Creating a business budget in times of uncertainty
Even the most experienced business owner can sometimes be swung off course by market volatility, economic shifts and global events that impact the bottom line. Today, businesses are facing several unique and cascading headwinds that make forecasting, budgeting and planning difficult. Below, we review some of those challenges and provide steps for approaching your business budget with them in mind.
Supply chain disruptions
The breakdowns of our global supply chains are impacting businesses and consumers around the world with slow manufacturing and delayed shipping. We’ve been hearing more and more about the impacts to businesses with increases in shipping costs, storage expenses, delivery delays and logistics snafus.
As you build your 2022 budget, keep these current challenges top of mind and implement a budget amount range with contingency plans baked in. Outline your variable and fixed costs and set some “red flag” moments that cue you to perform a budget check throughout the year. For instance, if you can’t access materials you need or you lose a big client, return to your budget and course correct as needed.
Before setting your budget, also brainstorm cost-cutting measures that can be quickly implemented if revenue doesn’t match expectations. This exercise can help you manage headwinds as they come, whether its logistics, materials or something else impacting your bottom line.
To combat the supply chain issues, you may need to order materials in advance —far in advance, like 12-18 months— if you can confidently predict what you need. This can impact budget when you are paying for materials now that you won’t use or sell until next year. Financing or floating enough capital to make purchases this far in advance is challenging, to say the least—not to mention any costs associated with goods storage for that time. Talk with your financial partner to consider creative ways to leverage financing or working capital solutions that help you maintain momentum.
Labor market challenges
Recently dubbed the “Great Resignation,” today’s labor woes are just another challenge to be met with resilience. Whether you’re looking to grow or need talent to keep your lights on, the tight labor market can impact your bottom line. Here are some financial considerations in this tight talent market:
- Invest in and strengthen your current team – Talent development, wage reviews, internal promotions and hires can all help retain your current workforce. Keeping your current team in place can build stability in your budget moving into 2022.
- Recognize that hiring costs have increased – Average wages for new hires have increased, so be sure to anticipate not only more expensive new hires, but questions about raises and promotions from your current team. Focus on benefits to make up any difference in salary or hourly pay that they may be seeing in market, which can mitigate some of the impacts on your budget.
- Flexible work environments – Gone are the days of in-person work being expected. Now, many candidates expect flexible work environments, whether through working from home or a hybrid home-office schedule. Embrace the change and consider how the work from home shift can help you cut costs if your industry allows for virtual or asynchronous work.
- Evaluate your workforce like any other budget contingency – You workforce budget is not one you can control and can have major impact on revenue. Be shrewd in your resourcing forecasts knowing you may not have the upper hand in resignations and new hire negotiations.
Interest rate uncertainty
Interest rates have been in stasis for a while with the Fed keeping them down in these unprecedented economic and social times. However, the Fed is now hinting at an interest rate rise, which could impact your budget.
Are you planning to take out a business loan in 2022? Time may be of the essence. If you are ready for financing, it may work to your advantage to strike now while the interest rates are low. If you are confident in your lending needs, this can be a way to avoid longer-term costs associated with business loan interest. You can also consult with your financial partner to determine the cost/benefit of taking out business loans while rates are low, or waiting until you actually need the funds.
Additionally, consumer confidence can take a hit when interest rates rise, so businesses that rely on direct sales or services should include contingencies in their business budget.
The pandemic is one of the reasons inflation is looming. But, in truth, inflation is a common ebb and flow of our lives. When considering inflation in your business budget, conduct a spending and expense review to see how much you are paying for goods and services. Are there sensible ways to reduce costs? If yes, plan to implement those cost reductions throughout the year, and factor those into your 2022 expense predictions. Be sure to keep an eye on shipping and material costs as I mentioned above, and closely analyze every non-essential dollar coming out of your bottom line.
Now is also a great time to ensure you are optimizing processes and embracing technology to further reduce costs without losing the value of your good or service. Review your accounts receivable and payable processes and make a plan to transition to digital wherever possible.
Inflation also lowers the value of the dollar as it simultaneously increases the value of assets, so if you have high debt, inflation can make it worthwhile to pay it back faster. For instance, your real estate loan payment may remain the same, but the value of your property may have increased, so you gain from inflation. Similarly, inflation can open up opportunities to evaluate your pricing structures – as the economy collectively raises prices, you can, too.
Continuing pandemic circumstances
As if anyone could forget, the pandemic continues. With that comes consumer challenges with online or virtual interactions now a necessity. And, maintaining the health and safety of your clients and workforce can increase expenses. As we head into the third year of the pandemic, review your expense trends from 2020 and 2021 for PPE, property modifications, technology, etc., and determine what your baseline expense should be for 2022.
Building your business budget is a nuanced undertaking in the best of times. In a season of headwinds, it can be much more difficult to forecast income, expenses and the impacts of the market. The good news? You don’t have to do this alone. Find a banking partner you trust to work with you on your 2022 financial plan.
If you are interested in learning more about how UMB can help your business as a financial partner, visit our website.