The last several years have undoubtedly been some of the hardest to predict in recent memory. Beginning with pandemic-related shutdowns and business interruptions, followed by supply chain disruptions, labor shortages, and volatile inflation, businesses have likely seen significant variances between their original budget and actual results.
Only time will tell if we’ll see some predictable activity in 2023. But to give yourself the highest chance of a successful budget model, it’s important to take a holistic approach by incorporating all areas of the business, including the following:
- Leadership: Paramount to the process is making sure the forecast aligns leadership’s goals and revenue targets.
- The sales team: Meet with the sales team to help you determine how the revenue goal will be met, whether from new business or expansion from existing customers. The source of revenue growth, as well as the products and services to achieve it and the strategies deployed, will be the main drivers in completing the budget and determining which investments are needed to achieve those goals.
- The department heads: Meet with other department heads to get their input on major cost changes from 2022. Here is where it is key for all aspects of the business to be on the same page for the coming year. If the sales team is anticipating half of the new sales to come from new customers requiring custom products, and the engineering department isn’t aware of this, chances are the engineering budget won’t align with the sales team’s goals.
Additionally, here are three factors to keep in mind when preparing your 2023 budgets and forecasts:
- Macroeconomic drivers: Interest rates have continued to rise throughout 2022, and many experts believe that trend will continue at least through the first half of 2023. This should be factored into budgets, especially when a variable rate line of credit is heavily utilized in operations. Similarly, inflation has continued, and many believe a recession could occur sometime in 2023. Depending on how recession-proof your business is, look back on recent downturns for strategies and lessons learned.
- Personnel: Many businesses have struggled over the past year to maintain their optimal headcount, and a major factor in the budget’s accuracy will be how well it accounts for payroll. The silver lining of a recession is that it’s expected labor will be easier to attract. But if a downturn does not occur, don’t expect labor shortages to resolve quickly on their own. Also, if additional people are needed to achieve those revenue targets, businesses may need to pay a premium – in compensation and recruiter fees – to get there.
- Customer segmentation: Analyze your customers based on industry and look at how those industries are expected to perform in 2023. Identify which customers would thrive in a recession and which customers would likely scale back. Similarly, identify customers who are involved in the production cycle of industries that stand to benefit from recent legislation, such as electric vehicles and infrastructure.
The budgeting process is often a time-consuming one that requires a lot of a company’s accounting department resources. But by spreading out the responsibilities intra-departmentally, the budget model receives the most diverse level of data and precision which will set the company up for success in the coming year.
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