How can you plan for your business future when sales may go up, stay the same or hit another dip?
The long-term unemployment and depressed housing market of the past four years have resulted in a pervasive sense of uncertainty, especially for small businesses dependent on the disposable income of consumers.
In this situation, a static one-year budget is next to useless. So is a cumbersome budgeting process that takes months to conceive and implement.
Conservation of cash, optimal inventory and staffing levels, and right-sized resources are key to successfully navigating this uncharted economic landscape. Deploying your assets wisely requires nimble management – and a flexible budget.
In contrast to traditional budgets, a flexible budget may include a range of scenarios or a shorter time frame, or both. Three scenarios at a minimum should be prepared: best, worst and most-likely cases.
A bare bones worst-case budget will show you exactly which expenses are crucial and where your break-even point is. What would happen if you lost a major client or there is another recession dip? Using this information, you can create contingency plans now, rather than in the midst of a crisis.
Prepare your flexible budget scenarios for shorter time increments – for instance, in six-month blocks. You can build a 12- or 24-month budget in various configurations to test business outlooks and help decide exactly when you’ll be able to add employees or make new capital investments with a degree of certainty.
Preparing a flexible budget means digging deeper into the line between fixed and variable costs. Fixed costs are those expenses not tied directly to a level of output – rent, loan payments and core staff. Variable costs such as inventory, supplies and shipping are dependent on sales volume.
Some costs are mixed, such as electricity, which has a base cost but may rise and fall with production and sales. A standard budget accounts for fixed costs and then projects variable costs based on the expected level of sales.
Rather than considering all your fixed costs as not subject to change, think about the level of activity they support.
The number of project managers goes up and down with projects and associated revenues, so is considered a variable cost. The assumption is, if you hire more than a certain number of managers, you will need another administrative assistant.
A review of work flow and the time the assistant actually spends helping each project manager may reveal a relationship between the two functions that turns a formerly fixed cost into more of a variable one.
In response, perhaps you hire a half-time person or add duties to a presently underutilized staff person. Contract employees can also help fill gaps on an as-needed basis.
Some fixed costs aren’t subject to negotiation, of course. But trimming or delaying expenditures across the board will help conserve cash. Once in place, a lean mindset can be a benefit even when sales take an uptick.
Any investments and new expenditures can be thoughtfully considered as to their true benefit.
Conversely, setting aside some resources so that you can take advantage of unexpected opportunities is a good idea.
Once your flexible budget is in place, it may be beneficial to update it on a rolling basis if your particular marketplace is struggling or volatile. After sales stabilize, it may be sufficient to update in six months. Depending on economic forecasts, develop a budget for the next period. While no one can predict the future, especially in this economy, a flexible budget is one tool that can help your business survive the uncertainty.
The technical information here is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS.
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