As an owner of a small business, there are many responsibilities that you need to have a hand in. Drafting, maintaining, and adhering to a budget are some of the most important tasks. These are necessary when running a successful business.
As the fourth quarter of 2020 approaches, now is the time to start fleshing out your 2021 budget. This year will be different. The many hardships that COVID-19 has caused will have a direct impact on how businesses will budget for the new year.
Let’s take a look at some of the best practices to follow when establishing your business’s 2021 budget.
Dig deeper into your 2020 numbers
To effectively create a new budget, you need to know how well your business did over the previous fiscal year. This has always been the case. However, really understanding your historical financial details will be more important than ever as we head in 2021.
Chances are, your 2020 numbers were a lot different than previous years. This is to be expected. Take the time to truly understand why the numbers are different. That will help you plan for the new year.
Begin digging into your 2020 financial records. We suggest that you look specifically at your company’s cash flow.
A company’s free cash flow (FCF), is a number used to calculate the total amount of cash a company has after accounting for its cash outflows. A company’s free cash flow is mainly used to show how profitable it can be.
As you examine your FCF from 2020, we recommend breaking it down to a more granular level than you typically would. Instead of just looking at your annual cash flow from 2020, look at your FCF from a month-to-month basis.
Looking at your monthly cash flow will help you better understand the impacts outside events had on your business. When looking at your monthly FCF numbers from 2020, look at how the numbers differ over the year. Did the months during COVID-19 negatively impact your business? Have you bounced back as states started opening? Has your business done better during COVID? Your monthly cash flow can help answer these questions.
Understanding the intricacies of your business’s financial data does not stop there. There are a variety of other numbers that can be used to help for financial forecasting in the new year.
Do not eliminate departments
When experiencing hard times, it can be easy to panic. Panicking is never good, and often leads to more troubling situations.
If your business was negatively impacted by the economic recession of 2020 completely eliminating departments may seem like the only step to operate within a budget. While slashing departments will help alleviate stress in the short-term, it could have negative effects on the long-term success of the business.
Instead of eliminating departments, see if you can reallocate funds to keep a department afloat. Some common ways that a business can save a department are:
● Salary Cuts
While not optimal, salary cuts are a quick way to gain some money you may have not had before. When conducting salary cuts, make sure that you, the business owner, are the first to take a salary cut. This will help ensure that you are doing everything you can do to save the department, thus showing your employees that you truly care.
● Business Loans
A small business loan is a great way to gain a larger sum of capital. If a department is on life-support, a business loan can help cover payroll expenses and other overhead costs that may have been attributing to the department’s demise.
● Furlough & Layoffs
Never fun, but sometimes necessary, furloughing an employee, or even letting an employee go could free up the money needed to save a department. To better understand which route is right for your business we recommend reading up on the differences between furloughs and layoffs.
Again, if you notice that your business may be operating in the red this upcoming year, do not act impulsively. Take the time to critically think about how you can save money across the business.
Adapt to modern times
I’m sure by now, you are sick of hearing about the silver linings of 2020, but there are some important changes that the epidemic has accelerated. One major change that 2020 has caused, has been the newfound acceptance of remote work.
The idea of adopting a more remote workforce has slowly been gaining traction for the last ten years, or so, but when COVID-19 first hit, this possibility quickly became more of a reality than ever.
While adopting a more remote workforce will come with its own expenses, it will help your business save money in the long run. You may need a loan or influx of money to help finance this new initiative, but the money saved over time will be worth it.
Moving to a remote work setting can help your business save money that would typically be spent on overhead costs. Not having an office will help your business save money that would have been used towards rent, utilities, insurance, office supplies, travel, and more. One thing to keep in mind is that you do not need to completely get rid of your office, just downsizing could help save thousands of dollars a month.
As you move to a more remote workplace, remember that not all of your employees will want to go remote. Put out a survey or questionnaire to gauge every employees’ feelings about going remote.
Ask for help
Creating a business budget during a historic recession is likely something that you are not well-versed in. As a business owner, it can be difficult to ask for outside help on something, but during times like these, asking for help could save your business.
When creating your 2021 budget, bringing in a business accountant or using accounting software can help make your business “recession-proof”.
If you decide to use a bookkeeper to help balance your business budget, make sure that you select the right person for the job. Not every bookkeeper will be equipped to handle every type of business. As you interview accountants, have a list of questions ready to ask prospective bookkeepers.
On the other hand, if you decide to use accounting software, make sure to conduct research before choosing a software offering. Each accounting platform will have different features geared towards different types of businesses.
Either route you take, using outside assistance to maintain your business’s finances will further help you with creating your 2021 budget.
Keep your head up
As 2021 approaches you will be forced to make a lot of tough decisions. We are entering unprecedented times where it feels like you are constantly facing a new hardship. Do not let your business become a stressor in your life this year. Sit down and really work on making your 2021 business budget bullet-proof.
It is impossible to predict what will happen in 2021, but what is possible is that you can have a hand in your own destiny. Things happen outside of your control all of the time, it is up to you to bounce back.
If you are having any trouble with your business, do not hesitate to reach out to find out what we can do for you.