Build Several Versions of 2027: Planning Your Business for an Uncertain Economy

As businesses begin looking toward 2027, there is no shortage of uncertainty.

The economy continues to change, political decisions at the federal, state and local levels can alter the cost of doing business, and employers continue to contend with higher wages, insurance premiums, commercial rents, utilities, supplies, financing costs, taxes, fees and regulatory requirements. At the same time, consumers are making their own adjustments as household expenses increase and purchasing priorities change. For a business owner, all of these forces eventually arrive in the same place: the financial statements.

No accountant can tell a business owner exactly what the economy will look like six months or a year from now. Economists cannot do that with certainty either. Economic forecasts are useful, but they remain forecasts, and unexpected events can quickly change the assumptions upon which they were built. What businesses can do, however, is use their own financial history, current economic statistics, known expenses and reasonable assumptions to model what several different versions of the coming year might look like.

That distinction is important. Financial planning is not about pretending we have a crystal ball. It is about recognizing that numbers provide us with information, and that information can be used to understand risk before the risk becomes an emergency.

Instead of asking an accountant to predict exactly what will happen in 2027, a better question may be: What happens to my business under several different versions of 2027?

One Budget Is Not Enough

Many businesses prepare an annual budget by taking the previous year’s revenue, estimating some growth and adjusting expenses based upon what they already know. There is nothing inherently wrong with that process, but it provides only one version of the future. If the assumptions behind that budget turn out to be wrong, the business owner may not understand the financial consequences until several months of actual results have already accumulated.

A stronger approach is to create multiple scenarios. Begin with a reasonable expectation based upon current revenue and known operating expenses. Then calculate what the business looks like if revenue declines by 5 percent. Run the numbers again at 10 percent, 15 percent and 20 percent. Those scenarios are not predictions that the business will lose that amount of revenue. They are financial stress tests designed to reveal how the company responds when circumstances are different from what management originally expected.

The same exercise should be performed in the other direction. What happens if revenue increases by 10 or 20 percent? Would existing employees be able to handle the additional workload? Would the business need additional inventory, equipment, vehicles, office space or financing? Would additional working capital be necessary to support the growth before customers actually pay their invoices? Rapid growth can create financial problems just as surely as declining revenue can, particularly when a business does not have enough cash available to finance that growth.

The purpose of creating several versions of 2027 is therefore not to determine which version will occur. The purpose is to understand what the business would do if any of them occurred.

Revenue Can Decline Faster Than Expenses

One of the most important things a financial model can demonstrate is that a decline in revenue does not necessarily produce an equal decline in expenses. If sales fall by 10 percent, the rent does not automatically decline by 10 percent. Insurance premiums do not decrease simply because fewer customers walked through the door. Loan payments remain scheduled, software subscriptions continue billing, utilities remain necessary, professional services are still required, and employees must continue to be paid.

This is why a relatively modest decline in revenue can have a much larger impact on profitability. Consider a business generating $1 million in annual revenue with approximately $900,000 in expenses. On the surface, that business is producing $100,000 before considering other taxes, distributions or obligations. If revenue declines by 10 percent while a substantial portion of its expenses remain unchanged, the company has not necessarily lost only 10 percent of its profit. Depending upon its margins and cost structure, it may have lost most or even all of it.

That is the kind of information a business owner should know before a downturn occurs. There is a revenue level at which the business is comfortably profitable, another level where profits become marginal, another where the owner’s compensation may need to be reduced, another where staffing becomes difficult to sustain, and eventually a level where the company begins consuming cash simply to continue operating. Those thresholds are different for every business, but they can be calculated.

Know Your Financial Breaking Points

A good planning discussion with your accountant should identify those thresholds and attach actual numbers to them. At what monthly revenue does the business stop producing a meaningful profit? At what point would current staffing levels become unsustainable? How much cash would be required to absorb three, six or nine months of weaker performance? Which expenses could realistically be reduced, and which expenses are essentially fixed regardless of revenue?

