Nobody saw 2020 coming when organizations put their budgets together in late 2019. As we enter the budgeting cycle for 2021, there is no clear picture of what the sustained new normal will hold. How do business owners confidently and competently approach budgeting with this level of uncertainty?
Forecast with Care and Stay Flexible
To echo the iconic business phrase from the book “Good to Great,” it’s important for leaders to firmly “embrace the brutal facts” of how the current economic situation has affected their business and to deeply consider what the continued impacts are likely to be. Companies generally approach annual budgeting with growth in mind, but current circumstances suggest a different approach: adopting a more flexible mindset while moving through the process and the year ahead.
Complicating the budget cycle this year is the difficulty of assessing what performance is going to look like over the next 12 months in such a dynamic environment. Some companies have seen an increase in business during the pandemic. Those that have not should identify areas in their budgets that provide flexibility to maneuver, should economic conditions bring additional unexpected negative impacts in the coming year.
For most companies, the hope each year is to meet or beat your budget. What additional planning is required due to the COVID-19 impact and ongoing uncertainty? What will this mean for the business? What actions can be taken if further impact occurs? These could be investment adjustments, hiring freezes or labor cuts, operational changes, and more. Every business leader needs to know what levers they can pull under potential impact scenarios.
Maintain a Strategic Mindset and Look for Past Patterns
Even in such a tumultuous environment, leaders should prepare their near-term budgets in the context of their broader long-term strategic vision. Ask the tough questions. Is it important to find a way to continue to invest in the company during this time? Should this be a save-at-all-costs period for the business until the economic picture is clarified? What will put the company in a position to take advantage of the recovery when it comes?
In all cases, leaders must ensure their balance sheet is as strong as possible and that they can weather the storm. Adopting an approach that is too conservative could limit an organization’s ability to take advantage of the economic rebound when it happens. Here’s how one organization looked at past patterns to inform their planning:
When COVID-19 began unfolding in the first quarter of 2020, “ABC Company” almost immediately experienced a 20% drop off in revenue from the previous year. At the same time, their staff demonstrated a range of reactions – everything from thinking that they were in imminent danger to others thinking the concerns were much ado about nothing. Leadership suspected that once they got through the initial wave of impacts that business would come back and that there would be opportunities they could take advantage of. They consulted with their external finance advisors to challenge and test that hypothesis.
Part of the planning involved looking at the company’s and market’s performance and response patterns throughout the 2008 downturn and subsequent recovery. Several similarities were identified, as were “apples to oranges” elements that were not applicable in the current situation. After comparing all the variables, ABC’s leaders concluded that they would recover sooner than many businesses would, even though they experienced significant impacts up front.
This informed ABC’s decision to not slow down hiring, but rather to start ramping up hiring in advance of the recovery they anticipated. They prepared a range of forecasts complete with if-then implications and actions that have ultimately put them in a stronger market position compared to others in their market.
Examine and Act on Leading Indicators
While leaders should continue to monitor their balance sheet and cash flow with great scrutiny, they should also remember that financial metrics are really lagging indicators. In periods of greater unpredictability, it’s even more important to keep a close watch on leading indicators that may suggest actions that will put the business in a stronger position. These leading indicators could include:
- Sales lead volume and pipeline health
- Inventory levels and integrity of supply chain
- Average order value
- Average contract/agreement lengths
Examining these and related KPIs will provide greater insight into the company’s health. In evaluating them, leaders should be careful to honestly assess what metrics appear to be temporary anomalies and which look to be predictive of near-term future conditions.
Control What Can Be Controlled
Business leaders should not expect to perfectly predict the broader ups and downs of the economy in 2021 and beyond. Even in unprecedented times such as these, leaders can look to the past for insights to help guide decisions. Most importantly, leaders should remain nimble, prepare for a wide range of possibilities, and stay vigilant in monitoring leading indicators to ensure they are moving in the right direction.
Need help developing your own plan in this uncertain environment to put your business on a better path to success in 2021? Request a free consultation from a vcfo expert who can help you strengthen your planning process.