As a small business ourselves, we know the difficulties of dealing with unexpected financial challenges. And like you, the past couple of years has brought unprecedented hurdles that we've had to navigate.
So, no matter what financial situation you find yourself in now, it’s more important than ever to get real about what that situation is. To bounce back on the other side from a financial crisis, you need a clear picture of your business and a cash system that allows you to see (and forecast), as accurately as possible, your cash in and cash out. That’s how you make it through a financial crisis and set your business up for recovery.
If you're not operating in crisis mode, we suggest creating a revenue forecast and a budget plan for a 6- or 12-month period. But when things are more complicated with circumstances beyond your control, fix your budgeting period anywhere from two weeks to two months, depending on what you can confidently predict. Here are the simple steps to creating your short-term budget plan.
1. Get real with your current financial situation
This may not be your wheelhouse, but when you’re experiencing financial hardship, you can’t abdicate this to anyone else. You should be the one to create and control the budget, along with whatever financial team you have.
2. Establish your budget period and planning cycle
What should the timeframe for your budget be? Especially in this time, when we've seen the economy change so rapidly and unpredictably, aim for a one-month budget plan, but revisit it weekly to update your plans and forecasts.
3. Build your operating budget for the month
Budgeting isn’t an exact science. So you’re going to need to make predictions, which—even at the best of times—can be difficult. To build your operating budget, you’d normally choose your revenue goal for the month and use it to calculate your profit goals. In times of crisis, when the most important thing is keeping your business alive, your goal may be to simply break even for a short period. To do that, you have to take a hard look at where your company is financially today. What’s your average monthly revenue? What are your operating costs? To break even, your revenue must balance your operating costs.
So what’s the break-even number for your business when it’s running as usual? If you don’t have immediate access to that information, look at Accounts Receivable. Talk with your bookkeeper or accountant, if you have one, to help you figure this number out.
With your current break-even number, you can realistically assume your operating expenses for the next month based on where they are today, and that will give you a starting point for your adjusted revenue goal.
4. Modify your budget for an adjusted revenue goal
Make an accurate prediction of the revenue you’ll make this month, then compare it to the revenue goal you just created to cover your operating expenses. For example, if you’ve already experienced a 25% loss in revenue in the last two weeks, you should plan for that loss to continue for the next month. So look at your revenue for a regular month minus 25%—this is a safe prediction of your revenue for this month.
And don’t forget to consider financial aid in this equation! Any support in the form of lines of credit, loans or grants that you receive counts as revenue and can be used to fill that gap and keep you in business until the market stabilizes or your own circumstances improve.
5. If necessary, cut operating costs
If after you’ve gone through the budgeting process, you still see a gap between your revenue reality and the goal you need to cover expenses, you have some options. You can aim to collect on outstanding money owed, or you could start cutting costs. But be strategic. If, say, in two months the market rebounds from slump and you need to get back to your normal production level quickly, you have to be capable of that. That’s to say, your priority is to maintain your people if at all possible.
In recent years, chances are good that you may have needed to update your budget plan more frequently than you expected—any maybe that still continues for you. But that’s okay. The key is to know what’s happening and be proactive about what you can do to come out the other end of a financial crisis ready to pick up where you left off—and be better for having taken hold of your company finances.
We’re committed to helping business, especially in times of crisis. If you’re looking for more information on getting in control of your finances, we're here to help.