How to cope with company budgeting in times of galloping inflation?

The article by a PKF expert (Grażyna Sadowska-Malczewska - Managing Partner of PKF BPO), was published on September 30, 2022 on the website mycompanypolska.pl.

"Uncertainty - that's what makes you think" - Albert Camus

Inflation of 20%, stagflation, rampant interest rates, and thus dynamically growing loan installments, exchange rate fluctuations, minimum wage, gas prices, fuel prices, electricity prices, health insurance premiums, etc.

Each of us is inundated with disturbing economic information that has put many business owners into a state of - to put it mildly - uncertainty.

"Every company's business begins and ends with an in-depth analysis of numbers" - Henry Ford

In any company, the budget is the first step towards building long-term strategic plans. The fourth quarter of each year is the time when many companies start working on the budget. Most of them largely base their thoughts on how the company's financial data has developed so far.

The year 2023, however, promises to be "a little" different. I will risk saying that each organization is currently facing a lot more uncertain factors that may affect its future operation, performance and liquidity.

Here are some tips to help us get to grips with the 2023 budgeting process.

Step 1 - Prepare a file for aggregating key data​

In the next step, you will find tips for analysing specific areas of the company.

From each of them, it is worth collecting data and determinants that are important to us in one file. It is important to collect data in an orderly manner so that it can then be used for scenario analysis. It is also worth preparing a place where we will aggregate economic data that is important to us, e.g. the inflation rate, exchange rates, etc.

Step 2 - Make a detailed analysis of the key factors affecting your business

Which items in the profit and loss account and balance sheet are worth paying special attention to when budgeting for 2023?

1. Revenue - in particular, pay attention in the analysis to:

• the market and financial situation of your regular customers - in particular the industry in which they operate (e.g. whether they are dependent on the Russian economy or in particular on gas or electricity prices). Prepare a list of Clients with a higher risk index along with the value of revenues from these Clients,
• provisions of contracts with customers - with whom we have / do not have provisions on price indexation in the contracts.

2. Costs - we can only be sure that they will increase. It is worth paying attention to:

• payroll costs - the minimum wage will increase in year 2023 and will amount to PLN 3,490 in January, and PLN 3,600 from July. You can also expect an avalanche of applications for an increase in remuneration,
• costs of business trips - further increases in subsistence allowances are planned. Initial announcements say that the amount will increase from PLN 38 to PLN 45 for the  domestic allowance,
• energy costs - if they are important in your organization, monitor their level on an ongoing basis or, if possible, think about contracting prices for a longer period,
• costs of materials and raw materials - unfortunately they will also increase. Worth considering: Will they be available? Do we need to increase inventory?
• fuel costs - an increase in fuel prices entails an increase in the costs of transport services

3. Financial costs - will the Monetary Policy Council raise interest rates again? If you have a loan, monitor interest rates. Use the budgeting period to analyse whether a change in the interest rate method (variable vs fixed) will be beneficial for you.

4. Receivables and liabilities - analyse whether payment terms have changed. If so, does this translate into liquidity?

5. Transactions in foreign currencies - analyse the areas in which they occur. If these are important items – monitor them.

6. What investments are necessary to maintain and develop the business.

Step 3 - Scenario analysis

After identifying the key positions and determinants, it is worth preparing a scenario analysis including optimistic and pessimistic variants of the development of the situation. If a given area has a greater impact on our business, the more we should follow the precautionary principle and adopt this less optimistic option.

Perhaps the analysis will show that we should think about raising prices or protect ourselves with a working capital loan before, for example, liquidity loss occurs.

It can also happen that the accompanying analyses in the budgeting process highlight opportunities and become an impulse for planning development investments.

Step 4 - Monitoring

To make monitoring possible, first of all, we need to know what to monitor. Therefore, a detailed list of key assumptions, determinants and items that created the greatest risks or opportunities for our business is such an important area of work on the budget.

Our scenario analyses based on predictions may turn out to be more or less accurate.

After writing down all the assumptions concerning individual determinants, a cyclical monitoring of the assumptions should be implemented. It is crucial to assign monitoring activities to responsible persons. It should also be considered whether, it will be necessary to update the budget when the assumed levels of our key determinants are exceeded. I recommend doing this, especially when the deviation from our forecasts is significant or if we still have a few months of the year left.

“More than anything else – being prepared is the secret to success” - Henry Ford

The tips given may seem obvious. Nevertheless, when you start budgeting, it is worth systematising your knowledge. Especially nowadays, when many risks related to economic uncertainty are highlighted.

It is worth spending more time on budgeting for 2023 so that we have time to analyse as many possible scenarios as possible for what may have a significant impact on the situation of our company. The security and fate of our business largely depend on the monitoring of the economic situation.

If we do not make appropriate analyses beforehand, without writing down the assumptions, and then constantly monitoring the deviations from these assumptions, it will be difficult for us to identify trends that are unfavorable for our business and react in time. A carefully prepared budget for our organization is a tool that brings us closer to agile management and immediate reaction to what is happening in our environment.