Show Me the Money: Setting Financial Guidance Amidst Uncertainty

When macro volatility spikes, investors rely heavily on management’s insights to predict future results—in short, they want you to “show them the money.”?

To calm investor concerns and build lasting trust, management teams can increase transparency by openly addressing uncertainties, providing clarity on assumptions and outlining risks and opportunities that impact future results.

If you’re thinking about how to position your company for the rest of 2024 and into 2025, keep these factors in mind:

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1) Embrace a conservative approach, within reason.

• Risk is asymmetric here; while aggressive guidance will be rewarded if achieved, missing guidance will have a greater downside to both valuation and credibility.
• On the other hand, avoid being too conservative. Investors are great at recognizing trends and will adjust their estimates if your team is consistently setting the bar too low.

2) Provide consistent updates in a transparent fashion.

• Don’t “set and forget” your guidance. Even if nothing changes, provide updates on any evolution of the assumptions behind the guidance and address any risks or opportunities that come up.
• Share information that impacts expectations as it comes along. If new information meaningfully impacts expected results, report preliminary results ahead of earnings if needed. Transparency in these situations allows the market to adjust gradually and helps build credibility with investors.

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3) State your assumptions and layer in qualitative guidance.

• Provide straightforward assumptions around guidance to get investors on board with management’s train of thought. Remember: Clearer guidance leads to more accurate analyst forecasts and less volatility in the stock.
• If you’re wary of giving out quantitative guidance, opt for something more qualitative instead. “Softer” guidance can at least give analysts and investors something to work with, helping get their estimates directionally correct.

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4) When nothing is clear, give scenario-based guidance.

• If uncertainty is high, scenario analysis will help investors better understand the range of potential outcomes and the factors that could influence them, making it easier for them to adjust their own estimates as new information emerges.

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Guidance is hardest, yet most important to give in times of uncertainty. As you assemble guidance for the next year, remember that transparent and proactive communication builds trust.?

Stuck on how to strike the right guide that investors will actually believe? Reach out to Riveron for help.

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