How To Survive A Struggling Economy With Zero-Based Budgeting

Discover advantages of zero-based budgeting compared to traditional budgeting in the COVID-19 era.

In your business management meetings, you’ll have heard ‘normal’ financial and non-financial reporting such as “sales are 15% higher than last year.” “Marketing spend is 8% below the last 10-year average.” “GDP is up 0.3% on last year” or “traveling activity is 15% below average”. But how do you relate these familiar measures to your business now during abnormal times created by COVID-19?

Can your business react to the new scenarios that the world faces since March 2020? Yes, you can! How? Dramatically change the way in which your business plans using a toolkit called zero-based budgeting (ZBB).

House_Collapsed_Zero_Budgeting. I like analogies so imagine this situation using ZBB is the equivalent to rebuilding a house after an earthquake. A house should not be rebuilt in the same way as it was destroyed. You would rebuild it with a fresh pair of eyes starting from the ground up and make full use of the space. This is how zero-based budgeting works. With this technique, each cost activity is justified regardless of previous business activity. Even if your business may not have been destroyed, the market around it is likely to have changed and so the assumption of your plans would need to be modified.

Incremental Budgeting vs Zero-Based Budgeting. Why now?

Over the last 6 months, an unprecedented “financial reset” process has taken place. The behavior of costs, revenues, cash flow patterns have all been subject to unpredictable change.

The role of the Finance Director is to facilitate the best performance, to make the performance sustainable and controllable, to align employees and managers, to foster the best possible processes and maximise the brand reputation.

COVID-19 is probably one in a century event but, most importantly, has completely reset expectations on a number of business models. Examples are commercial real estate and retail business behavior, in a sector in which “default thinking” and, therefore, incremental budgeting has been practiced for some time.

This type of “default thinking” and, therefore, “default incremental budgeting” can no longer apply in the current economical environment, hence zero-based budgeting is now required to address the totally new economic environment we all face.

Where to start with Zero-Based Budgeting?

Look at all your costs including your suppliers and internal. What do you spend your money on? Are you getting value for money? Do these activities still need to happen at all or differently?

Ask yourself, could we produce this internally, does this have the desired outcome we need, is there still demand for this service/product, can we source the same quality product or service elsewhere?

You’re likely to need access to your company financial reports pre COVID-19. Do you have these to hand and can you translate the figures to make sound decisions? Do you need help to explain zero-based budgeting to budget holders and get this off the ground? A Finance Head can join your business on a flexible (as needed) basis to help your business survive this challenging period. Please contact us we can put forward the best Finance Head for your business. You can then have a no-obligation confidential chat about your business challenges.

Does This Picture Sound Like Your Business?

So why does this happen when you try to scale up your business?

The answer is quite simple yet this happens frequently enough to establish a discussion with our potential clients.

We often say that there are two roles played by finance in business.

Role 1) keeping the score. This role is relatively simple to achieve and it is usually performed by a book-keeper/chartered accountant. He/she will calculate tax and will comply with the law

Role 2) facilitate wealth creation. This is where we seek to modify the picture below and match rising sales with rising cash flows. The bookkeeper is not designed to do this for you.

Get in touch with us if you are a business owner and you want to discuss this further.

Brexit & One of the 3 Pillars of Financial Success

This chart clearly illustrates the major economic shift that is happening in the World.

Over the last 3 decades we have seen a major emerging trend.

The G7 economies (USA, Canada, Japan, UK, France, Italy, UK and Germany) no longer dominate the World and the Emerging Markets (including China, Brazil, Russia, India, Mexico, Indonesia, Turkey, etc…) are fast taking ground and conquering a higher percentage of wealth.

What makes this relevant to a UK business?

Earlier on last year we launched the Scale Up Academy and we illustrated the 3 pillars of financial success, one of them being new geographies for your business.

Our declared mission as Chartered Accountants is to facilitate wealth and we will be very happy to help our UK clients with facilitating an international growth. We also do this with our investment banking partners when our clients seek expansion capital.

