Sun. May 26th, 2024

Budgeting

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Entering the budgeting season with talk of a recession on the tip of nearly everyone’s tongue is problematic enough. High interest rates, labor shortages, supply chain disruptions, accelerated digital transformation, and cybersecurity threats have only complicated matters further, leaving many first-time CEOs to question where exactly to adjust their spend. Cost-saving opportunities aren’t always easily found. Even though founders are notoriously practical and conservative in planning their budgets for the year, it can be difficult to remain a few steps ahead.

Being proactive can certainly help. If there were a downturn, where would it hit business the hardest? How would you respond, and when? Maximizing cash generation, too, can be of great assistance. Whether in the private or public sectors, you’ll want to evaluate the fundamentals like a budget to manage not only revenue growth, but also the cash flow runway situation—both essential criteria for investors. The last thing any founder needs is for funding to dry up when they’re just getting off the ground. In fact, many in the startup space are now recommending that founders extend the runway from 12 months to 18 months or longer.

No one needs to tell you that commencing with very detailed, calculated budget planning right now will be essential. But what does bear mentioning is the importance of how to improve internal workflow efficiency to reduce costs and extend that runway. The same can be said for exploring different funding sources, improving capital efficiency, and bringing ROI to the center of where you might make cuts. Every dollar matters, after all.

The question then remains: Which budgeting tactics will serve founders best amid economic uncertainty? Start with these:

1. Focus on diversification.

Diversification is generally a strategy employed within investment portfolios. Spreading out your money across a range of investment types can reduce risk while still allowing for financial growth. The same principle should apply to your approach to budgeting. Lu Zhang, founder and managing partner at Fusion Fund, suggests this: “Make sure to first have diverse funding sources, including venture investment, investor capital, and mandatory capital venture debt options to supercharge revenue growth. Then, diversify the company’s revenue, as well.” It may also be beneficial to apply some diversification to investor backgrounds, as it can offer different perspectives on how to reduce costs, generate additional revenue, and so on.

2. Factor in development.

For many companies, one of the first line items to dwindle down to the bare minimum will be development. That’s a big mistake, especially in the current labor market. Supporting the growth and development of employees is key to both retention and recruitment. “Our budget,” explains Brian Kerlin, founder and CEO at Optitude, “will allocate resources to programs and initiatives that deepen our relationship with the leaders we mentor. This means transparent operations, open channels of communication, and always staying true to our promises.”

Set aside enough funds for courses, certifications, training programs, workshops, seminars, and conferences. Be particular about what gets approved, but never forget that employee development has always been tied to business growth. If you still have little wiggle room in your budget, consider establishing a formal mentorship program to provide personalized guidance and development for employees.

3. Leave room for technology investments.

The last thing any business leader wants to hear during uncertain times is to set money aside for additional tech investments. But here’s the thing: Digital transformation is still in full swing. “All business leaders should consider integrated digital tools sooner rather than later,” recommends Zhang. “Technology reduces a company’s fundamental costs and improves productivity dramatically. Now, there are tons of AI tools that can optimize the cost of talent, offering greater flexibility in the use of resources.”

Of course, it’s essential to perform the proper due diligence during the selection process to ensure you’re making the right technology decision for your limited funds. Whatever solutions you choose must make sense for your operations, add value, and work within your current tech stack. Otherwise, the investment won’t be just a waste of funds but could lead to turmoil with your processes and workflows, negatively impacting your bottom line.

4. Remember your values.

Your organization’s mission, vision, and values likely serve as the foundation of your budgeting process during good times. That shouldn’t change amid economic uncertainty. If you take any other approach, it could quickly impact everything from decision-making and resource allocation to business strategies and overall goals, which may erode your current funding and revenue sources.

“Budgeting, especially for this coming year, is an embodiment of our core values and mission at Optitude,” explains Kerlin. “We’ve not just adapted our strategies but delved deeper into fortifying our core principle that success starts from within. By consistently reinforcing our internal capabilities and dedicating resources to bolster our offerings, we’re setting an example for leaders. Our aim is to demonstrate that even in turbulent times, with the right approach, businesses can not only survive, but also thrive.”

5. Be realistic.

“It will take a while for the whole financial market to recover,” cautions Zhang. “Think about the timing of the microeconomy more clearly before planning your budget. All the minor details will impact what you project for your future budget.” In other words, it’s more important than ever to be realistic about how the geopolitical landscape will affect your business—because, as Zhang so eloquently puts it, “The key to success is making smart and calculated investments during an economic downturn.” Perhaps focusing less on research and development and more on revenue-generating sales or broker-dealer ventures will extend the runway for your new enterprise.

Economic volatility is not new, but each era brings its unique challenges. Today is no different. You’ll want to be proactive with planning and budgeting, looking for ways to diversify your funding sources, leave room for new technology investments, and offer people development opportunities to encourage growth. More importantly, focus on nurturing trust both inside and outside operations. Where you cut back shouldn’t leave people questioning whether you have their best interests at heart.

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