Brian Ondeng, East Africa Portfolio Manager, Acumen

When thinking about assumptions, it's important not to focus only on what the business can control, but also to take into consideration variables that could be very impactful that are outside the control of the business. These are things like exchange rates, political events, risk, or climate change. 

An investor will not only be looking at a financial forecast or model in the context of the business itself and its unit economics, but also how that interfaces with what we expect the macroeconomic environment to look like in the future.

Many businesses we've worked with, by not taking into consideration things like exchange rates, have lost a lot of their margin in the event they are importing goods that they use to produce or the inputs they use to produce their goods. If exchange rates go against them, they end up paying more for those inputs, but are not necessarily able to pass that cost onto the consumer in most cases. 

How to protect your business from external shocks

The easiest way, and the lowest hanging fruit, is to always have a worst-case scenario. In your financial forecast, you should have what you hope to achieve, but in the event that things don't go your way and these are things that are out of your control, what would your financial situation look like? And in that situation, what kind of capital support would you need? It is important to be aware of what you would have to prepare for in the event that things do not go your way.

The other way is partnerships. For example, consider a company that depends greatly on smallholder farmers. These farmers are very vulnerable to climate change. Suppose the company can identify a partner or organization that specializes and the expertise in providing farmers with training, irrigation, inputs, or financing, even at sort of the first mile, to empower them to be less vulnerable and more resilient to climate change or economic shocks such as inflation. In that case, the business has a more stable back-end and is able to scale and benefit from that intervention as well.

Key takeaways

• Consider external factors like exchange rates, politics, and climate that can shift your projections.

• Have a worst-case scenario in your forecast showing what things look like if things don’t go your way.

• Build strong partnerships that help manage risks outside your control.