How to Approach Your Business Finances For the Rest 2021Ramon Ray
Insights from Paul Reed who runs Reed & CO an accountancy firm in Bristol, UK.
The year 2020 was incredibly tumultuous for business owners. Now, 2021 is well under-way, and we still don’t know what kind of market we will be facing. Some predict a fast rebound due to the stimulus money, while others predict that growth will stagnate.
To make matters worse, many entrepreneurs have spent a good deal of capital on worker safety measures and furlough fees. It is unclear how necessary these will be as the vaccine operation unfolds slowly.
How are business owners supposed to prepare and budget with such an uncertain outlook for the future?
Business as Usual or Rolling Budgets?
As we slowly return to normalcy, we will want to return to the regular budgeting, which provides a measure of security for our business. However, uncertain times require a good deal of flexibility.
This is not the time for a by the numbers, unimaginative budgeting scheme. Therefore, it is best to question the significant assumptions on which you based previous iterations.
Maintaining Flexibility in Your Budget
Here are some things to include in budgets this year:
- Trim the fat in your decision-making process.
- Include stress-test scenarios and worst-case scenario hypotheticals to guard against the worst dangers of the unstable market.
- Reexamine your business drivers. The marketplace has changed, and your assumptions should change with them.
- Keep part of your finances uncommitted as contingency resources. Flexibility in budgeting is meaningless without money to back it up.
Market Changes May Be Permanent
Many businesses have faced an entirely different marketplace during the pandemic. We may find it comforting to believe that your business model will now slowly return to normal.
However, it is not necessarily so. For example, many brick-and-mortar stores have incorporated a more significant e-commerce component into their sales to compensate for lost in-store sales. Some of those changes may be permanent, as customers are now comfortable making transactions online, where they once preferred to visit an outlet.
The new marketplace realities may mean you need to question the basis of your supply chains. Do not be afraid to do so. The first companies to adapt to the new environment will be the ones that prosper.
Budget from a Zero Base
Usually, when we budget for a new year, we examine problem areas and leave what is working in place. Please don’t hate me when I tell you that this year, that isn’t an option.
With the uncertainty and changes we face this fiscal year, every budgeting assumption has to be questioned and justified. It is a particularly arduous process.
However, this is, without a doubt, the year to engage in the complex process of rebuilding and reprioritizing. There is not a single business out there that is not changing its spending. Therefore, it is more a question of how to change than whether to change.
When digging deep into the budgeting process, you will find some of the allocations (and possibly many) are based on outdated pre-COVID assumptions.
Have a Good Billing Strategy
Clients who do not pay their bills on time are always a problem. But now, it is more of an issue than ever before.
Remember that the uncertainty isn’t just hitting your company. It is also hitting everyone with whom you do business. Therefore, inconsistency in payments is inevitable.
One way that works for many firms is to change the incentive structure. You may want to a ‘2/10 Net 30’ strategy. That means that if your customer pays the invoice within a ten-day period, they are rewarded with a 2% discount.
Another Crisis May Occur
We are past the worst days. Probably. But from both a health and financial perspective, things may get quite hairy again.
The three things you can do to prepare:
- Beef up your business insurance
- Create emergency contingency plans
- Set aside a substantial fund for a rainy day
If we can sum this advice up in a few words: keep your business as agile as possible in 2021. It is a year of greater risk and greater opportunity than most. The companies that respond quickly to changes will not only survive; they will positively thrive.