If your business operates on a calendar year, you’re likely in the midst of budgeting for 2021. However, with the uncertainties and possibilities ahead of us in 2021, it may seem an impossible task. So, how can you establish an accurate yet flexible budget for the coming year?
Below are a few tips to keep your company on track while adapting to whatever comes your way.
Build in flexibility. No one knows exactly what will happen in 2021, so it’s wise to plan for more than one scenario in your business budget. How your industry and unique company fare in the coming year could depend on the progress of the COVID-19 vaccine, the U.S. and local economy, consumer spending, and a number of other factors. That’s why it’s important to build flexibility into your budget by identifying areas to cut quickly if revenue falls short of targets and areas to strategically invest should revenue exceed them. Maintain a single budget to avoid unnecessary complexity, but keep detailed notes in a separate column to remind you what triggers your changes.
Audit your fixed and fluctuating expenses. Make sure you truly understand the costs of operating your business today – not simply when your original budget was created. Review the past 12 months of expenses and arrive at updated averages. Audit your dues and subscriptions, and ensure each is still necessary. If you’re not seeing value from memberships, technology, and other expenses, consider eliminating them in 2021.
Reduce overhead. Speaking of eliminating unnecessary expenses, COVID-19 has altered how many companies do business. Many have been forced to find remote or flexible solutions to deliver their services efficiently. In May 2020, more than 70% of Americans who could work from home did so. It might be time to reconsider whether that big expensive office space is truly necessary to produce a profitable company.
Renegotiate long-term contracts up for renewal. If you have existing, long-term contracts approaching their renewal dates, use this time to secure competitive bids or negotiate new terms. Be your business’s advocate by ensuring you’re getting the best possible deal on equipment leases, insurance policies, and even rent if you decide to keep your current office space.
Plan for new assets. Fixed assets – like company vehicles or equipment – are an essential part of operating efficiently and delivering a product or service. Depending on how you expect to grow your business in 2021, be sure to plan for the cost of new assets. Producing a new product, expanding to a new territory, or scaling up staff may require some upfront investment. With interest rates being extremely low it might be wise to finance large asset purchases and might be a good time to renegotiate current asset loans.
Investigate new incentive programs. State and federal governments often revise existing or implement new incentives for doing business. As an employer, your ability to add jobs and contribute to the local economy is important. So, make sure you’re exploring tax benefits, disaster relief support, and other corporate incentives for operating or expanding your business next year.
Prepare for the unexpected. Even with flexibility built into your budget, it’s important to have an emergency fund and other financial resources like a line of credit to tap into in the event your worst-case scenario budget still doesn’t cover your necessary expenses. Be conservative in your revenue projections. Be comprehensive in your operating expenses. But have a back-up plan for emergency assistance.
Get comfortable with getting it wrong. Businesses rarely get their budget 100% right (even us!). Budgeting is about having a plan using educated guesses, monitoring your progress, and adjusting it as you learn. In normal years, budgets are a work-in-progress, but that might never be more true than when planning for 2021.
When it comes to tax advice and how your business profitability affects your personal income and financial plan, be sure to talk with a financial professional to best understand your opportunities. Wishing you a merry holiday season and happy new year!
Category: Financial Service Team