How to Adjust Your Budget in a Recession
With Forbes reporting a massive decline in retail sales, industrial production and manufacturing, it should really be no surprise that Bloomberg declared there is a 100% chance of a recession in the next 12 months.
Our Cloud CFO team has always advocated dynamic budgets. Budgets that are more adaptive to market trends force teams to come together to plan and forecast. This approach yields strategic conversation. I recently wrote on how a zero-based budget can help reduce spending when you are facing a cash flow crisis. So, how do you make those adjustments to your budget while being chased by a looming recession?
To Begin to Adjust Your Budget in a Recession, You Have to Rethink Your Budget Period
The current economic downturn may warrant you adjusting your normal budgeting period. You may want to amend your “budget period” from yearly to quarterly, or from quarterly to monthly, to tighten your control over any expenses carried over.
Toss out the idea of looking at your previous periods like you have done with traditional budgeting. This method assumes that all of your expenses were necessary. In this climate, many businesses are being forced to quickly redefine “necessary.” Complicated phone systems are being replaced by Zoom memberships and photocopiers are being traded for Dropbox. Printing costs have plummeted, while IT requests have gone up, as everyone tries to navigate remote access. Why not replace your traditional budget with a zero-based budget?
Steps to Building Your Zero-Based Budget
- Have your sales manager provide a three to six months forecast for revenue. Then, cut that number in half (sales people are often “optimistic” and these are unparalleled times).
- Next, loop in your management team. Have all of your department managers involved create a list of non-negotiable expenses.
- Think from a cost-management approach. Determine where you can adjust operations or spending to achieve your goal. It might be a good time to shop around for price-matching and discounts to lower your cost of goods sold (COGS). Look for redundancies that can be eliminated.
- Only approve spending that shows a return on investment (ROI) in the next period or two. Look for a short-term impact rather than chasing long-term ventures. For example, reallocating print advertising budgets to targeted online campaigns allows you to measure ROI.
- Prioritize the strategies you plan to roll out.
- With the help of your managers, link incentives to key targets. Incentives will align your team to be working towards the same goal of either cutting costs or increasing revenue to meet your budget.
Related Read: In this post on zero-based budgeting for profitability, we discuss tips for encouraging employee engagement in a cost-management environment.
When Zero-Based Budgeting Just Isn’t Right for You
Not all companies can thrive in a cost-reduction approach. Businesses that have a large R&D team or have high customer service needs may find those departments have trouble justifying their ROI on budget requests.
If this is the case, you may want to employ a cash budget in the short-term to help you manage the recession. Put simply, you will want to list out all cash inflows and outflows expected in a fixed (i.e., short) period of time. Given that we are still in a point of uncertainty in this global pandemic, try to employ projections based on modeling available. This is an inexact approach; however, it will give you a better idea of what your cash flow may look like in the upcoming period and help you strategize accordingly.
No matter how you slice it, running a business in the face of an impending recession is a daunting task. Whether you are considering adjusting to a zero-based budget or a cash budget based on modeling, you are looking at a time-intensive process. However, the time you invest now will better prepare your business for the uncertainty ahead.
For more information, contact Chris Arndt at firstname.lastname@example.org or at 312.494.7014. Visit ORBA.com to learn more about our Cloud CFO Services.
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