An illustration of economic ups and down during COVID-19, used for "Budgeting and Financial Forecasting during COVID-19", written by Rolf Neuweiler, www.a2zCFO.com

Budgeting and Financial Forecasting During COVID-19

COVID-19 is changing the macroeconomic climates as well as impacting individual entities. Your annual, quarterly and monthly budgets and financial forecast during this uncertain time has become a moving target, as the economy shuts down, reopens, and recovers.

Since April, 2020, we have experienced business shutdown, PPP and EIDL loans, and undoubtedly more uncertainties for the rest of 2020 and 2021. Recovery will take awhile.

“I did my budgeting in December 2019 for the entire year of 2020 and it was out the door the beginning of April,” says a business owner.  “Right now it’s a moving target.

Nonetheless, you still need budgeting and forecasting in order to survive and thrive: business budgets help CEOs to steer the ship in uncharted waters to stay afloat and on course, by avoiding overspending and tracking financial goals. 

Financial forecasting can help project a business’ future financial health by examining past financial data. Forecasts estimate a business’ income, expenses, profit and loss statements, balance sheets, and cash flow.

Forecasting can guide a business back on track and assist with budgeting as well.

Adjustable vs. static financial forecasting

The market fluctuations and the fast changing COVID-19 economy has caused most small businesses to nimbly and flexibly reevaluate their 2020 monthly or quarterly budgets, sometimes on a weekly basis until the economy is stabilized and fully reopened. Continuous planning is needed for a company to plan ahead over 12 to 18 months.

It is highly recommended that companies develop multiple business budgets for different economic scenarios to address various conditions.

Prepare for the worst, and hope for the best

Prepare the downside scenario with focus on cash, liquidity, debt payment, to allow a company to be financially afloat. Keep an eye on capital allocation toward fewer, more focused growth investments.  It is time to “trim the fat” and be lean and focused.

As soon as the economy is reopening, leadership needs the best forecast for the revenues based on improved economic scenarios.

Control expenses without hindering growth potential

If revenue is decreasing, focus on the expense side of the budget over which you have more control. Develop a flexible budget based on high, medium and low levels of business activities.

But treating every department the same with headcount reductions or across-the-board cuts    could be short-sighted. Rather, organizations can consolidate products and services into fewer lines of business.

If your cash flow is different from pre-pandemic time, your business budget will need to be re-tweaked. Even If your cash flow wasn’t negatively impacted by COVID-19, to ensure that spending won’t exceed income, carefully track your finances in your accounting software

Budget cut: across the board, or only in selected areas?

Leading a company during COVID-19 requires EQ for controlling the panic button and avoiding across the board cuts and/or killing every long-term investment plan.

Some cuts to SG&A (selling, general, and administrative) may be needed, but across-the-board cuts to every category of SG&A may do more harm than good.

Reducing expenses without inhibiting revenue growth once the business comes back takes vision and strategic planning. If possible, avoid or minimize cuts in these areas now and later:

IT:  Working from home is getting to be the new normal.  Working remotely requires additional cyber security measures and new IT infrastructure that the IT department provides. Cutting IT budgets can expose your organization to new risks and cause great damages.

BI:  Keep investing in business intelligence and analytics provides vital tools for the leadership to understand the constantly evolving business landscape.

Digital marketingWhile more and more business is prospected, conducted and transacted online, budgets for digital marketing, website, e-commerce if applicable should not be decreased, or even increased if necessary.

Emergency Fund:  Always having a business emergency cash reserve is a necessity for weathering unexpected storms. Just like this coronavirus pandemic is hard to predict, who knows what other unpredictable emergencies such as wildfires, earthquakes, and social unrest may take place. 

If you have an emergency fund, try not to dip into it for non-emergency use. If you don’t have one, be disciplined to create a cash reserve that covers three to six months of expenses.

Changes in goals or even business models cause changes in budget priorities

The post Pandemic economy will be changed for good. Many companies need to carefully analyze business models, revenue streams and financial goals. Things will be in a state of flux.

If substantial changes have been made to your budget due to COVID-19, your future financial goals also need to be adjusted to reflect the changes. 

Your budget should reflect and be aligned with your priorities and financial goals. You may need to adjust both your budget and goals during and after the coronavirus crisis

A2zCFO, both the Right and Left Arms for your organization:

A2ZCFO takes pride in helping small business owners prepare for either storms or calm weather, and navigate safely through rough waters. As a consulting CFO, I help business owners and management to “keep your ship on course.”

We help with any aspect of financial management from A to Z. By providing trusted financial advice, I create financial and goal clarity, resulting in increases in cash, profitability and sales all the while preparing the business strategically for a successful exit when the time is right.

  • Works at client’s location and directly with client’s staff;
  • Affordable and flexibility in hours – 4 hours a month to short term full time assignment;  
  • Excels at messy and difficult clean up situations;
  • Meaningful financial reporting for management, bankers, and CPA’s.  Tax returns completed by due dates;
  • Cradle to grave services – from bootstrapped startups to exit transition service experience.

Please call me (925) 216-5058 or email:  rolf@a2zCFO.com

A2Z CFO, we keep your ship on course.

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