These questions also force management to distinguish between expenses that are necessary and those that are discretionary. A long-term lease may be difficult to change. Debt payments may be contractual. Certain employees may be essential to maintaining operations. Insurance cannot simply be eliminated. Conversely, some equipment purchases may be postponed, certain subscriptions may be unnecessary, expansion plans may be delayed, vendor contracts may be renegotiated and other expenses may have alternatives.

The time to make those distinctions is while the business is financially healthy. Waiting until cash balances are declining rapidly changes the nature of the decision. Instead of evaluating alternatives carefully, management may be forced to react. A business owner who already knows what would happen at a 10 percent or 15 percent revenue decline has considerably more flexibility than one discovering those answers after several months of losses.

Pay Attention to the Cost of Producing Revenue

Business owners naturally pay close attention to sales because revenue is one of the most visible measures of performance. However, revenue growth by itself does not necessarily mean that a company is becoming financially stronger. If the cost of producing that revenue is increasing faster than sales, the company may actually be working harder for less profit.

Suppose revenue increases by 4 percent during the year, but payroll increases by 7 percent, commercial rent increases by 5 percent, insurance rises by 10 percent and suppliers increase prices by another 6 percent. The business can legitimately say that sales increased, yet its profitability may have declined. That difference becomes especially important in an environment where many operating costs are increasing simultaneously.

This is why financial planning for 2027 should look beyond the top line. Your accountant should be examining gross margins, operating margins, payroll as a percentage of revenue, occupancy costs, debt service, tax obligations, accounts receivable, cash flow and other measurements that show what the business actually retains after generating its sales. Sometimes the most important number is not how much money came through the door. It is how much remained after the cost of producing that revenue was paid.

Taxes, Fees and Government Decisions Belong in the Model

Businesses do not operate independently from government policy. Federal, state and local decisions can affect taxes, payroll obligations, minimum wages, licensing costs, employer requirements and regulatory expenses. In Washington, businesses may already be managing a complicated combination of Business & Occupation taxes, sales taxes, payroll-related programs, local tax rates, licensing requirements and industry-specific obligations. Changes to any of these costs can affect profitability even when revenue remains unchanged.

Business owners do not need to become political analysts to prepare for these possibilities. They need to understand what a proposed or enacted change means in dollars. If a new requirement is expected to increase payroll costs by $30,000 annually, that amount can be placed into the financial model. If insurance is expected to increase $12,000, include it. If a lease renewal will add $2,000 per month beginning in July, the forecast should reflect it. If a tax or regulatory change could materially affect the business, calculate several reasonable possibilities rather than simply discussing whether the policy is good or bad.

Politics can generate endless debate, but ultimately a business must pay its bills using dollars rather than opinions. Whatever the source of an increased expense, the accounting question remains the same: What does this cost the business, and what does it do to the bottom line?

Your Accountant Should Help You Ask “What If?”

Accounting should do more than tell a business owner what happened last year. Historical financial statements are essential, but much of their value comes from what they reveal about patterns. Several years of financial information can show how revenue behaved during stronger and weaker periods, whether payroll has gradually consumed a larger percentage of sales, whether margins are deteriorating, which expenses are increasing faster than revenue and how much cash the company typically requires during slower portions of the year.

That information becomes the foundation for scenario planning. Instead of simply preparing a budget, your accountant can begin changing individual assumptions and observing what happens. What if revenue declines by 10 percent while wages increase? What if a major customer disappears? What if rent increases significantly at renewal? What if borrowing becomes more expensive? What if insurance premiums increase again? What happens if two or three of those things occur during the same year?

The same process can reveal opportunities. What if a competitor closes or leaves the market? What if demand unexpectedly increases? What if a major new customer wants to do business with the company? Would the business have the staffing, equipment, inventory and cash necessary to take advantage of the opportunity? Financial preparedness is not exclusively about surviving difficult economic conditions. It is also about being financially capable of responding when favorable conditions appear.

Build a Base Case, a Stress Case and an Opportunity Case

For many businesses, a practical 2027 planning process can begin with three broad models. The first is a base case representing a reasonable continuation of current operations while incorporating expenses that are already known or reasonably anticipated. This model should account for expected changes in payroll, rent, insurance, taxes, utilities, vendor pricing and other significant operating expenses rather than simply assuming that next year’s costs will resemble this year’s.

