In the vast majority of sectors, 2020 was just a bad year. 2021 will be different in the sense that alongside the pitfalls, there are incredible opportunities. However, to take advantage of them, business owners will have to be agile and flexible in the coming year.
What makes the year so unpredictable? The market is recovering from its lowest COVID-19 induced point. Unemployment was not as bad as predicted, and customers are flush with cash from the stimulus.
However, aftershocks and any number of obstacles on the road to full recovery are all but a certainty. Most businesses will have to continue to spend an inordinate amount on worker safety measures. There will also be more spending on furloughs and market adjustments.
The exact mixture of restraints and opportunities ahead remains unclear as the country is very slowly vaccinated.
Despite all these question marks, business owners are expected to create and stick to long-term budgets. How can firm budgeting be accomplished in these times of uncertainty? Is it even necessary?
We will do our best to answer your questions.
Should We Return to Strict Budgeting to Manage Our Business Finances?
It doesn’t matter how hard you may have tried; there is no way you were able to stick to a pre-determined budget in 2020. If you came even close, you deserve a standing ovation. Instead, the chances are that you had to do a significant amount of improvising and have gotten used to a rolling budgetary operation.
Now that the environment is getting (a bit) more stable, it is tempting to return to the comforting coherent structure of budget we enjoyed in 2019 and further back.
Don’t listen to those instincts. We are not back in the pre-pandemic world. In fact, in some significant ways, we never will be.
You will want to approach budgeting and finances differently this year. The key is to maintain the flexibility to deal with an environment that is constantly changing.
Here are some ways to maintain flexibility in your budget.
Streamline Your Decision-Making Process
You are going to need to respond to changes quickly in real-time. The red-tape complications and delays you face in making financial decisions (or others) make it harder to navigate.
2021 is not a year for drawn-out decision-making through consensus. Put together a small core of individuals with sound judgment who can work together to make essential decisions on the company’s direction.
Incorporate Stress Tests into Your Planning
It wouldn’t surprise anyone if there were a further political, economic, or a continued health crisis in 2021. If the last few years have taught us anything, it’s to expect the unexpected.
Although you cannot predict every scenario, you can prepare yourself for some of the worst ones. Incorporating stress tests is an excellent way to keep your company agile and ready for any eventuality.
Your budgetary process should account for worst-case possibilities, as well as unforeseen opportunities. In the current environment, the two can happen in close proximity.
Reexamine Your Business Drivers
Anyone running a business in the last year is aware of how deeply customers and clients have changed their behavior. They engage with us or choose not to, for different reasons than they did before.
Most of us know that the market will not return to its previous structure in the back of our minds. Some of the new behavior will stick. In other cases, it will revert to the pre-pandemic norm.
For example, you may be selling more online than you did before the pandemic. Therefore, your business is operating differently. There is no reason to assume that the balance will revert to what it was previously. You may find that some of the pandemic period adjustments turn out to be permanent.
The future success of your business could depend on recognizing which is which and doing so quickly. Therefore, you have to reexamine what brings business to your door.
Keep Contingency Resources in Reserve
It is one thing to pay lip-service to adaptability and flexibility. Following through is a whole other story.
What is the difference? Money. If your budget commits all of your funds in advance, your business will be unable to respond to market changes.
The more uncertainty your marketplace faces in the next year, the more you will want to maintain in reserve.
Budgeting from a Zero Base
Putting together a new budget is always hard work. However, this year (unfortunately) is going to be even more challenging.
Typically, we can rely on a certain amount of stability from year to year. However, 2021 is an unpredictable year. It won’t be a continuation of the pandemic marketplace. Yet, there won’t be a return to the pre-pandemic world either.
Instead, this year will be something completely different. Therefore, it is best to start afresh when it comes to budgeting.
The usual budgetary process involves making some changes. However, this year it is certain that all of the priorities will shift. Therefore, there is no escape from a case-by-case justification and reexamination of every line in the budget.
Cheer yourself up with the knowledge that next year you won’t have to engage in this arduous process. At least we hope not.
Make Sure You Have a Good Billing Strategy
Getting clients to pay, and do so on time, is always a problem. However, in an unstable market, the problem is worse.
Some of this behavior is unscrupulous, but in most cases, it is because everyone else is hurting as well. Therefore, one way to boost your billings is to offer positive incentives.
Some businesses offer a discount for payment within ten days. Even a small discount can do wonders for speeding up payments.
If you have one takeaway from this article, it is this: stay agile and able to respond quickly to market changes. Your business will likely look different at the end of the year, so take steps to make adaptation as painless as possible.
2021 presents as many opportunities as risks for your business. Therefore, make sure your company is ready to capitalize and thrive in this rapidly changing environment.
Paul Reed runs Reed Tax, an accounting firm within the UK. He has experience working with small to large companies across a range of industries.