Budgeting for an uncertain year ahead

So, what is 2022 likely to look like? 

Probably, what you forecast, then go out and make of it.

The most important thing we know about the future is that it is unpredictable, so to plan for this we need to look at a range of scenarios that should, could and might occur.

Our financial thinking should cover the things we know now that we will or may need, and it should cover the things we do not yet know we may require in the future. 

The strength of having a range of considerations in your annual budget and/or three year forecast – and looking beyond this to look at the things that might just happen if certain conditions are created and opportunities realised – is that it will give you options and choices to consider.

It is knowing your potential options and investment choices that it gives you resilience and robustness for the future. 

Looking ahead, will help you to spread your risks when making financial decisions and it will lessen the likelihood of your chosen options failing or underperforming.

As we come to the end of 2021, its time to start thinking about the budget for next year. One thing is certain – uncertainty.

Business planning and budgeting have become increasingly complex in today’s uncertain and volatile environment. Firms have had to adapt and become more agile in order to react quickly to changing market conditions and budgets should be created with this in mind.

Start with your fixed costs – the things that you can be certain of such as premises, staff costs, raw materials, light, heat, electricity, IT, etc. Next, turn your focus to the longer term aspects of your budget with an analysis of existing strategic or capital spending plans.

Stress test the assumptions, scenarios and decisions that have gone into your draft budget. What if your sales don’t grow next year? What if your annuity income falls because 10% of your customers leave and go to another provider? How does this affect the profitability of the firm?

In uncertain times, it is important to be pragmatic. Create 3 scenarios for your budget – high, medium and low. Start with the medium scenario – the “expected” outcome and from there you can derive variations on whether things turn out better (high) or worse (low).

Scenario-based budgeting is not intended to predict exact outcomes.

Instead it is intended to help the business to understand the likely variances and prepare accordingly.

Hold back some spending centrally as a contingency. This builds some flexibility into the budget so that the business can react to changing circumstances as the year progresses.

Calculate your budget using new data, not historical projections. Budgets may have been squeezed in the past 18 months and may not reflect the current or predicted market trends.

Finally and most importantly, build realistic income models.

Ensure you provide for bad debts and write offs in each of your high, medium and low scenarios.

Cash is king and in uncertain times every business must focus on getting cash in on a monthly or even weekly basis.

Billing cycles and cash collection management should be at the top of the agenda for the management team and offering extended payment terms to customers should be avoided as much as possible.

Build these principles into your budget and ensure you keep adequate reserves in case you encounter headwinds during the year ahead.

Whether you have an established business or considering starting up a business we can work with you. We can package your ideas into a professional and focused business strategy and plan.

We will help you to assess the future viability and direction of your business. And help you to develop the strategic action plan you need to get you where you want to be >read more