The last thing that a ship's captain wants to do in stormy weather is to toss his navigation equipment overboard and dismantle his steering system. The same goes for business owners and their budgets. You must engage more intensively with your budget than usual, but if you do it right, it will actually help your business to be more flexible and to ride out the storm.
Here are Jeremy's pointers for business budgeting in these tough times:
- Live close to your budget: In normal times when things are steady and business is predictable, it's fine to check in and update your budget once a month, to forecast a year ahead and have end goals stretching as far as three to five years ahead. In current conditions, however, you need your budget right at hand, preferably one click away on your desktop. Your time horizons shrink so that you do at least weekly updates, and quarterly budget reviews, with your end goals stretching no further than a year ahead. Three-year forecasts in times such as these are almost irrelevant, says Jeremy.
- It remains a formal exercise: A useful budget is one that is well thought through, well documented, and well communicated. In other words, it is a formal, written document. Just because you will probably change it more often than usual does not mean that you can neglect writing it down. Once you have a set of sensible spreadsheets set up to house your budget, writing it up and adjusting it becomes quick and easy.
- Start by reflecting on the past year: Don't just write 2020 off as good riddance. As painful as it is, spend some time thinking carefully about the past year. Your business has probably been stress-tested, and there is a lot you can learn from it. Try to identify unnecessary overheads, revisit the deals that you have with your suppliers, look at your costs and profit margins, and think about doing things more efficiently, or completely differently such as building an ecommerce system in time for a possible third wave.
- Study the changed environment: The landscape has changed for most sectors, and your budget must take these changes and new trends into account. Look for the ways in which your customers' behaviour is different, and how the players in your industry - suppliers and competitors - are changing. Be sure to use credible sources of information only. There is a lot of misinformation sloshing about on the internet. Take care to vet the rumours that you hear before you act on them.
A useful budget is comprehensive and detailed: A good business budget is more than just a profit-and-loss forecast. At the very least, it must contain the following sections:
- A detailed sales forecast, which is difficult enough to get right in the best of times, usually due to over-optimism. Try to be as realistic as possible and adjust it often.
- A profit-margin forecast, which means you also must get the mix of goods and services that you will be selling right.
- An overheads forecast: consider every line item and think how it might change, or how it can be reduced.
- A working capital forecast: Your budget needs to consider the lag between sending your invoice and getting paid, which severely impacts on the cash available in your business. In the changed circumstances of your industry and your market, will this lag lengthen? Are there ways you can shorten it?
- A staff and remuneration forecast: Make sure your staffing levels are in line with your sales levels and operations, and that their wages are still in line with those of your industry.
- A tax and VAT forecast: A flush bank account can make it easy to forget that a good chunk of the money may belong to SARS.
- An expansion forecast: Ensure that your budget includes the resources to make careful, measured expansion possible.
- Repairs, replacements, and revamps: Don't neglect the preventative maintenance programme of your business. If you postpone it, it may cost you more in future. And make space on your budget for unforeseen breakages.
Review and adjust: A budget that is not reviewed regularly is of no use. This is essentially the same as the first point on this list, but it is so important that it bears repeating - keep your budget close at hand and review it regularly. You will be amazed at how it can put you back in charge of your ship, no matter how bad the storm.