Get in touch with us to find out how we can help your business be more successful.

Business Crisis: when time & timing become money

How do we solve the business crises with our clients?

Oftentimes, crisis resolution is about the time of intervention. We often see that the longer the solution drags the more severe the crisis becomes.

We partner with insolvency practitioners, other accountants, and solicitors to resolve crises. However, our ultimate objectives are to avoid insolvency and to restart a new season of growth for our clients.

However, time becomes money with the crises.

If we are able to intervene well in time, all we need to do is a new business plan to establish a new strategy.

If the crisis is not handled in time, a simple business plan then becomes restructuring, then recovery, rescue until the business can no longer function normally.

It is at this point that we may still be in a position to rescue the business with voluntary arrangements. We are successful in 85% of the cases and crisis resolution is indeed what makes us proud of our profession.

Get in contact with us to find out more about how we happily solve the business crises and restart the business.

How Is Risk Management Like The Titanic?

The story of the Titanic has always been exemplary of what might happen to any business at any time at any latitude. During its journey from Southampton to New York, the captain gave orders to accelerate its speed as the ship was believed to be “unsinkable”. There was no risk management as there was no expected risk! Don’t let your business hit a ‘hidden’ iceberg!

This attitude is quite common amongst businesses, especially SMEs when business owners decide that no proper risk management plans are required to support the long-term stability of the business. The reality is very different, in fact, no business can be immune from any external risk as COVID-19 has brutally demonstrated.

Other examples of external risks are customers withdrawing orders, suppliers defaulting on obligations, key employees lost to competitors, unexpected tax and political changes, pandemics completely redesigning economies and default thinking. The list could go on and on.

What is the Role of a Finance Director in Managing Risk?

The opposite of risk is an opportunity. A risk is something to mitigate (the iceberg!), while an opportunity is something to maximise.

Each business then has to manage risks and to exploit opportunities. How do we do this? Very simply, any planning activity needs to address risks and each risk needs to be quantified with a probability and expected impact.

On the other hand, opportunities need to be equally quantified and chased for potential maximum benefit.

To simplify: It is the role of the Finance Director to ensure that risks are managed and minimised while opportunities are maximised and taken advantage of. This will ensure that maximum valuation is always achieved for the business and that progress is always on track.

Can Icebergs be Avoided?

Yes! Business icebergs should always be anticipated, keep a lookout and have a plan to address the change and react quickly when you need to to avoid critical damage to your business. Sometimes a collision will be in your blind spot and come upon you suddenly, such as COVID-19, but it those businesses that have a plan and change their course and speed with assurance to back-up those decisions will come through potentially stronger than before. Always be aware of blind spots such as customers running into difficulties and unable to pay which can be anticipated. These risks should be mitigated to be eliminated.

Have Your Own 'Risk' Lookout

Your Finance Head can be your navigator and inform you as captain when to take a different course or be wary of dangerous waters ahead. Your own Finance Director can help you create risk management plans to charter unknown waters. Get in touch with us to discover your own virtual Finance Director for your business.

Growth Business: Sales are up. Cash flow is down.

The chart above describes the typical growing business story.

Your sales are rising but your profits are not rising at the same pace.

And it may get even worse : Cash flow is falling.

This is far from unusual and it is actually a story we keep seeing every day in the majority of businesses we visit. There is a scientific reason why rising sales are very rarely converted into rising cash flow and this is to do with financial discipline required to grow your business.

Our packages at Taras Services Ltd include funding for growth, ongoing financial support, business plans, tax planning, relationship managements with banks, investors & other stakeholders.

At Morgan Corporate we partner with businesses in any cycle and, thanks to our extensive network in financial services, we have identified 5 tailor-made products:

  • Business plans for investments
  • Growth & funding
  • Crisis & insolvency
  • Exit for sale
  • Transformation

Get in touch with us