Budget Planning During a Pandemic
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 completely 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 I’m not using the word “pivot” here, is because 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.
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 I 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 unsure about where you stand, contact us for a complimentary assessment of your current bookkeeping.
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 to give you a baseline for comparison and ask:
1. 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?
2. 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? How did emergency funding sources such as the Paycheck Protection Program alter your spending decisions?
These numbers not only explain your current situation, but they also 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 isn’t well known. Unfortunately, we are still learning about the spread of Coronavirus and have yet to know 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 very simple form of this is to build up a contingency budget. Similar to an emergency fund, this is money set aside for unanticipated expenses each month that covers you should your budget go off track. This is a relatively easy adjustment, but it is also highly reactionary and doesn’t help you prioritize your spending in the most critical areas.
Another more proactive approach, is to make different budgets based on best, good, and worst-case scenarios. Your best-case scenario is based on revenue numbers and expenses that mirror the prior year. Your worst case would reduce your revenue by the percentage drop in revenue at the height of the 2020 shutdown or the lowest amount the business could tolerate. The good scenario would lie somewhere in between. By having these 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. After all, these shutdowns are not just mandated by state and municipal governments. Any individual, including key employees and management, may find themselves in a situation where they are unable to work for a period of time throughout this pandemic.
The major drawback of this strategy is time. For many of us, the thought of making one budget, let alone three, is enough to make 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 ole days). In an effort to address these and other budgeting frustrations, Firm Numbers is now offering discounted coaching sessions to help business owners take control and design a financial roadmap that works for their business. For more information, join our waiting list here to take advantage of this limited-time offer.
Firm Numbers is dedicated to helping pull entrepreneurs out of decision-making based on emotion and get the necessary data to objectively run their business. Book a free consultation online to find out how our bookkeeping and accounting packages can help you be the boss, not the bookkeeper.
