When the good times are rolling and
cash is flowing, company expenses
tend to get the green light without careful scrutiny. In a difficult economy, the
rules of the game change. There’s not much
leeway for certain expenses, and businesses
that don’t alter their budgets and plan several
years out will not be prepared to weather the
financial storm.
“Business owners should not panic, but
they must be realistic,” says Kimberly Zagar,
CPA, an associate director in the entrepreneurial services department at SS&G
Financial Services, Inc. “To ignore the economy and not take steps to ‘lean’ your organization is a disservice to your company. Think
well in advance — create budgets that
address the next 18 to 36 months.”
Smart Business spoke to Zagar to learn
how businesses should evaluate their budgets for 2009, what expenses to reconsider
and how to position a company for growth in
recessionary times.
What should a recessionary budget look like,
and what factors should business owners
address upfront?
Start by forecasting realistic sales numbers,
and work through what-if scenarios: What if
sales stay the same? What if sales decline or
grow? What if you lose a key customer? How
will you react if reliable customers pay slowly? How will you pay vendors if accounts
receivable aging is excessive? What if vendors raise prices? What if a key vendor goes
out of business? Do you have backup vendors in mind, and have you discussed pricing
with these potential vendors? Do you plan to
cut a product line or add a new one?
Ultimately, where will revenue come from in
2009 and the years following?
Design a three-year plan that captures the
full impact of business loss and gain. Your
banker will be interested in how your business will respond to an expected decrease in
revenue and how you plan to recover. So
think ahead. Examine all of these factors that
could pinch cash flow in the next 12 to 18
months. Planning your recessionary budget
will be like one of those choose-your-own-adventure books, where certain outcomes
(losing a customer, adding a product) can
result in an entirely different story, or budget.
What expenses should business owners curb
as they look for ways to run leaner in 2009?
Examine expenses that tend to get out of
line, even in good times. Get back to the
basics and remember; you can’t afford to
spend money that you don’t have. Sounds
like common sense, but following this rule
can be difficult. Consider charitable donations. Perhaps your business has always
given generously to a local organization, but
this year, doing so would put you in a cash
crunch situation. You may need to scale back
until you are in a better financial position.
Review your meals and entertainment
expenses, and determine how much you can
cut without it being detrimental to your business. Review phone, automobile and luxury
expenses, such as data plans on cellular
phones. Talk to your service providers about
bundling options and revisit the terms for
current Internet or phone features to make
sure they still make sense for your business.
Essentially, review every line item on your
budget and highlight nonvital expenses that
can be reduced or eliminated. Now is the
time to consider cost benefits of expenses
and determine what can be changed without compromising the integrity of your business
or the product/service you provide.
What expenses should be the last cut from
the budget?
Assuming that your business is appropriately staffed, do not cut payroll unless it is for
the right reasons: because someone is not
productive, not performing job duties or you
can’t afford them. Payroll should not be a
reactionary cut. Payroll should be handled
delicately because your company culture,
employee morale and, ultimately, customer
satisfaction depends on how you handle personnel. If you slash positions, morale could
drop. Consider the domino effect that terminations have on an organization. Good workers may look elsewhere for employment if
they are uneasy about their futures with your
company. When they leave, what’s left?
What message should employers convey to
their people during this time?
Reassure your staff and let them know you
have a plan. Tell them upfront that times are
tough and the budget is tight. Emphasize that
you are working hard to keep the business
healthy, and ask for their help. Show your
employees your plan so they understand
how their actions can make an impact on the
company’s ability to run smoothly in a tough
economy. Most importantly, if you will not be
cutting payroll, assure them of this.
Employees are stressed during these times
and they’re looking to their managers for
reassurance that their futures are safe.
What should business owners communicate
to their advisers and the bank?
Be open, and share your plan with your
advisers and the bank. Understand the terms
of current loans and requirements. If you
anticipate needing funds in the next few
years, consider asking for funds now before
you are desperate. Ask your banker about
financial options to help your company
bridge from this recession to more prosperous times.
KIMBERLY ZAGAR, CPA, is an associate director in the entrepreneurial services department at SS&G Financial Services, Inc.
(www.SSandG.com). Reach her at (800) 869-1834 or [email protected].
