Going into budget season with recession talk on the tip of almost everyone’s tongue is problematic enough. High interest rates, labor shortages, supply chain disruptions, accelerating digital transformation and cybersecurity threats have only made things even more complicated, leaving many new CEOs wondering where exactly to adjust their spending. Cost reduction opportunities are not always easy to find. Although founders are notoriously practical and conservative in planning their budget for the year, it can be difficult to stay a few steps ahead.
Being proactive can definitely help. If there was an economic downturn, where would it affect businesses the most? How would you react and when? Maximizing cash generation can also be a big help. Whether in the private or public sector, you will want to evaluate the fundamentals like a budget to manage not only revenue growth, but also cash flow situation, both essential criteria for investors. The last thing any founder needs is for funding to dry up when they’re just getting started. In fact, many in the startup industry now recommend that founders extend the runway. 12 months to 18 months or more.
No one needs to tell you that it will be essential to start now with very detailed and calculated budget planning. But what’s worth mentioning is the importance of improving internal workflow efficiency to reduce costs and expand that runway. The same can be said for exploring different sources of financing, improving capital efficiency and putting return on investment at the center of possible reductions. After all, every dollar counts.
The question then remains: What budgeting tactics will best serve founders amid economic uncertainty? Start with these:
1. Focus on diversification.
Diversification is generally a strategy used in investment portfolios. Spreading your money across a range of investment types can reduce risk while still allowing for financial growth. The same principle should apply to your approach to budgeting. Lu Zhang, founder and managing partner of Fusion Fund, suggests: “First make sure you have diverse financing sources, including venture capital investment, private equity, and mandatory debt-to-equity options. -risk to boost revenue growth. Then, diversify the company’s revenue as well. It can also be beneficial to apply some diversification to investors’ backgrounds, as this can offer different perspectives on how to reduce costs, generate additional income, etc.
2. Development factor.
For many companies, one of the first positions to be reduced to the bare minimum will be development. This is a serious mistake, especially in the current context of the job market. Supporting employee growth and development is essential to both retention and recruitment. “Our budget,” says Brian Kerlin, founder and CEO of Optitude, “will allocate resources to programs and initiatives that deepen our relationships with the leaders we mentor. This means transparent operations, open communication channels and always true to our promises.
Set aside sufficient funds for courses, certifications, training programs, workshops, seminars and conferences. Be specific about what is approved, but always remember that employee development has always been linked to business growth. If you still have little wiggle room in your budget, consider creating a formal mentoring program to provide personalized guidance and development to employees.
3. Leave room for technology investments.
The last thing a business leader wants to hear during uncertain times is to set aside money for additional technology investments. But here’s the thing: digital transformation is still in full swing. “All business leaders should consider using integrated digital tools as early as possible,” recommends Zhang. “Technology reduces the fundamental costs of a business and significantly improves productivity. There are now many AI tools that can optimize the cost of talent, providing greater flexibility in resource usage.
Of course, it is essential to do your due diligence during the selection process to ensure that you are making the right technology decision for your limited funds. Whatever solutions you choose, they should fit your operations, add value, and work within your current technology stack. Otherwise, the investment will not only be a waste of funds, but could cause disruptions in your processes and workflows, negatively impacting your bottom line.
4. Remember your values.
Your organization’s mission, vision, and values likely serve as the foundation for your budgeting process during good times. This is unlikely to change amid economic uncertainty. If you take another approach, it could quickly impact everything from decision-making and resource allocation to business strategies and overall goals, potentially eroding your current funding and revenue streams.
“Budgeting, especially for the year ahead, is an embodiment of our core values and mission at Optitude,” says Kerlin. “We have not just adapted our strategies, but we have deepened our fundamental principle that success starts from within. By continually strengthening our internal capabilities and devoting resources to strengthen our offerings, we set an example for leaders. Our goal is to demonstrate that even in turbulent times, with the right approach, businesses can not only survive, but thrive.
5. Be realistic.
“It will take some time for the entire financial market to recover,” Zhang warns. “Think more clearly about the timing of microeconomics before planning your budget. Any minor details will impact what you plan for your future budget. In other words, it’s more important than ever to be realistic about how the geopolitical landscape will affect your business, because, as Zhang so eloquently puts it, “the key to success is making smart, calculated investments in times of economic slowdown. Perhaps focusing less on research and development and more on revenue-generating sales or broker-dealer activities will extend your new company’s runway.
Economic volatility is nothing new, but each era brings its unique challenges. Today is no different. You’ll want to be proactive in planning and budgeting, looking for ways to diversify your funding sources, making room for new technology investments, and providing development opportunities for people to encourage growth. Most importantly, focus on nurturing trust both inside and outside of operations. Reduction measures shouldn’t make people question whether you have their best interests at heart.