Given the turbulence of the past year, agility should be at the forefront of our minds when building a budget and strategy for 2021. Business owners need to be prepared to navigate the continued uncertainty. The ability to pivot in an unpredictable business environment will be essential this year, and with revenue assumptions changed across all industries by the events of 2020, a fresh approach is needed.
The industry can look to
Historically, only large enterprise companies had the means to invest in quality software to enhance their decision-making capabilities for strategy and budgeting. Small and medium-sized enterprises in contrast often relied on a semi-annual conversation with their CPA. In the last few years, countless new software products have come to the market geared toward SMEs. There has never been a more important time for accountants to look ahead and prepare themselves for strategy-based budgeting conversations rather than historical budgeting.
First, let’s run through the ground rules for forming a budget, before looking more specifically at how the 2021 budget should differ.
The basics
When forming a budget, it has to align with the company’s vision and goals. Are the vision and goals specific, measurable, achievable, time-based and relevant? This is the
Understand the executive team: What is their management style? Are they aggressive or conservative? That will ultimately decide whether they are willing to absorb losses in order to achieve their growth goals and thus will shape the budget and give a clear picture on raising or securing necessary capital. Understanding management style and the decision-making approach is really a personal question for every business owner, which must be reflected on individually.
Get specific with the industry. Think about the industry and economic factors that will affect the company’s operations in the coming year. Naturally the whole business world has been radically changed by the events of 2020, but its effects will be distinct across different industries.
Consider the company’s overall revenue goal. Is it hoping to offer new products or services? If management wants to increase sales, perhaps it needs new sales personnel, and the budgeted payroll expense will likely depend on their level of experience.
Consider the company’s costs: Do they need greater inventory to satisfy orders? What is the staffing cost required for increased sales, or even the cost of outsourcing some tasks? Also, try to predict upcoming costs, like any equipment purchases that could be beneficial.
The last ground rule for forming a budget is to choose a budget framework — a historical budget or a zero-based budget. In normal times, a hybrid budget would be recommended, with historical data as a base to develop revenue and payroll, and all other expenses using the zeroed-out approach. However, the 2021 approach to budgeting is going to challenge the traditional ways.
The 2021 approach
A new business environment demands a fresh approach to budgeting. Zero-based budgeting should be the preferred framework, prioritized over the historical data approach. In fact, McKinsey even echoed this point in a recent
The historical data approach could be misleading this year. 2020 may have been a statistically anomalous year, meaning the data produced in the most recent year, which would usually carry the most weight, is difficult to utilize.
In building a budget, assumptions are one of the most important components because those will drive total annual budgeted revenue and expenses, and thus shape the entire report. For 2021, those assumptions are even more important and should be afforded greater scrutiny. Geographical and seasonal variables also require particular attention. With greater market fluctuations expected amid an unpredictable political and economic environment, accountants must make themselves available for up-to-the-minute advice. Businesses will need them to be on hand to review and adjust budgets throughout the year, to help adapt to environmental changes as they come.
The accountants who build that trust are likely to have a profitable 2021 and beyond. They should consider changing their own pricing model to a monthly retainer, rather than a by-the-hour model, so their company involvement can be more consistent and available for pivoting throughout the year.
In addition, the increase in automation is compounding the need for the new pricing model. Much of the traditional bread and butter work of accountants is being automated, meaning the professional role is becoming increasingly advisory, with trust key to the relationship. Accountants should realize where the industry is headed, and get ahead of the game.
Those professionals should consider acting as a strategic partner to businesses rather than a professional who gets called in for projects or regulatory requirements. While the ground rules remain an important point of reference, the 2021 budget demands the industry adapt to an unfamiliar economic environment. Being in such unchartered waters heightens the importance of the zero-based budgeting framework and requires deep thought on every single assumption included in the budget.
Accountants will be trusted with a weighty responsibility as their clients navigate and profit from an unpredictable 2021. Those who are on hand to course a way through choppy waters are sure to develop great relationships with their clients and gain a solid reputation in the industry.
