While planning and budgeting are often frustrating even in normal times, creating a business budget in today’s uncertain economic climate is downright daunting.
In a downturn, your business faces volatile conditions that necessitate nimble planning, budgeting and forecasting. The once-predictable variables and metrics upon which your traditional budgeting process was based have been thrown into flux.
In this season of economic headwinds, following your regular budgeting process is risky.
Comprehending the uncertainty
Before we dive into budget strategy in a turbulent environment, here’s a brief look at the factors behind why forecasting, budgeting and planning are increasingly difficult for businesses, and why you should plan accordingly.
Tepid stock market.
Tech stocks cratered in the first five months of 2022. The Nasdaq had plummeted by over 30% at the year’s halfway point, its second-worst quarterly slump since the 2008 global financial crisis.
Record inflation.
The U.S. inflation rate catapulted to a 40-year high in May. The Consumer Price Index increased 8.6% between May 2021 to May 2022, the largest 12-month increase since the period ending December 1981. June’s CPI proved even hotter, rising by 8.8% on a year-over-year basis and 1.1.% on a monthly basis.
Surging interest rates.
The Federal Reserve raised its benchmark interest rate by 0.75% in June, the sharpest hike since 1994. With inflation continuing to heat up, the Fed is likely to pursue an aggressive rate path in coming months.
Labor challenges.
The Great Resignation is not over. One in five global employees intends to quit in 2022, according to PwC’s Global Workforce Hopes and Fears Survey 2022. Further, America’s talent crunch has more than tripled in the last decade.
Supply-chain disruptions.
The supply chain crisis, long expected to improve by now, has instead been exacerbated by global events. Russia’s invasion of Ukraine has triggered new supply-chain bottlenecks, while China’s surge in COVID-19 cases and lockdowns have compounded supply-chain chaos.
Further supply-chain disruptions could be in store, unless an agreement is finally reached in the negotiations for a new labor contract at West Coast ports.
A new approach to budget strategy
Your business-as-usual budget strategy may serve you well in a “regular” economy, but not in a downturn. That’s because the traditional strategy assumes that by applying certain budget forecasting tools, businesses can predict their future accurately enough to monitor performance and choose a strategic direction.
In a time when economic uncertainty has become the norm, creating a reliable budget requires recognizing the uncertainties your business faces and their implications for your budgeting process.
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Tailoring your budget strategy to uncertainty
Here’s how you can adapt your budgeting strategy for a downturn.
Change the objective
. Meeting your budget doesn’t automatically translate to business success. Adjust your objective to focus on the idea that business success centers on creating value and improving outcomes for customers and stakeholders.
Rather than trying to create long-term forecasts amid unpredictability, redirect your efforts toward learning and adjusting. Try to confront honest uncertainties and challenges rather than brushing them off as unthinkable.
Shift your focus to strategic success.
A conventional budgeting process might entail a CFO issuing financial targets and spending guidelines, prioritizing investments and making painful cuts when budget submissions finally roll in.
A better approach for the era of uncertainty is turning those targeted outcomes into strategic guidelines for navigating the entire budgeting process. This is likely to beget discussions on allocating resources from the strategy down, rather than from the individual project up, helping to ensure the right resource tradeoffs are made.
Revisit growth plans.
Re-examine any business growth plans you made before the economic downturn. Decide whether your plans need to be executed, adjusted, postponed or shelved.
Plan often, and for multiple scenarios.
Your ability to adjust your forecast every quarter, month or even week will help you continually improve the accuracy of your budget with less effort overall. In keeping with today’s unpredictability, consider building a flexible budget strategy that can be quickly adjusted to shifting conditions.
Taking it a step further, consider what could happen to your business drivers and create several versions of your business budget that incorporate best- and worst-case scenarios. Don’t forget to create a contingency plan for each scenario so you can correct your course swiftly.
Takeaway
The prospect of adjusting your budgeting strategy in an era where talks of a recession are growing louder is unsettling, but the process will help ensure your business remains viable. By building flexibility into your budgeting strategy to accommodate today’s uncertainty, your business will be primed for the economic recovery.
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