“The best way to predict your future is to create it.” – Peter Drucker
As we approach the fourth quarter of 2022, AcceleratingCFO is partnering with our clients to start forecasting the rest of 2022 and begin planning for 2023. This is an important process for our clients, which establishes the path to increase profitability, allocate resources in an optimal manner, and reach financial goals. It’s challenging to navigate the future — or as Peter Drucker says, create it — especially without making some informed assumptions about the next twelve to eighteen months. Although we are not soothsayers, there are certain economic influences that historically have helped us guide our clients to accurately plan their budgets.
Right now, we are planning with our clients with the following in mind:
- The Rise of Labor Costs: Over the past few months, we have seen a steady increase in inflation and a steady decline in unemployment rates. Per Statista, the unemployment rate has dropped from 5.2% in August ‘21 to 3.7% in August ‘22. Over the same period, the annualized inflation rate has increased from 5.3% to 8.3%. This combination usually predicts the need for a more expensive compensation package for employees. Therefore, in your 2023 budget, you should plan on increasing your current employees salaries at a 5-8% increase and increasing your starting salary for any open positions by 10-15%.
- Occupancy Costs: For the past 2+ years, we have seen a hybrid (office/home) working model for employees. Many large companies have recently required in-office hours at a central location 3-4 days per week. However, the SMB community is experiencing a different trend. In order to keep valued employees and manage rising labor costs, many owners are continuing the hybrid model and lowering their building footprint. Although each company has its own unique set of circumstances, we are generally seeking ways to lower rent and occupancy costs for 2023 to adjust to the changes in the modern workplace.
- The Impact of Discretionary Spending: Slower discretionary spending will impact revenue forecasts. As costs start to rise, consumers are forced to make decisions about their pocket book and where they spend their money. With rising food costs and rent, operating a restaurant, for example, is significantly more expensive than it was even 12 months ago. Then add in rising labor costs and restaurant owners must address how much they can raise prices for food and beverages on their menu. Yikes! The same principle applies across almost all industries, from real estate to consumer goods to live entertainment. These factors are forcing us to be more conservative (i.e., show a lower increase) in our revenue and profitability estimates for 2023. Although we don’t enjoy being the wet blanket in the room, the current macroeconomic factors compel us to be less optimistic — ensuring that our clients do not bear too much risk in their business model.
It’s important to have a healthy balance of optimism and prudence. The art of successful budgeting and forecasting is greatly dependent upon recognizing, and acting upon, the facts as they are rather than how you want them to be. We don’t want to make our entrepreneurs nervous or anxious about what the future holds because manifesting your destiny is a key component to any successful business person. But it is important to be flexible and adapt to changing factors in your industry so that you can thrive in times of uncertainty.
Take-away: If you have not yet started your 2023 budget process or are uncertain of where to begin, please contact Brian or Scott at email@example.com.
Co-founders & Managing Partners