The recent spike in fuel prices is just the latest speed bump in the economy’s long road to recovery from 2020. This latest problem is a consequence of supply not keeping up with surging global demand. Skyrocketing natural gas prices in Europe turn into balance sheet headaches for construction companies in Southern California, adding a tough new layer on top of high input costs and labor challenges.
Looking at oil price forecasts from 2020 shows that this spike wasn’t something we could have predicted a year ago. With so much uncertainty, how can a CFO of a small construction firm reliably plan for the future in corporate budgets and project bids?
There’s no easy answer to the problem. These are some ideas that have come up in recent conversations among CFMA members:
- Reexamine your KPIs
The right key performance indicators, or KPIs, give leadership teams a quick way to measure the business’s trajectory. But KPIs can also be a distraction. If your KPIs are dependent on keeping input costs low, you may need to adjust them for the new reality. In other words, don’t let yesterday’s plans overshadow today’s conditions.
- Seek out new sources of information
If your current sources for predictive data are not delivering an adequate picture, it may be time to find others. The data industry is struggling with the same surprises we are. They may rely on approaches that don’t account for factors that are important to a highly local business or reliant on a particular supply chain.
- Diversify your planning
Relying on a single model is fine so long as the model’s assumptions are borne out. When outside circumstances go sideways, the single model can fall apart. Many businesses are addressing this problem by developing several forecasts at once. This approach broadens the planning perspective to take on a broader scope of possible futures. The result is sturdier risk management and greater flexibility in the face of changing conditions.
- Revisit and revise
When important financial drivers change every week, a forecast made six or nine months ago may be more harmful than helpful as a planning tool. When the world around us is rapidly changing, we need to change our forecasts along with it. Some finance professionals have begun updating their forecasting models monthly or even weekly, to base new bids on the latest predictions.
- Bring other perspectives into the process.
Financial planning better serves its audience when it accounts for the full range of a team’s priorities over the next year and the next decade. Planners should bring the rest of their company’s team into the planning process. The forecasting process needs to account for ideas that may not be visible to the finance team, including HR’s new recruiting plans or a major client’s threat to take work elsewhere.
Tap into the resource of the CFMA
Of course, other financial professionals can be an invaluable resource for finding new ways to improve our forecasts. That’s why the CFMA exists: to foster conversations across the full spectrum of businesses within the construction industry.
If you’re not sure how to incorporate high uncertainty into your forecasting model, reach out to your colleagues in the Association. You’ll find that everyone is confronting similar issues, and you’ll be surprised at the range of solutions members have found. We encourage you to start a conversation in the member forum, at the next meeting, or on LinkedIn.