Your budget should be your best estimate of what is likely to occur based on current knowledge. To manage change, you can scenario plan where your budget forms the baseline, but you also forecast best and worst case scenarios based on potential risks and their likelihood (for example, the impact of another lockdown). Or, the simplest method is to use your budget as a baseline and regularly review and adjust depending on current conditions.
The greatest risk to your profit is unlikely to come from your cost structure. It is more likely to be revenue volatility. Keep your eye on your cost structure and make sensible cuts where appropriate. But, in your search for savings don’t remove your essential revenue generating capacity that you need.
A lack of profit will eventually erode your business, but not enough cash will kill it stone dead. Businesses will fail because they don’t manage their cash position. Plan, track and measure your cashflow. This not only means closely monitoring your debtor collections and inventory but also running a rolling three month cashflow position. This should provide an early warning of brewing problems.
Manage your debt levels carefully (your bank is likely to). While there is nothing wrong with debt, it is likely that the banks will be closely watching customer accounts. Where you have loan facilities in place make sure that you understand the loan terms and any debt covenants that you have entered into. These covenants could include regular reporting to the bank, debtor and working capital ratios, or debt to equity ratios. Where the banks may have been more relaxed about these in the past, this year will be different. If you believe that you need additional funding, talk to your bank early and don’t wait until the last minute. You’ll need to present your case on why you need it, how much, for how long and when it will be repaid.
Cash flows, operating budgets, cost control and debt management all need to be part of your business management. The more in control you are the lower your risk position.