With the multiple uncertainties small and medium businesses in South Africa face, drawing up a budget is a source of stress for business leaders and owners. Not only are we unsure how much longer the COVID crisis will last, we also face challenges such as political instability, load shedding and a volatile economy. A disciplined approach that maximises visibility and control can help you manage financial anxiety in these unpredictable times.

Here are a few ideas about how businesses can navigate budgeting today:

  1. Understand what you can control and what you can’t 

A good place to start with a budget is to review which of the factors that affect your business are in your locus of control and which aren’t. You can’t control whether the rand/dollar exchange rate goes up and down, whether GDP or industry growth is positive or flat, or whether the government decides to impose new lockdown restrictions in response to rising COVID cases.

However, you do have a number of levers that you can push in response to the external factors that affect your business: your cost base, your sales and marketing strategy, your product and service mix, and more besides. Having survived the past year, you will have a good idea by now of which actions help you to best optimise your finances under pressure.

  1. Plan for different scenarios 

The importance of scenario planning is a recurring theme on our blog. In addition to helping with planning strategy, it’s a tool that helps you budget during volatile times. Essentially, it’s about budgeting and planning for a range of outcomes, from the best case scenario where your business shoots out the lights in terms of sales to the worst where revenues face a near-collapse or costs get out of control.

Quoted in Business.com, Xero’s Ben Richmond, count says business owners should determine how much cash flow is necessary in the best and worst-case scenarios. “Scenario budgeting allows you to think about what your cash flow looks like and if you need more funding,” he says. “It gives small businesses confidence. They know there are things to be done in each scenario.”

  1. Find a budgeting system that works for you 

Managers and business owners who don’t come from a finance background can sometimes struggle to visualise their revenue, profits, costs and cash flow, which in turn can cause anxiety. Finding the right budgeting methodologies and techniques can help demystify the numbers and put you more firmly in control.

Intuit, maker of the QuickBooks software, says that some small and medium business owners find the personal budgeting tool of envelope budgeting useful. This approach is about storing funds for specific expenses in envelopes. In personal budgeting, these would often be literal paper envelopes stuffed with banknotes, but in this case, it’s about categorising expenses and setting aside funds for them.

Zero-based budgeting is becoming popular with businesses of all sizes. Fool.com offers an explanation: “Zero-based budgeting…is budgeting from scratch: looking at each expense or potential expense carefully before deciding to add it to the budget. Unlike traditional budgeting…which concentrates on historical results, zero-based budgeting is used to align strategic goals with your budget.”

Zero-based budgeting is a time-consuming and rigorous process, but it is particularly well suited to the needs of cash-strapped businesses navigating uncertain times. You start from zero, and justify every expense, before deciding whether it should be increased, decreased or eliminated. Starting with a blank slate like this can help you to identify new ways to cut costs.

  1. Pay up debts as quickly as possible 

One of the best ways to deal with budget anxiety is to use any free cash flow to pay interest bearing-debt, especially if you had to borrow to stay afloat during lockdown. Interest rates are relatively low at the moment, but there’s no guarantee they will stay that way forever. Now is a good time to clear that commercial mortgage, credit card or overdraft—then you can focus on growing your business again.

  1. Build up a cash buffer 

One of the best ways to feel in control of your finances is to build up healthy cash in reserve. It offers you the comfort of knowing that you can weather a bad month or two without needing to borrow money. Setting aside some money in your business savings account is a wise idea, if you have managed to pay off your debts.

  1. Revisit your budgets often 

Especially during volatile times, budgets shouldn’t be treated as a one-and-done exercise each year or quarter. Revisiting the budget often will help you to identify opportunities for refinement and optimisation. Some advice from business coaching expert, John Knotts: “Know that the budget can adjust monthly and it’s a tool to know where you need to adjust.”

  1. Don’t lose sight of your goals 

Over the past year, many businesses have focused on day-to-day survival at the expense of long-term planning. It’s hard to rethink a growth strategy for the next five years when you’re hustling to close a sale or bring in an overdue payment, so that you can pay the rent and utilities at the end of the month. However, this short-term focus cannot last forever.

FreshBooks’ Matt Baker tells Business.com: “A lot of people are focused on the microscopic, but equally important is the telescopic. Sometimes, it’s helpful to think beyond the year to where you’re trying to go with the business. When you put yourself in both mindsets, it helps your budgeting. Attaching your budget to your growth drivers, whether it’s getting more customers or having existing customers buy more, will aid you in reaching those goals.”

Take control and gain visibility

Visibility and a sense of control are the best antidotes to anxiety about your business’s finances. Equipped with the right insights into costs, revenues and cash flow, you can avoid overspending and stay on track for your financial goals. This will not only help your business steer through the current crisis but put it on a trajectory for growth in the future.

References:

https://www.tarsus.co.za/forecasting-and-scenario-planning-whats-the-difference/

https://www.tarsus.co.za/making-strategy-more-agile-to-keep-pace-with-a-fast-changing-world/

https://www.business.com/articles/budgeting-for-tumultuous-year/

https://quickbooks.intuit.com/r/cash-flow/envelope-budgeting/

https://www.fool.com/the-blueprint/zero-based-budgeting/

https://www.forbes.com/sites/forbescoachescouncil/2020/04/27/15-tips-for-small-business-owners-planning-their-first-budget/?sh=2edc8d0f5804

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