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The coronavirus pandemic has created uncertainty in every aspect of life, including business management. You’ve solved problems as a business owner, but the pandemic makes planning for the future a huge challenge. How do you plan with so much uncertainty?
Deloitte defines three steps for dealing with the pandemic: respond, recover and thrive. First, owners must simply respond to the current situation, and do what is necessary to control costs and maintain sales in the short term. Owners can use what they’ve learned and recover over the next 18 months, and implement plans to thrive over the long term.
Here are five tips for budgeting during a pandemic. To start the process, ask yourself: Will my current business model produce revenue during the remaining months of the pandemic?
#1- Decide on a business model
You may operate a successful business, but the pandemic has made it difficult to serve customers and generate revenue. You may need a new way of doing business until the pandemic is over, and you might consider some permanent changes to protect your operation in future years.
The amount of change depends on your industry. As consumers, we’ve all seen companies adjust their business model to maintain revenue during the pandemic:
- Restaurants: Your favorite restaurant may now focus on carryout and delivery service. As the winter months approach, restaurants in many parts of the country will lose the ability to serve diners outside.
- Doctors, dentists: Doctors and dentists had to immediately start using protective equipment to see patients, and put rigid protocols in place to limit risks. Many people delayed annual checkups and elective surgeries during the beginning of the pandemic, but some patients are starting to come back.
- Movie theaters: This industry has been hit hard by the virus. Movie studios are delaying release dates into 2021, or launching films on streaming platforms. Ticket sales have declined sharply, and companies including AMC are struggling to generate revenue and cash inflows.
Changing your business model isn’t unusual, and many companies go through the process.
#2- Understanding a business pivot
The changes you make to deal with the pandemic might be considered a business pivot.
A pivot is a major change in your business model, according to Steve Blank, one of the first people to use the term. As this Forbes article points out, dozens of successful businesses have pivoted and become far more successful.
The article states that: “The most critical decision for an entrepreneur is to know when to stay the course vs. change direction.” The pandemic may be forcing you to change direction, and you can map out the steps required to make it happen.
Once you decide on specific changes, you need a plan to implement the new business model.
#3- Making changes
Let’s assume that you operate a restaurant, and you decide to shift to a carryout and delivery model. The lease on your restaurant space ends in 2021, and you’re considering a lease on much smaller space. Long term, you want to sharply reduce the dining area and stay focused on carryout and delivery.
Here are the initial changes you need to make:
- Staffing: Payroll expenses may decline. Your cooking staff stays in place, but you can serve customers with a smaller total staff. Rather than serving inside the restaurant, your staff will take orders, package food, handle carryout orders, and make deliveries.
- Technology: How often have you placed a restaurant order on your phone during the pandemic? You need technology in place so customers can scroll through your menu, place orders, and pay using a mobile device.
- Marketing: Customers need to know about your new way of doing business, and that requires marketing. Spend dollars to email your database periodically, promote your restaurant on social media, and to invest in other marketing efforts.
Now that you know what you’re going to do, work out the revenue and expense assumptions for your business.
#4- Budget for revenue and expenses
To budget, start with fixed expenses. How much is your lease payment, and what do you need to spend on technology and marketing to implement your new plan? Technology and marketing costs are not necessarily fixed, but come up with a minimum dollar amount that’s needed.
Now, add in variable costs. Estimate your payroll costs and food costs as a percentage of total revenue. Say, for example, that 50% of each revenue dollar covers payroll and food expenses. You can tie in revenue and compute a profit using this formula:
Revenue less variable costs less fixed costs equals profit
During the pandemic, operating at a breakeven level- or even at a small loss– may be a reasonable goal in the short term. Finally, think about cash flows.
#5- Create a cash flow rollforward schedule
You can manage cash effectively by creating a cash flow rollforward, which is based on this formula:
Beginning cash balance plus cash inflows less cash outflows equals ending cash balance
Build a rollforward for each month, and use the ending March cash balance as the beginning cash balance for April. This format connects one month to the next.
The last step is to stay informed. If you work as a CPA, Becker has offered high-quality continuing education courses for more than 60 years. Learn about changes in the industry, so you can improve your skills and advance in your career. Visit the website to find dozens of useful CPE courses.
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