When the good times are rolling and cash is flowing, company expenses tend to get the green light without careful scrutiny. In a difficult economy, the rules of the game change. There’s not much leeway for certain expenses, and businesses that don’t alter their budgets and plan several years out will not be prepared to weather the financial storm.
“Business owners should not panic, but they must be realistic,” says Kimberly Zagar, CPA, an associate director in the entrepreneurial services department at SS&G Financial Services, Inc. “To ignore the economy and not take steps to ‘lean’ your organization is a disservice to your company. Think well in advance create budgets that address the next 18 to 36 months.”
Smart Business spoke to Zagar to learn how businesses should evaluate their budgets for 2009, what expenses to reconsider and how to position a company for growth in recessionary times.
What should a recessionary budget look like, and what factors should business owners address upfront?
Start by forecasting realistic sales numbers, and work through what-if scenarios: What if sales stay the same? What if sales decline or grow? What if you lose a key customer? How will you react if reliable customers pay slowly? How will you pay vendors if accounts receivable aging is excessive? What if vendors raise prices? What if a key vendor goes out of business? Do you have backup vendors in mind, and have you discussed pricing with these potential vendors? Do you plan to cut a product line or add a new one? Ultimately, where will revenue come from in 2009 and the years following?
Design a three-year plan that captures the full impact of business loss and gain. Your banker will be interested in how your business will respond to an expected decrease in revenue and how you plan to recover. So think ahead. Examine all of these factors that could pinch cash flow in the next 12 to 18 months. Planning your recessionary budget will be like one of those choose-your-own-adventure books, where certain outcomes (losing a customer, adding a product) can result in an entirely different story, or budget.
What expenses should business owners curb as they look for ways to run leaner in 2009?
Examine expenses that tend to get out of line, even in good times. Get back to the basics and remember; you can’t afford to spend money that you don’t have. Sounds like common sense, but following this rule can be difficult. Consider charitable donations. Perhaps your business has always given generously to a local organization, but this year, doing so would put you in a cash crunch situation. You may need to scale back until you are in a better financial position.
Review your meals and entertainment expenses, and determine how much you can cut without it being detrimental to your business. Review phone, automobile and luxury expenses, such as data plans on cellular phones. Talk to your service providers about bundling options and revisit the terms for current Internet or phone features to make sure they still make sense for your business.
Essentially, review every line item on your budget and highlight nonvital expenses that can be reduced or eliminated. Now is the time to consider cost benefits of expenses and determine what can be changed without compromising the integrity of your business or the product/service you provide.
What expenses should be the last cut from the budget?
Assuming that your business is appropriately staffed, do not cut payroll unless it is for the right reasons: because someone is not productive, not performing job duties or you can’t afford them. Payroll should not be a reactionary cut. Payroll should be handled delicately because your company culture, employee morale and, ultimately, customer satisfaction depends on how you handle personnel. If you slash positions, morale could drop. Consider the domino effect that terminations have on an organization. Good workers may look elsewhere for employment if they are uneasy about their futures with your company. When they leave, what’s left?
What message should employers convey to their people during this time?
Reassure your staff and let them know you have a plan. Tell them upfront that times are tough and the budget is tight. Emphasize that you are working hard to keep the business healthy, and ask for their help. Show your employees your plan so they understand how their actions can make an impact on the company’s ability to run smoothly in a tough economy. Most importantly, if you will not be cutting payroll, assure them of this. Employees are stressed during these times and they’re looking to their managers for reassurance that their futures are safe.
What should business owners communicate to their advisers and the bank?
Be open, and share your plan with your advisers and the bank. Understand the terms of current loans and requirements. If you anticipate needing funds in the next few years, consider asking for funds now before you are desperate. Ask your banker about financial options to help your company bridge from this recession to more prosperous times.