaborate

During times of uncertainty, your assumptions of how things work will break. You have to be agile in responding to changing circumstances as a team. Engage cross-functional teams to gather insights from multiple departments, including finance, sales, and operations. This rounds out your forecast with multiple perspectives and ensures that all relevant data is considered when making assumptions.

Plan Scenarios

Develop multiple scenarios based on different economic conditions (such as a state of high inflation vs. low inflation). Pay particular attention to worst-case scenarios. This allows for better preparedness for various outcomes and helps identify key drivers that impact revenue and expenses. The best way to ensure you can take advantage of opportunities that arise is to avoid compromising yourself by not addressing the worst case.

Use Real-Time Data

While all forecasts incorporate real-time data, once things are in flux, the value of understanding and processing data earlier is higher. Keep your assumptions dynamic by regularly updating them based on economic conditions and business performance metrics. Use analytics tools to assess market trends and buyer behavior continuously, so you can adjust forecasts promptly as new information becomes available.

Maintain a High Cadence

No forecast is ever complete and done; it must always be continually reviewed - and this becomes even more urgent during economic uncertainty. Establish a higher cadence for financial forecasts, with some sources even recommending weekly reviews. Create an ongoing feedback loop from operational teams to your finance departments to maintain mutual accountability.

Keep Calm and Carry On

Uncertain conditions don’t just entail the risk of being unable to make decisions in time. They also include the risk of making hasty decisions. Resist the temptation to hit the panic button prematurely. FYI, the phrase “Keep Calm and Carry On”  was coined in the UK during WWII. So, this principle will see you through the most uncertain of times.

Wrapping Up

Effective financial forecasting is vital for ETS founders. By developing resilient and adaptable forecasts, founders can make informed decisions about their company’s growth. Developing such a financial forecast involves collaboration across departments, scenario planning, and utilizing real-time data to stay agile amid changing conditions. Detailed projections and regular reviews can help your company survive in volatile environments. While the future may be uncertain, proactive financial forecasting can empower founders to steer their organizations toward sustainable growth and profitability.

A Gift for You 🎁

At Vixul, we spend a large part of our time reviewing the forecasts created by the founders of our portfolio companies. It is amazing for us to see our founders mature as executives and be able to answer questions they couldn't in the past. Unfortunately, most founders struggle with these issues until we point them in the right direction. We believe the lack of guidance on forecasting is a primary issue for early-stage tech services founders.

That's why we're working on an eBook with detailed instructions on how to set up forecasts for sales pipelines. This will help you plan your new year with better foresight. The book will be free for people on our mailing list when it is published, so please subscribe now to ensure you receive it.