No crystal ball? Six Crucial considerations for budgeting during uncertain times
By John W. Allen, CPA
If you happen to have a magic crystal ball in your filing cabinet, this is the year to use it. Given the continued impacts of the pandemic and a general sense of economic uncertainty, it is imperative that businesses carefully look at every line item on their budget.
From ensuring 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 crucial areas to tackle as you plan for 2023 and beyond:
1. Realistic planning
This is not the year to give each department a cost of living adjustment and 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 challenging 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.
This year’s budget will require accurate planning from both the sales group and the pricing team.
I’m sure your costs are higher than you would have thought at this time last year. Sales price adjustments probably happened in 2022, and now it is staring you in the face again for 2023.
The current market in most industries is becoming very price-conscious as consumers have less disposable income. Many companies will need to let profits slide from 2021 highs and focus on maintaining sales to keep operations going well and everyone employed. The challenge is finding a balance between recouping lost profits and severely impacting operations due to losing too much in sales.
Many sales managers tend to be optimistic, which makes them good at their job but can cause them to project too rosy a picture. This year, CFOs and controllers must reign in that optimism.
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.
Every manufacturer we talk to right now has the same issue: Not enough employees and a small pool of interested candidates. Many companies have to make tough decisions about how to operate with fewer employees.
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
If you have any variable interest rate debts, now is not the time to expect the same interest expense as last year. The general expectation from the Federal Reserve appears to be that rates will continue to rise in 2023.
In the face of rising costs and uncertainty, focus your estimates on the most recent quarter and then add a cushion to account for increases instead of looking at last year as a whole. Even if gas prices continue to decline, an overall drop in energy costs will not come quickly.
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, 2023 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 whittle them down to only the most necessary.
Your 2023 budget should have a lot of cushion built into it so you can weather sudden shortages, price jumps for specific materials or how the consumer may react to higher interest rates cutting into purchasing power.
It is imperative to see what experts in your industry anticipate as we continue to move through the unknown.
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.