Corporate Budgeting in a Time of Great Uncertainty
Written by: Mary-Anne Blount, CPA, MBA & Financial Project Manager
Mary-Anne joined our VERVE team in 2012, bringing a strong focus on financial management, internal controls and client success. In her role as Financial Project Manager, Mary-Anne works with organizations to understand the strategic initiatives and challenges and develops solutions that contribute to their success. Mary-Anne has a background in accounting, finance, audit, internal controls, M&A due diligence and integration, strategic planning and project management. Prior to VERVE, Mary-Anne had a very successful career within the financial services, manufacturing and consulting industries.
The world is in a state of great uncertainty as to the future. Covid-19 has changed the way business is done and the way people live. Businesses can no longer assume past experience will result in the same future growth. Companies need to look at their budget process with “fresh eyes and assumptions.” Various scenarios of the budget may be needed with assumptions clearly identified to allow for quick reaction to the ever changing world also known as “risk assessments”.
For 2021, companies should be looking inward to their operations to determine the best path forward in very uncertain times. All aspects of their operations should be questioned whether they are a manufacturing business or in the service arena as many of the costs overlap. The budget process should not only look at the income and expenses but also look at the impact on the balance sheet and cash flow. Remember “CASH is KING!”
The following is a quick refresher in the key aspects to look at when budgeting in this “New World” we are all living in. We need to be cognizant of these basic principles.
All companies have both fixed costs (the costs incurred whether or not any manufacturing is done or any services are provided) and variable costs (costs supporting the operations of a business where discretion can be exercised) that support the revenue expected to be generated. Let’s look at the building of the budget.
It is important to clearly define the assumptions expected for the coming year and to ensure the costs that are in the budget reflect these assumptions. Given the uncertainty for Covid-19, let’s look at building a budget under these real life scenarios.
Each individual company needs to take a close at how revenues are generated as no two companies are the same. How will sales be affected? Given the economic downturn, can I consider increasing prices? How might sales be affected should the unemployment rate remains high?
Cost of Sales
While used mainly in manufacturing for raw materials, purchased components, labor and related overhead to manufacture the product, service companies also have labor and overhead costs related to their revenues. All of these costs should be tied to the cost of the product/service.
For manufacturing, one needs to reach out to their vendors to determine the impact of the current environment on the raw materials or purchased components. For just-in-time, decisions need to be made on whether or not to build inventory. There is always a cost associated with building and holding raw material or component inventory – understand the impact on the business from a cash flow perspective and the risk the Company is willing to take. Once this is determined, the fixed and variable costs for manufacturing can be laid into the equation as manufacturing operations have fixed costs and variable costs. Some variable costs are related to the fixed costs components which occur based on the volume of output of the product.
For service companies, the current employment environment needs to be assessed as the staff hired to support the revenue will affect the operating margin.
General and Administrative Costs
Identify all the fixed costs incurred for bringing the product to market. There are costs in G&A that are incurred even if no product or service is sold. Identify and understand these costs. This will include, but is not all inclusive: utilities, lease payments, property taxes, salaries and benefits for key personnel. Next, identify those costs needed to absolutely run the business from the most basic level. The need of these costs should be defined in the Assumptions. Finally, identify all other costs that could possibly be eliminated if the economy has an impact. This will allow for a way to quickly look at where the company may right size in this unpredictable environment.
While some companies may be able to obtain financing either through stock sales or loan agreements, it is necessary to look at the state of the current financing arrangements, the ability to renegotiate these arrangements and the company’s current liquidity position. Financing has an impact on current cash flow and on the future cash flow of a company. Know and understand this impact in the current uncertain economy. Remember “CASH is KING!”
VERVE’s subject matter experts are adept with supporting budgeting demands in addition to lending a hand with current, new or upcoming financial projects.
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