Written by Heather L. Cole, October 13th, 2022
Budgeting and Planning is even more important in times of uncertainty! And I think we can all agree that we are in one of those crazy times. This is a year of extreme uncertainty! Inflation, supply chain issues, workforce issues, and crazy political unrest in many countries are all creating a budgeting environment we have not seen in decades. Last week we blogged about things corporations should consider when budgeting for expenses. This week we will cover Things to Consider for Corporate Budgeting in Uncertain Times and focus on, revenue, the other important component of the Cash Flow and Balance Sheet.
When times get uncertain, and scary, organizations usually tighten their purse strings and look at what expenses can be cut. But wait, there are two parts to the Profit and Loss statement. The revenue is a key component to profitability.
There are only a few ways to increase your revenue.
- Increase prices
- Sell more to your existing clients
- Find new clients
But there are additional ways to increase profitability even in uncertain economic times.
Losing Clients on Purpose
One way I find interesting is to purposely lose the non-profitable clients. I was talking to a CFO friend and client of mine a few years back and their industry was in a difficult situation. Competitors were slashing prices, and it was putting them in jeopardy. The CFO made a bold decision, after doing the analysis he determined if he increased his prices, he would lose about 20% of his clients. He believed that the 20% of the clients he would lose were also the high maintenance, non-profitable clients. At first people thought he was crazy, but they did it. When they increased prices, they lost a little more than 20% of their clients but their profits soared.
It's the old Pareto Principle, which states that for many outcomes, roughly 80% of consequences come from 20% of causes, also known as the 80/20 rule. If you want to learn more about Pareto Principle I think you will find this Entrepreneur article interesting, The 80/20 Rule is True for What’s Holding You Back, Too.
Talk to Key Customers
Don’t just look at expenses and guess at revenue. Talk to your key customers. Remember they are facing the same uncertain times you are. Talking to your customers about their business, their struggles, and their fears, will not only build a stronger relationship but give you clarity on your revenue stream.
Another advantage to talking to your customers, is that you will also learn if the staff shortages you may be experiencing are jeopardizing your relationship with your customers. I don’t know about you but recently I have experienced horrible customer service at companies I used to love to patron. In some cases, I am not going back. To accurately forecast your revenue, you must evaluate your customer service. According to a Forbes article, Ninety-Six Percent Of Customers Will Leave You For Bad Customer Service.
The Other Important Statements
Most companies still focus on capital expense, operating expense and revenue in their budgeting and planning cycles. But in uncertain times it is even more important to not ignore the other statements. Yes, the cash flow and balance statement.
Typically these statements are viewed at the highest level of the organization but according to the Harvard Business Review article, Setting Your Annual Budget Amid Economic Uncertainty, “Business-unit budgets generally track revenues and costs — items on the income statement — but not cash-flow or balance-sheet items. The three get tied together at the highest level of the company, but P&L owners should see them, too. They’re likely to be the first to spot slowing orders, growing inventory, or delayed collections, but they effectively ignore the cost of capital and rarely look to the balance sheet as a source of funds or savings. As a result, they often miss the broad significance of what they see.”
Lodestar Solutions recommends our IBM Planning Analytics clients redesign their models to incorporate all the financial statements - P&L, Balance Sheet and Cashflow. But we also recommend monthly and quarterly reviews at the budget unit level to understand where the potential issues lurk.
Ask Questions at Lower Levels
In the book, Seeing around Corners How to Spot Inflection Points in Business Before They Happen, by Rita McGrath the author discusses how team members at the lower levels often see changes, risks and opportunities first. We recommend clients get more people involved and ask more questions to thrive in uncertain times.
Having the Right Tools
As a software reseller of IBM Planning Analytic software, I would be remiss if I didn’t remind you that having the right tools for your budgeting and planning process is essential. I am amazed how many mid-market and large organizations still rely on Excel for their planning and budget process. Don’t get me wrong, I love Excel, but also appreciate it’s limitations. One of the things to consider when budgeting in uncertain times is the tool you are using. If you want flexibility and to be agile in your planning, you need software that helps streamline the modeling and planning processes when budgeting in uncertain times.
If you would like to learn what industry leading tools like IBM Cognos Planning Analytics can do for you, join us on Thursday, Nov 10th, 2022, at 1 PM Eastern for our webinar, Tackling the Top 3 Performance Management and Budgeting Struggles - Talent, Time and Tech.