As Chief Financial Officers gear up for 2024, preparing an effective budget is critical for driving financial health and enabling strategic growth. The economic landscape for 2024 presents unique challenges, from inflationary pressures to regulatory changes, global market uncertainties, and advancements in technology. Here’s a guide on how CFOs can best prepare for the upcoming financial year.
Understand the Broader Economic Context
Before diving into budgeting, CFOs need to have a clear grasp of the macroeconomic environment. Several factors will influence financial planning in 2024:
- Inflation and Interest Rates: The UK, like many countries, has been grappling with high inflation rates, which are impacting consumer spending, raw material costs, and overall business expenses. Interest rate fluctuations, driven by the Bank of England, could continue to affect borrowing costs.
- Energy and Utility Costs: While energy prices have stabilised compared to 2022 and 2023, geopolitical factors such as the conflict in Ukraine could lead to price shocks. CFOs should remain conservative in estimating utility costs for 2024.
- Political and Regulatory Changes: The UK’s regulatory landscape is expected to see shifts, especially with ongoing discussions about corporate taxation, environmental sustainability regulations, and post-Brexit trade policies. Staying updated on potential changes will help CFOs incorporate any new legal or compliance costs into the budget.
Set Realistic Revenue Projections
Accurate revenue forecasts form the backbone of any budget. CFOs should take a data-driven approach, evaluating historical performance, current trends, and market expectations. This means:
- Customer Behavior and Market Demand: Analyse how changing customer preferences, shifts in supply chains, and economic constraints could affect demand in 2024. For instance, businesses in sectors like retail may see increased volatility due to changes in disposable income, while B2B firms could encounter fluctuating corporate demand.
- Scenario Planning: Given the uncertainties in global markets and economic conditions, CFOs should plan for multiple scenarios (best case, worst case, and moderate). This will allow flexibility in responding to unpredicted events, such as supply chain disruptions or geopolitical tensions.
Focus on Cost Management and Efficiency
With the pressure of rising costs in the UK, cost control is critical to ensure profitability. CFOs should emphasise:
- Operational Efficiency: Evaluate current operational structures and identify areas where technology, process automation, and outsourcing can improve efficiency and reduce costs. Investments in digital transformation and AI-driven analytics may yield significant cost savings over time.
- Labor Costs and Talent Retention: Wages are a major expense for most businesses, and 2024 could see ongoing demands for salary adjustments due to inflation. Striking a balance between offering competitive wages and maintaining profitability will be essential, particularly in industries facing a talent shortage.
- Supply Chain Resilience: Disruptions in the supply chain over recent years have shown that over-reliance on single suppliers or regions can pose significant risks. Diversifying suppliers and exploring local options where feasible can help mitigate risks and control costs in 2024.
Leverage Technology for Financial Planning
The use of financial technologies (FinTech) is rapidly growing, and CFOs should embrace it in their budgeting process. Some steps include:
- Advanced Analytics and Predictive Tools: AI and machine learning can provide valuable insights into spending patterns, forecast trends, and reveal inefficiencies. Predictive analytics can offer dynamic financial models that adjust to real-time changes, offering more reliable data for decision-making.
- Automation in Financial Operations: Implementing automated financial management systems can reduce manual errors, enhance compliance, and allow the finance team to focus on high-level strategic planning rather than repetitive tasks.
- Cloud-Based Financial Tools: Cloud technology offers greater flexibility and scalability, allowing teams to work remotely and access real-time financial data. Investing in these tools can drive better collaboration and faster decision-making across departments.
Align Budgeting with Long-Term Strategic Goals
While short-term cost management is important, CFOs must also keep long-term goals in mind. The 2024 budget should be aligned with the company’s strategic objectives, which may include:
- Sustainability and ESG Initiatives: Environmental, Social, and Governance (ESG) factors are becoming more crucial in business decision-making. Many investors and stakeholders are looking for companies that incorporate sustainable practices. CFOs should ensure the budget reflects investments in ESG, particularly with new UK regulations around carbon neutrality and reporting standards.
- Digital Transformation: Investment in technology isn’t just about immediate gains. Long-term digital transformation strategies that enhance operational agility, customer experiences, and product innovation should be prioritised.
- Growth and Expansion: Whether it’s entering new markets or launching new products, CFOs should allocate resources toward growth while ensuring that the associated risks are accounted for. Mergers and acquisitions (M&A) opportunities may also arise, and having capital reserves or leveraging financial instruments for acquisitions should be part of the financial strategy.
Prepare for Tax and Regulatory Updates
Changes in tax laws can significantly impact a company’s financial outlook. For 2024, CFOs should:
- Monitor Corporate Tax Rates: The UK’s corporate tax rate increased from 19% to 25% in 2023 for businesses with profits over ￡250,000. CFOs need to factor this into their projections and explore tax planning strategies.
- Incentives and Reliefs: There are several tax incentives that CFOs can take advantage of, such as R&D tax credits and capital allowances for investments in plant and machinery. Identifying and leveraging these opportunities can provide significant cost savings.
- Regulatory Compliance: Staying compliant with UK-specific regulations, such as the Financial Reporting Council (FRC) guidelines, accounting standards, and industry-specific laws, will be key. New or changing regulations in areas like data privacy, employee rights, and sustainability reporting could require budget allocations for compliance efforts.
Engage Key Stakeholders Early
Budgeting isn’t an isolated activity; it requires collaboration across the organisation. CFOs should engage early with department heads, executives, and other stakeholders to ensure that financial planning aligns with organisational priorities.
- Cross-Departmental Input: Involving other departments in the budgeting process ensures that financial allocations are aligned with operational needs. It also fosters a sense of ownership, increasing the likelihood of adherence to budgetary constraints.
- Regular Communication: Open lines of communication with the CEO and board of directors are essential to ensure that the budget aligns with broader business goals, investor expectations, and market conditions.
