Corporate budgeting during a pandemic: 6 crucial steps
Given the national and worldwide economic uncertainty posed by the COVID-19 pandemic – plus our current political uncertainty — it is imperative that businesses carefully look at every line-item on their budget.
From ensuring your key executives are realistic with their revenue targets to making informed choices about staffing levels, now is the time to tackle what is likely the most challenging budget you will ever develop.
The following are six key areas to tackle as you plan for 2021 and beyond:
1. Realistic planning
This is not the year to give each department a cost of living adjustment and then let the managers spend it as they wish. This is the year that the budget committee and key executives must make critical decisions on operating during these unprecedented times.
Key executives need to be realistic in their financial projections. Profits will most likely be down, and in some cases, breaking even will look good. Plan for at least two rounds of budgeting and allow department managers to present options, knowing cuts may likely become necessary.
From there, see how all the departmental budgets fit in with the overall executive plan. Determine the level of cuts needed to achieve your company’s goals and then review department by department, line by line.
Finally, hold managers accountable for sticking to those budgets.
Sales managers tend to be optimistic, which makes them good at their job but can cause them to project too rosy a picture. Especially in these tough times, CFOs and controllers must bring that optimism back down to earth.
Compare sales projections to your numbers over the last few months. Do the estimates make sense? A conservative sales budget is not exciting, but given the uncertainty, it is more important to be realistic and prepare for the unexpected.
It seems like everywhere you go, someone has a “help wanted” sign in the window. Several factors caused by the pandemic are hindering companies from hiring lower-wage positions.
If your company is carrying unfilled slots, now is the time to decide whether you need those positions. Are you projecting lower production or revenues? If so, then you have already answered the question.
4. Expenses and debts
With travel restrictions abroad and many companies enacting no-visitor policies because of COVID-19, your company’s travel expenses will likely be substantially less than prior years.
Also, as more companies struggle, bad debt expenses are rising. We are seeing Accounts Receivable turnover rates growing as cash-strapped businesses look for more time or favorable terms.
Go through your Accounts Receivable Aging with your collections person and identify the customers that could be next on the write-off list. Budget as if those customers will not be paying and add a cushion for the inevitable customers who do not have an issue yet but may have problems.
5. Capital projects
For many industries, 2021 is not the year to take on many capital-intensive projects. With so much uncertainty, we advise not taking on projects that could cash-strap your company.
Determine the maximum spending level from the start based on projected cash flows. Ask departments to give you a ranked “wish list” of desired projects and be willing to whittle them down to only the most necessary.
On the plus side, bank interest rates are not getting much lower, so it is a great time to borrow if you have a large, must-do project. However, banks vetting financial statements and forecast projections carefully to protect themselves from companies that have been hurt by the pandemic.
Remember the toilet paper shortages in the spring? We are now seeing new shortages caused by shutdowns and operational changes companies must make to satisfy state guidelines.
It is imperative to see what experts in your industry anticipate as we continue to move through the pandemic. What potential shortages or supply disruptions could impact your company? Create a budget that can absorb the unexpected.
As you work through your budget process, take your time, do the proper research, and do not shy away from the tough decisions that lie ahead.
John Allen is a Manager with Boyer & Ritter LLC, where he provides audit, accounting and tax services in the Small Business, Manufacturing, and Construction practice groups. For questions, reach out to your Boyer & Ritter representative or reach John at 717-761-7210 or firstname.lastname@example.org.