The second should be a stress case. Revenue can be reduced incrementally by 5, 10, 15 and 20 percent while realistic assumptions are made about which expenses would remain fixed and which could be reduced. This model helps identify the point at which profitability disappears, cash reserves begin declining and management decisions become necessary. Instead of discovering that point during an economic slowdown, the business knows approximately where it is in advance.

The third is an opportunity case in which revenue grows beyond expectations. This scenario should examine whether additional employees, inventory, equipment, financing or working capital would be required. It should also determine whether increased sales would actually produce acceptable additional profit. Growth that requires significant investment but produces very little additional margin may not be as attractive as the revenue numbers initially suggest.

Together, these scenarios create something more useful than a prediction. They create a financial map showing management where the business may be headed under different conditions and what decisions may be appropriate along the way.

Decide What You Would Change Before You Need to Change It

Scenario planning becomes particularly valuable when it leads to predetermined management decisions. If revenue falls 5 percent, perhaps no significant changes are necessary beyond closer monitoring. At 10 percent, certain discretionary spending might be reduced or planned purchases postponed. At 15 percent, staffing, operating hours, marketing expenditures or vendor arrangements may need to be reconsidered. At 20 percent, the company may require a much more substantial restructuring of expenses.

Those percentages are only examples. Every business has a different cost structure, and a 5 percent decline could be serious for a company operating on extremely narrow margins while another company might comfortably absorb a 20 percent reduction. The important point is that management establishes its own financial thresholds based upon its actual numbers.

This process can also prevent indiscriminate cost cutting. When businesses become concerned about declining revenue, there can be a temptation to eliminate whatever expenses appear easiest to remove. That may include marketing, experienced employees, technology or professional services that actually help generate revenue or protect the business. Scenario planning allows management to think through those decisions in advance and distinguish between costs that can safely be reduced and those whose elimination could make the situation worse.

Cash Reserves Should Be Based on the Business, Not a Rule of Thumb

Business owners are frequently advised to maintain cash reserves, but general rules about keeping a certain number of months of expenses do not account for the enormous differences between businesses. A company with mostly variable costs may require a very different reserve than a company carrying substantial payroll, rent, equipment leases and debt obligations.

Financial modeling can provide a more meaningful answer. If a 15 percent revenue decline would create a monthly cash deficit of $20,000, maintaining $25,000 in reserves offers very little protection. If the same company has $150,000 available, management has considerably more time to evaluate what is happening and make thoughtful adjustments.

Cash creates time, and time creates options. A company with sufficient liquidity can renegotiate contracts, adjust staffing gradually, pursue new customers, change marketing strategies, delay capital expenditures or restructure operations without immediately facing a crisis. A company without sufficient liquidity may have to make those same decisions within days or weeks.

Review Debt While the Business Is Healthy

Economic planning should also include a review of business debt and available credit. Business owners should understand their current interest rates, loan maturity dates, variable-rate exposure, equipment financing obligations and monthly debt service. They should also know whether an existing line of credit is available and what borrowing capacity the company might reasonably have if conditions change.

The purpose is not to encourage unnecessary borrowing. Debt creates its own obligations and should always be considered carefully. The objective is to understand the company’s financial resources while it remains healthy. Businesses sometimes begin searching for financing only after cash has become tight and financial performance has deteriorated, which may be precisely when favorable financing becomes more difficult to obtain.

Knowing what resources exist before they are needed gives management another option. In uncertain economic conditions, options have value.

A 2027 Plan Should Be Reviewed Throughout 2027

A financial plan prepared at the end of 2026 and placed in a drawer until the following December accomplishes very little. The scenarios should become benchmarks against which actual results are compared throughout the year. Monthly financial reporting allows management to determine whether the company is tracking close to the base case, moving toward the stress case or outperforming expectations.

A single weak month may not mean very much, particularly in a seasonal business. A developing trend is different. If revenue is down 3 percent in January, 5 percent in February, 7 percent in March and 9 percent in April, management should recognize that trajectory before another four months pass. The earlier a financial trend is identified, the more choices a business owner generally has available.

This is also why accurate and timely bookkeeping matters. