COVID-19 Calls for Budget RevisionsJune 23, 2020
Your business’ strategic plan is likely far different now than it was heading into 2020. Does your budget need revising? Here are our tips.
COVID-19 has affected the economy in profound ways. Just about every business owner’s strategic plans for 2020 looks far different now than they did heading into the year. As your business moves forward in this uncertain environment, it’s important to ask whether your 2020 performance goals still make sense.
If your business is like most, your initial budget for 2020 is no longer relevant in the COVID-19 era. When recasting your budget, avoid the temptation to simply make across-the-board cuts. A more methodical approach is to re-evaluate the two key components of your budget — revenues and expenses — to get a handle on your operating cash flow.
As the saying goes, cash is king. Begin the re-casting process by estimating how the demand for your offerings is likely to fare over the next 12 months. This will be challenging given today’s volatile environment. Unknowns include: How long will civil unrest persist across the country? When will the first wave of COVID-19 end? Will there be a second wave later this year? Will a new threat unexpectedly emerge before the November elections?
Without a crystal ball, it may be prudent to consider the risks and opportunities affecting revenue under the following scenarios:
- Best case,
- Moderate (but most likely) case, and
- Worst case.
For example, restaurants and entertainment venues may continue to face low demand, while grocers and wine clubs may experience skyrocketing demand. Use this exercise help identify products or services that aren’t worth continuing due to waning profitability, as well as new market opportunities (such as new distribution methods or product lines) that may be worth pursuing.
Modifying your offerings to accommodate expected short- or long-term changes in demand may, in turn, lead to significant reductions to your expenditures. What cuts make sense for your business?
Pandemic closures have forced some businesses to make dramatic changes to reduce labor costs, including layoffs, furloughs and pay cuts. Others have scaled back employee benefits and perks, such as 401(k) matching programs, vehicle allowances and company picnics. And recruiting and training programs may be temporarily deferred until the economy recovers.
Marketing budgets also may be dialed down or revised to include more budget friendly alternatives. For example, you might shift from advertising via radio and direct mail to email and social media campaigns.
For white-collar jobs, COVID-19 also has put work-from-home arrangements to the test — and some businesses that have traditionally resisted these arrangements have seen, first-hand, that remote workers can be productive and engaged. Going forward, some businesses may decide to maintain a smaller on-site workforce, reducing the need for pricey office space and other overhead expenditures, such as office supplies, utilities and the costs of buying and maintaining equipment.
Of course, remote work also creates some costs. It requires investments in technology to ensure off-site workers have adequate and reliable capabilities at home. The IT department will shoulder a greater burden, too, potentially driving up personnel expenses. But personnel costs could be lowered by turning to freelancers and independent contractors for certain tasks.
IT is only one example of the type of work that can be could outsourced on a more cost-efficient basis than keeping it in-house. Outsourcing specialized functions, such as human resources, finance and accounting, can provide access to high-quality experts on an as-needed basis, trimming the costs of recruiting, training, salaries and wages, and employee benefits.
The pandemic has also taught business owners about how effective and low-cost video conferencing technology can be, compared to face-to-face meetings. A greater reliance on virtual meetings could lead to lower travel expenses. Canceled conventions, seminars and trade shows could translate to travel savings, too.
If there’s one thing this tumultuous year has made clear, it’s that static one-year budgets have a limited usefulness in a rapidly evolving business environment. This is an opportune time to adopt rolling forecasts that can incorporate changing circumstances on a timely basis, facilitating more agile responses. Contact our accounting and assurance professionals to help re-calibrate your business’s budget to reflect today’s uncertain marketplace.