We are into the last quarter of an unprecedented 2020, it’s the time when CFOs begin preparing financial planning for the next year. The ongoing year with all its devastating economic effects seems ages away before we can call it off. Coronavirus caused economic recession globally, significantly affecting small and medium enterprises. We all learned a few lessons amid the hardships; the first should be plan well for the future.
If the year 2020 is to go by anything, we should plan for the next year as an unpredictable and uncertain year. A zero-based budgeting approach and planning for each business as a new one would imitate only the fraction of the recent economic instability. It gets extremely hard to predict for uncertain economic times. Here are a few tips for better planning and budgeting for the next year for your business.
Realistic Forecast and Plans:
Planning and budgeting begin with forecast numbers. Set your business targets for the short-term and realistic. Expect the sales trends to move slowly albeit in a positive direction. Although, the recent recessions affected many business sectors differently, make conservative growth estimates.
The economic recovery may exhibit a sharp V-shape recovery curve, but it may remain stunted for the next year too. Planning for resources with a minimum lower threshold will help you efficiently organize resources.
Plan for Contingency:
That’s the lesson we all learned the hard way. If the current economic uncertainty is an indicator of our business planning, we must plan for an emergency fund immediately. Contingency planning for small businesses is even more vital with a limited cushion of surplus cash and tangible assets. Securing financing for small businesses get harder with lower sales and shrinking profits.
One important aspect of emergency planning is to make the right call under stress. Evaluate your recent decision-making under economic stress and try to build on. It may not be a bad practice to consider a few stern and harder financial scenarios for the next year.
Prepare Rolling Budgets with Flexible Approach:
Large business entities will also have to consider more conclusive and a bottom-up budgeting approach. For small and medium entities, the realistic choice is to adopt rolling budgets. Rolling budgets offer great flexibility and can be updated on a regular basis even on a daily basis. Plan ahead for any forecast targets, but create the cushion for adjustability. Make more flexible budgets for production, sales, and marketing on an on-going and rolling basis.
Rolling budgets take a toll on the finance department as they need continuous monitoring and evaluations. However, the unpredictability and uncertainty call for the best resources utilized in the best possible way.
A long-term budgeting plan would usually span over a year, split the budgets into shorter and flexible plans.
Delegating authority is a decentralized approach where the decision making powers are granted to lower management. Large businesses will have to rethink their top-down and centralized control mechanism. Decentralization offers a realistic and hands-on experience with valuable insights on budgeting and planning. Even for small businesses, a more delegated authorization can speed up the decision making process.
Uncertainty in business calls for robust and dynamic responses. A faster decision making process along with empowered employees can help mitigate the financial risks for all businesses.
You would probably already have postponed any business expansion plans. It will be wise to delay any expansion or remodeling plans for a little while further. If at all any restructuring and remodeling requirements are inevitable, cut them precisely to the minimum. If you have any surplus financial resources by this quarter of a crunch business, make them alternative funding options for the next one.
Rethink Performance Appraisals:
A key point with budgeting and planning is performance appraisals. Budgeting variances offer control measures by comparing actuals and targets. A rigid budgeting approach may lead to unrealistic performance appraisal. Even flexible budgeting approaches like rolling budgets and zero-based budgets show variances. For any business, it is impossible to achieve a targeted budget with full accuracy. Make your business performance appraisals realistic and unbiased with a flexible approach.
A Quick Wrap-up:
Forecasting and planning for uncertainty are hard; the only sensible solution is to adopt a collaborative and flexible planning approach. While planning for the next year, it will be a good idea to test-run a few crunch situations we recently faced.