If you have responsibility for budgeting in your business, the events of the last couple of years will undoubtedly have kept you busy and will probably have thrown some challenges your way. You’re not alone. Businesses everywhere are struggling to set and maintain accurate budgets, beset on all sides by world events and economic trends.
As we enter 2023, the outlook is for more of the same. So how do you budget effectively, and more to the point accurately, when the external influences – many of which entirely out of your control – are so strong and can create significant variances in your costings?
The calm before the storm
For an extended period, we had become used to working with minimal variability in the economy or the other factors that represent the guess work in planning the year ahead. Budgeting in a growing economy or even a flat line economy with static interest rates is relatively straight forward.
There’ll always be some currency fluctuation and we knew how to accommodate that, but the instability caused by (first) Covid and then the war in Ukraine, has been hard to cope with. The US dollar rate has been heavily impacted by World events, which coupled with concerns around supply and demand, has helped push energy and shipping costs to all-time highs. With more dollars in circulation outside the US than inside its own borders, it’s little wonder that the currency has been impacted so greatly and changes are reflected globally.
After record periods of equally record low interest rates, the sharp upturn in those toward the end of 2022, and expectations set by the central banks for further increases, will have put pressure on a lot of organisations, as well as individuals. We know that this has a ripple effect on consumer habits, turning spenders into savers. And it’s this kind of knowledge that we need apply to our budgeting process as we enter 2023.
From Known knowns to unknown unknowns
When you’re planning your budget this year, you might like to keep this quote from former U.S. Secretary of Defence, Donald Rumsfeld, in mind “…there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns — the ones we don’t know we don’t know.”
Actually, using this quote as a backdrop is not a bad place to start your planning. Set out these three categories and then work through the macro and micro elements of your specific circumstances, and place each in its relevant category before working through them to assess their impact.
One chink of hope as we look forward, is that we’ve almost become accustomed to the uncertainty. As a for instance, we know that there is the war in Ukraine and that its not likely to end quickly, a known known. We also know that Russia, the aggressor, is volatile and that the war may escalate, but to what extent we are unsure – a known unknown to quote Mr Rumsfeld.
Another global factor to consider in the known known category is the next US presidential election cycle. It feels like we’re always in a US election cycle, but by the end of 2023 we will be in full campaigning mode and it looks set to be another divisive event, which may once again cause some instability on the currency markets as the global economy tries to determine forward trade policy.
On a slightly more positive note, as we sit here in January fuel, gas and shipping costs are starting to come back down, but this takes time and they are highly unlikely to revert back to their pre-2020 levels – after all we know that these shoot up like a rocket and come down like a feather in a breeze. Struggling economies impacting demand and China’s removal of covid restrictions will temper shipping costs as goods and ports begin to flow with more predictability. Global reliance on Russian gas and energy will ebb away as alternatives are found, developed and come on stream.
Tips for budgeting in 2023
So taking all of this into account, here are 5 tips for beginning your budget process in 2023:
- Think macro – few businesses can ignore global or even national events. Consider manufacturing locations, supply lines, raw material availability and shipping costs and the risks to each
- Don’t try and plan the full 12 months in detail. This is definitely a year for short bursts of budget. High level budgeting for the second half is fine, with the detailed focused in H1
- Set the expectation for regular budget revisions amongst your team – almost monthly but certainly quarterly – and make sure you plan purchases, investment and staffing accordingly. For a lot of companies, the early part of a new budget year means relaxed restrictions on spend, but 2023 may need to be a little more measured
- Pessimism equals profit – If you expect the worse and it doesn’t happen, it will leave you writing chunks of profit back into the accounts. Being overly ambitious or ignoring potential curve balls can be costly. Whilst an accurate budget is the ideal without significant swings either way, it’s better to err on the side of caution
- Play the markets – if you need to add some certainty to your cost prices through currency rates, then forward buy so you can fix your prices and reflect these in the budget