How to Approach Budgeting During an Economic Downturn
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You're not alone if you're struggling to create a business budgeting strategy in the current economic climate. Budgeting can be daunting when the stock market takes sustained hits, economic uncertainty becomes the norm, supply chain issues lead to costly losses, companies of all sizes are retrenching, and cost-reduction measures are suddenly on the table.
A business budget is still one of the best ways to avoid financial disaster when unforeseen challenges arise. Use the strategies below to keep your business on track during these uncertain times.
Annual Business Budgeting Process
Before we dive into creating a business budget in uncertain times, here's a quick recap of what an annual business budgeting process looks like in more uncomplicated times.
1. Work With the Best Data You Can Find
Use accurate, historical data to inform your budgets—such as your business's sales analytics, up-to-date books, and accurate financial statements.
2. Identify Key Business Drivers
Figure out which business drivers are having the most significant impact on your business's performance. These can vary significantly by industry, but common examples include sales leads and quota attainments, internal efficiency, and supplier costs. Find yours by looking at your financial statements and asking: "What drives this line item?"
3. Assess the Financial Impact of Known Upcoming Changes
Are you planning to hire more employees, purchase new equipment, or lease a new physical location? Then, make sure your business budget reflects the financial impact of any known upcoming changes you'll be making in the next 24 months.
4. Pull It All Together
With all of the above information, it's time to pull your business budgeting plan together. Make sure it includes the following:
- Cost of Goods Sold (COGS)
- Gross Profit
- Operating Costs
- Capital Expenses
- Net Income
Want a detailed guide on creating a business budget? Check out our Annual Budgeting Guide for Startups.
Annual Business Budgeting During a Downturn
Creating a business budget regularly means relying on typically predictable variables; however, many of them are in flux during an economic downturn. Things like market stability, supplier availability, and even the ability to hire staff are all no longer guaranteed. So, as you begin to create a recession-proof budget for your business, there's a list of new considerations that you'll need to keep in mind.
Expect Long-Term Uncertainty Around Market Conditions
Every industry will be impacted differently by an economic downturn. Demand has skyrocketed for some and trickled for others. So while you may be able to forecast how market conditions will impact your business in the coming months, it's essential to accept long-term uncertainty and preparedness for things to change suddenly at any time.
Business Growth Plans May Need to be Postponed
Given how the economic downturn could impact your business, it's essential to ask yourself: are your original business growth plans still viable? Do they need a slight tweak, or is it time to pivot and create a new growth strategy altogether?
The answer to this question will be different for every business. However, some things to think about include the following:
- If you have plans to expand into new geographic areas or launch a new product or strategy soon, is now the right time to do so?
- What about hiring? Can you source employees?
- Can you bring on all the new hires you need to accomplish your original growth objectives?
It May Be Harder to Secure New Funding
Investors tend to be more cautious in a downturn. If your business relies on funding, ensure you're clear on how easy or difficult it will be to secure investment in the next 24 months.
Navigating a downturn will require you—and everyone within your organization—to make critical decisions quickly. If you're amid a raising round, close it as soon as possible. And, if you can raise more capital now, it's probably a good idea to do so—don't get too caught up on your previous valuation or the terms that another person's company secured a few months ago.
It's also imperative to understand what your company must achieve before you can start fundraising. Whether you need to launch a new product or reach a specific dollar amount of annual recurring revenue, make sure your team understands why this goal is essential and has a clear plan.
Addressing Uncertainty in Your Budget
It's never fun to imagine your business in crisis, but coming up with a plan to deal with financial challenges before they happen can help you change course and avoid disaster. The following strategies can help you plan for future uncertainty in your budget.
Re-Examine Your Key Drivers
You know what drives business in regular times. And based on the last six months, you also have some rough historical data on how an economic downturn has affected your industry. So to plan for future uncertainty, use your knowledge to assess how your key drivers may be impacted over the next 24 months.
Ask the following questions:
- If governmental regulations suddenly change in response to an economic downturn, what impact will that have on any of your key drivers?
- Will all (or any) of your physical locations (stores or offices) remain open?
- Will the services/suppliers support your key drivers and remain fully operational?
Plan for Multiple Scenarios
Based on what could happen to your business drivers, create several versions of your business budget and put a plan to navigate the best- and worst-case scenarios.
Use these questions to get started:
- What will revenue look like if churn increases by 20, 30, or 50 percent?
- What if sales increase, hold steady, decrease slightly, or decrease dramatically?
- How will headcount and payroll change in relation to the items above?
- Will utilities, leases, and other operational expenses change for better or worse?
With a contingency plan on hand for each of these scenarios, you'll be able to course-correct the second an unforeseen challenge arises.
Recalculate Your Cash Burn Rate. Extend Your Runway.
For better or worse, all of these scenarios will impact your business's financial runway. So make sure you're clear on your runway needs in each scenario by asking some tough questions:
- How will your cash burn rate increase or decrease in each scenario?
- When will your business run out of money in each scenario?
- What does this mean for future fundraising plans? Do you need to find money fast, or can you delay the need for investment by reducing your cash burn rate?
If your runway is shorter than expected, run the numbers and recalculate your cash burn rate. Extending your runway may give your business more time to find its footing again and reduce your startup operating expenses before turning to investors or creditors for support.
Revisit Your Growth Plans and Adjust Accordingly
Remember those business growth plans you had before the economic downturn? It's time to re-examine them and decide if they need to be adjusted, postponed, or shelved. Use the following questions to assess your growth plans for each of your business budgeting scenarios:
- Based on your current cash reserves and revenue forecasts, what growth plans are you likely to accomplish in the next 24 months?
- What growth targets do you need to hit to increase revenue by 20, 30, or 50 percent?
- What growth initiatives do you need to invest in to achieve those targets?
- Do you need to reduce your operating expenses to stay on track and set these initiatives into motion?
It's challenging to create a business budget in uncertainty, but it's also more critical than ever. Adapting your business budgeting strategy for uncertain times can keep your business on track as the economy recovers.
Remember: you'll need accurate books and up-to-date financial statements to work through the above-outlined strategies. If you need some help, Pilot's expert bookkeeping and CFO services can set up the foundation you need.
Check out these other helpful resources as you navigate these times:
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