Never before have I seen the economic uncertainty that I see today. The recent presidential election, health care reform, the fiscal cliff, and the European central bank’s series of crises could all impact our businesses. Each one has the power to hurt our businesses – and when you group them all together, it’s a scary scenario.
As you sit down to hammer out your 2013 budget (and if you don’t, we need to talk about that first), these factors might make you feel out of control. You might wonder why you should even do a budget if everything is uncertain anyway.
Well, that is the worst thing you could do. Small businesses have a history of weathering tough economic times. Your business is more flexible and you can turn on a dime if needed. If outside influences start to touch you, you can go a different way. That’s what I love about small businesses!
But, as a positive as I am about small businesses in tough economic times, I want you to be cautious too. That’s why this year, for the first time ever, I am recommending that you make two budgets:
- A business-as-usual budget
- A downside budget
Now, I’m really not scared that next year is going to be a disaster but with all of the uncertainty, I think the best thing you can do is at least plan for it. Go for growth next year, but have a plan for what you will do if you encounter challenges. That way, you have a plan in place that will help you recover quickly should something out of your control happen.
Here’s what should be included in both budgets:
Sales forecast. Is your business humming along right now? Go ahead and extrapolate that trend line out into the future. If what you are doing is working, how can you do more of it?
- Payroll. Despite the high unemployment, demand for employees with specialized skills is strong. Make sure you aren’t underpaying because people you lose right now will be hard to replace.
- Your salary. If you haven’t given yourself a raise in a few years, factor one in. Businesses have been on spending lock down for a few years and I’m sure you have been working hard.
- Freelancers/virtual team members. If you are experiencing growth now, can you leverage virtual team members for a while until the future becomes clearer? They may cost more now, but they are easier to let go if things turn down.
- Expenses. Sometimes when things are good it’s easy to spend a little more money. Look at your expenses as a percentage of sales. You don’t want to spend more of each sales dollar as you grow, you want to spend less (and keep more!). So maintain a conservative ratio of expenses to sales (e.g. If salaries are 45% – 50% of sales, the rest of the expenses should be 25% – 30% of sales so that you have a solid 20% – 25% profit.).
Sales forecast. If your clients’ budgets get tight, where will they cut? What will they continue to spend? Where are opportunities for you to help them get more done with less?
- Expenses. If the sales line drops, where would you make cuts? Remember, it’s always better to cut deeper than you want to and preserve cash. Make that plan now – not to execute it, things are hot right now – but just in case.
- What’s your trigger? Once you have built your plan, what would make you pull it out? What leading indicator are you going to watch that shows you the future health of your business? Some clients track number of leads, others track trailing twelve month sales (TTM) — what is it for your business?
I’m still positive about the outlook for small businesses next year despite all the uncertainty. I want you as a small business owner to feel the same way and proceed with confidence.
Photo credit: blogher.com
Brad Farris is the author of 3 books, the Executive Editor at EnMast.com, and Principal Advisor at Anchor Advisors, a firm that helps small business owners to grow their business. He’s also a frequent speaker at business events.