The COVID-19 pandemic has taken the world by storm since it was first discovered in late 2019, affecting virtually all strata of human endeavors. Business owners, business advisors, and other business stakeholders were not left out of the onslaught. It has become more difficult to follow through with budget planning due to the many uncertainties. Now, business owners must adapt to this new normal and make budgets while accounting for COVID-19.
To make such budgets, a detailed financial report is necessary. Having a breakdown of preceding fiscal years before projections for the coming year is key. However, you’d need to understand how the pandemic has destabilized businesses’ financial reports.
How COVID-19 has affected Businesses’ Financial Reports
The pandemic has resulted in the destabilization of businesses’ financial reports in 3 primary ways.
Rent/Lease: The pandemic has forced many to work from home. SMEs may be considering downsizing office space or giving it up altogether as they embrace a more remote style of working. For property owners renting or leasing office space, they will be adjusting their projected rental revenues for the coming year or two.
The government, in a bid to cushion this imbalance, provided stimulus packages. The Canadian Emergency Rent Subsidy (CERS) provided subsidies on commercial rent from September 27, 2020, until June 1, 2021. If you have received, or plan on applying for, CERS you will want to account for that in your budget planning including a return to full rental payments.
Employment and Salaries: Many employees were furloughed or took a pay reduction as business stalled. The Salary Planning Survey for 2020/2021 revealed that 62% of workers had a pay increase just before the pandemic. However, the effect of the COVID-19 pandemic in Q1 of 2020 compelled many to cut down their salary budget. Pay raises turned to pay cut in no time. In other cases, workers were laid off.
As businesses open up and adjust to doing business in the new climate, they may find they need to rehire employees or hire and train new ones. In this case, not only will there be adjustments to salaries and wages, but there may be increased training costs as employers are having to train staff on new systems to support remote work or new business strategies.
Utilities/Office expenses: Over the past year, many companies had to implement a work-from-home policy during the pandemic. With fewer or nobody in the office, businesses will have experienced a reduction in utility costs such as electricity, hydro, etc. Reductions in overhead from utilities may be absorbed by new expenses.
Companies have had to adopt outsourcing to automated systems, such as replacing a receptionist with an automated answering service, implement chatbots or email autoresponders. Or upping the service level of platforms such as Zoom and Microsoft 365. It has become apparent that virtual meetings are here to stay. Including increases in these subscription services will be important to your budget planning as they will likely be adopted permanently.
With a thorough analysis that highlights areas that have been affected in a year-over-year comparison, you may be wondering how to create a budget going forward when faced with so much uncertainty. Here we outline some tips for moving forward with a budgeting process.
Tips for Budgeting 2021
- Ask questions that would affect your business key performance indicators. It could be questions such as:
- What are my expected sales this year against 2019 before the pandemic
- Amidst the pandemic, is my product/service more or less relevant to the consumer?
- What should the level of customer service be at this time? Should you put in more budget towards digital or social media marketing?
- How much are you willing to invest in human capital development and infrastructure?
- Create multiple scenarios cash flows or contingency budgets: Scenario cash flows involve imagining what your business cash flow would look like assuming a best-case scenario and worst-case scenario. One big takeaway from the pandemic experience is that anything can happen.
- What is the status of your business loans, lines of credit, and overdraft limits? Do these need to be adjusted?
- Think beyond a fiscal year: When budgeting, do not see it as a year in isolation. Your budget needs to align with the bigger picture of your business.
- How has the pandemic affected your tax planning and strategy? How have any subsidies or relief programs affected your taxes?
Times are rapidly changing. Making budgets and financial reports should not be a one-time event but rather iterative. It can be as frequent or monthly, or weekly. If you are having trouble navigating these unprecedented times and getting a grasp on how to move forward with planning, or for more information on our tax and business advisory services please contact us.