Small business owners are living through the greatest economic challenge they may ever face. The Covid-19 pandemic won’t play out like an ordinary recession–there are no models that can account for the near-infinite variables affecting the United States’ ability to contain the pandemic and get the economy back to normal.
While some industries are thriving during the pandemic, many other businesses are shutting down and it’s unclear what, if any, help is on the way from the federal government. As such, it’s imperative that you budget for uncertainty.
How do you plan for the future in this uncertain climate, with no end to our collective troubles in sight? What can you count on? There are some steps you can take to protect your business now and in the future.
Save your money
Most business owners are wondering when things will return to normal or where their next major revenue opportunity will come from.
But no matter how much their small businesses are thriving or struggling right now, owners should preserve each dollar like it’s their last. If you’re thriving, rather than reinvest your unexpected profits, consider building up a rainy day fund. The truth is, this situation could change in an instant. If you’re struggling, now is not the time to lean into marketing campaigns or test new products.
Either way, cut expenses where you can, on things like non-essential technology, employee perks, or even your office lease, if possible. We all want to avoid layoffs during a pandemic so if you have to cut employee hours to ensure you stay in business, that’s preferable.
It may sound banal but simply preserving capital is the best way to budget for an uncertain future, as it gives you the flexibility to address an ever-changing landscape moving forward.
Create multiple revenue scenarios
This may be the most difficult market to forecast in, ever. Ironically, that makes forecasting even more important than in normal times.
For many businesses, forecasting revenues even one month into the future is difficult, let alone doing it for six months to a year out. Right now, it’s next to impossible to do it with confidence.
As such, it’s best to create multiple revenue scenarios, understanding what will need to happen for each to play out, and how each scenario will impact the overall health of the business.
Some important questions to ask yourself as you consider these various scenarios:
What fixed or variable costs can you eliminate or reduce?
What will your costs have to be to stay afloat in each scenario?
Are there other revenue areas you could pivot to, in order to support core business revenues?
Will seasonal demand change or impact each scenario?
When you forecast, start with what you consider your “most likely” scenario and then create two more “downside” or “upside” scenarios. (If your industry is especially variable based on seasonality or especially affected by Covid, you may even want to create a couple more scenarios.)
Your most likely scenario is, of course, difficult to accurately create right now, so take an informed guess based on the various drivers of your business and the numbers you’ve seen over the past four months.
Consider the consequences for each scenario
Once you have your forecasted scenarios, take a look at the cash forecast for the business based on each scenario. Knowing how much cash you’ll have on hand should each scenario (or something close to it) play out will help you plan for necessary changes.
For instance, if you reach your “downside” scenario, will you have to make layoffs or close a location? Will you have to apply for a loan? Knowing the thresholds for which you’ll have to take action will help you act quickly should that scenario come to bear. Speed is imperative if you need to downsize expenses, especially in a rocky economic climate.
Update, update, update
Forecasts are guidelines, not plans you’ll need to stick to. As time goes by, adjust your forecasts accordingly based on actual outcomes and changes. Maybe you discover a new source of revenue that elevates even your worst-case scenario. Maybe businesses receive a more beneficial stimulus package that helps you offset some operational costs. Whether your actual numbers are better or worse, it’s critical to refresh your forecasts frequently so that you’re operating each day with the most current view of the business.
Budgeting in the current economic climate is extremely difficult, but it’s also essential. The best way to do it is to adopt some flexibility with your forecasts, and by treating each dollar as precious. Remember to prioritize your people and adapt to the successes and challenges of each day.