How to Prepare Your Budget During a Recession
You’re not the only one who finds it difficult to develop a corporate budgeting strategy in the current financial climate. When the stock market has prolonged losses, economic uncertainty becomes the norm, supply chain problems result in expensive losses. Businesses of all kinds are going through layoffs, and cost-cutting measures are suddenly on the table, creating a budget can be a difficult task. Here, you can find out more about how to prepare a budget during a recession.
When unforeseeable difficulties happen, a business budget is still one of the greatest solutions to prevent financial ruin. Use the tactics listed below to maintain the direction of your company during these tumultuous times.
Process for Annual Business Budgeting
Here’s a quick overview of the annual business budgeting process in easier, “normal” times before we get started on how to prepare a budget for your company in difficult times.
1. Use the most accurate data you can find.
Budgets should be based on correct historical data, such as sales analytics, and up-to-date books. And accurate financial accounts for your company.
2. Determine the main business drivers
Determine which business factors are most affecting the performance of your company. These might vary greatly by industry. But typical examples include supplier prices, internal efficiency, sales leads, and quota attainments. Look at your financial statements and ask yourself, “What motivates this line item?” to discover yours.
3. Determine the financial impact of anticipated changes.
Are you going to hire more people, buy more machinery, or rent a different building? Make sure you prepare your business budget accounts for any anticipated adjustments you plan to make over the next 24 months.
4. Bring Everything Together
It’s time to put your business budgeting plan together now that you have the data mentioned above at your disposal. Ensure that it contains:
- Cost of Goods Sold Revenue (COGS)
- Revenue Operating Expenses
- Capital Costs
- Net Profit
Creating Annual Business Budgets During a Recession
The problem with making a corporate budget in normal times is that it depends on factors that are frequently predictable. But many of them can change during an economic downturn.
Market stability, supplier accessibility, and even the capacity to acquire personnel, are all no longer certainties.
As a result, there are several new factors to take into account as you start to prepare a recession-proof budget for your company.
Long-Term Market Conditions Will Be Uncertain.
An economic slump will have a varied effect on every industry. For some, demand has surged, while for others, it has dwindled.
Although you may be able to predict how the market will affect your company in the coming months, it’s crucial to accept long-term uncertainty. And also be ready for things to shift quickly at any time.
Plans for Business Expansion Might Need to Be Delayed
Given the potential effects of the economic downturn on your company, it’s important to consider if your original goals for business growth are still realistic. Whether they require some minor adjustments, or whether it’s time to change course entirely and develop a new growth strategy.
Every business will have a different response to this query.
Consider the following, among other things:
- Is this the ideal time to introduce a new product, change your business strategy, or grow into new geographical areas?
- What about employment? Can you find workers?
- Can you afford to hire every additional employee required to meet your first growth goals?
- It might be more difficult to find new funding.
- In a slump, investors are more likely to exercise caution. If your company depends on money, be sure you understand how simple or challenging it will be to get investment over the following 12 months.
- Making important decisions swiftly will be necessary for you and everyone in your organization to navigate a downturn.
- Close any raising rounds you are currently engaged in as soon as you can. And it’s certainly a good idea to acquire extra money right away if you can. However, don’t get too hung up on your previous value or the terms that another company’s business obtained a few months ago.
- Before you begin fundraising, it’s also crucial to know what your business needs to accomplish. Make sure your staff is aware of the significance of this objective and has a clear plan in place to attain it. Whether you need to introduce a new product or reach a specific level of yearly recurring revenue.
The Budget’s Uncertainty: How to Address It
It’s never fun to picture your company in trouble, but developing a strategy to handle financial difficulties in advance can help you veer off course and avert disaster.
You can prepare your budget for future uncertainty by using the following tactics.
Review Your Important Drivers
You are aware of what motivates business in normal times. You also have some approximate historical data on how a downturn in the economy has affected your industry based on the previous six months.
Utilize what you already know to evaluate how your main drivers may be influenced over the next 24 months to plan for future uncertainty.
The following inquiries:
- What effect would a sudden change in governmental rules brought on by a downturn in the economy have on any of your main drivers?
- Any of your physical locations (stores, offices, etc.) will they continue to be open?
- Is it likely that all of the vendors and services that support your core drivers will continue to be active?
Prepare for a Range of Situations
Make numerous iterations of your business budget based on what might occur to key business drivers, and put a plan in place to handle both the best- and worst-case scenarios.
To get going, consider these inquiries:
- How much income will there be if turnover rises by 20%, 30%, or 50%?
- What if sales go up, stay the same, go down, go down dramatically?
- How will the aforementioned changes affect headcount and payroll?
- Will the cost of utilities, rent, and other operating expenditures increase or decrease?
- If you have a backup plan in place for each of these possibilities, you’ll be prepared to change direction as soon as a complication materializes.
Your Cash Burn Rate Should Be Updated
All of these possibilities will affect your company’s financial runway, for better or worse.
Ask these challenging questions to make sure you understand your runway requirements in each scenario:
- How will each situation affect the rise or fall of your cash burn rate?
- In each case, when will your company run out of money?
- What does this imply for upcoming fundraising strategies? Can you delay the need for investment by lowering your cash burn rate, or do you need to find money quickly?
Run the figures and revise your cash burn rate if you discover that your runway is shorter than you had anticipated.
By lengthening your runway, you might be able to offer your company more time to get back on track while also lowering your starting operating costs before approaching investors or creditors for financial assistance.
Amid so much uncertainty, creating a company budget is difficult, but it’s also more crucial than ever. Maintaining your company’s direction when the economy recovers can be accomplished by modifying your business budgeting plan for unpredictable times.
To find more about this, contact us and we will make everything easier for you!