COVID-19 is changing everything. It’s time to rethink how we plan for the future.

Small business budgeting is never an easy process, but it is one of the best tools we have to execute a plan to achieve short and long-term goals. So what happens when those plans go awry? The COVID 19 pandemic impact has forced us to turn on a dime, adjust to temporary business disruptions, and plan for an uncertain future. (Note the only reason the word “pivot”  is not used here is that we see or hear that word about every 2.3 seconds.) In this context, budgeting can seem like a waste of time and effort, but are we dismissing it too quickly? The pandemic has forced us to rethink the way we do business and budgeting is no different. A more flexible, out-of-the-box approach can still provide you with a practical roadmap to guide your business.

Getting the Information You Need

Before we talk about solutions, it is important to acknowledge that many business owners still don’t understand the problem they have with budgeting (hint: it’s not the pandemic). If you don’t have accurate and consistent bookkeeping, you don’t know your numbers. Furthermore, in what comes as an unpleasant surprise to many people who eventually hire a qualified bookkeeper, incorrect or incomplete numbers from the past will skew your current numbers and undermine your ability to budget for the future. If you do anything else, as much as we would love for everyone to devour this article and pass it along to all their friends, stop and ask yourself if you have invested your time, effort, and money into getting the information you need. If you are a small business unsure about where you stand, contact us for a complimentary assessment of your current books.

Dealing with the Ghosts of COVID Past and Present

Predicting the future may seem like an exercise in futility at this point, but it is possible to lessen the uncertainty by doing an honest assessment of your business. If your numbers are in place, you will want to assess the impact of COVID-19 with an analysis of your actual versus expected numbers before and during the pandemic. If you have a budget already established, a budget variance report can quickly provide this feedback. If you have not yet created a budget, you can look at last year’s historical data in your accounting and bank records, on a month-by-month basis, to give you a baseline for comparison and ask: 

How did my business perform relative to expectations before the pandemic? 

For most industries, business owners indicated a high level of optimism in late 2019 and early 2020. Was your business able to fulfill those expectations? Did you take outsized risks in the anticipation of a strong economic outlook?

How did my business perform relative to expectations during the pandemic? 

Almost all businesses experienced some sort of disruption, particularly during periods of mandatory quarantine, but to what extent? The emotional toll of this experience left many business owners riddled with anxiety, but the numbers provide a more clear picture of what really happened. Where did you cut expenses? Which areas of your business remained unchanged? Where did you find unexpected sources of revenue? How did emergency funding sources such as the Paycheck Protection Program alter your spending decisions? 

These numbers explain your current situation and give insight to the next critical question…what now?

Where to Go From Here – A New Idea

As you look to the future, the lessons learned from the past few months serve as your guide toward a new normal. A more conservative budget is likely warranted given the changing economic landscape, but to what extent you should be hoarding cash? Unfortunately, that answer is not yet clear. We are still learning about the spread of Coronavirus and don’t know for certain what future disruptions may befall us. Does that prevent us from making a practical and useful plan forward? Not necessarily. 

Rather than spend time revising budget numbers that could deviate wildly with future outcomes, small business owners would be well served to consider multiple scenarios that plan for the worst and hope for the best. A simple adjustment is to build up a contingency budget. Similar to an emergency fund, this is money set aside for unanticipated expenses each month to cover you should your budget go off track. This is a relatively easy change to apply, but keep in mind contingency budgets have their shortcomings. Dipping into this fund each month is a reactive strategy that doesn’t prioritize where you should be spending money and why.  

Another more proactive approach, is to make different budgets based on best, good, and worst-case scenarios. Ideally, these scenarios would be made on a case-by-case basis, depending on the analysis of your pre-COVID and present situation. For businesses who have not experienced a significant downturn, a best-case scenario would be to earn revenue and incur expenses expected before the pandemic occurred. In other words, your original 2020 budget numbers, which are generally based on a percentage increase from the prior year. For other businesses, the best-case may be revised based on changing circumstances. Your worst case may be a reduction in revenue similar to what you experienced at the height of the 2020 shutdown or the lowest amount your business could tolerate. The good scenario would lie somewhere in between. It is important to take into account both the change in numbers and the change in how you would do business in each of these scenarios. Would you be working from home during a mandated shutdown? How would you reallocate expenses if economic activity slowed? At what point would you have to furlough employees? 

By having different budgets in place, on a month-by-month basis, you can more easily adjust and make faster decisions should a temporary event, such as a mandated quarantine, go into effect. It is also important to remember these events are not just precipitated by state and municipal governments. Any business is vulnerable to interruptions and lost productivity during a pandemic and need to remain as nimble as possible. Unfortunately, not every business owner has the time and resources to sit down consider all these scenarios. The thought of making one budget, let alone three, is enough to make some of us want to throw our hands up in the air, grab a glass of wine, and binge-watch bad, pre-COVID reality TV. (ah, the good ol’ days). 

How to Get Started (No Really…You Can)

If done correctly, the value of budgeting goes far beyond the initial investment of time, but many of us need that extra push to actually get it done. In an effort to help business owners take control and make a plan, Firm Numbers is now offering value-priced small business budget training. One session provides one hour of financial guidance with an experienced Chief Financial Officer to small and mid-size businesses for a fraction of the cost of hiring a formal consultant. Whether you need help drafting your first budget or adjusting to COVID-19 circumstances, our professionals provide personalized advice to get you started. For more information, join our waiting list here to take advantage of this limited time offer.

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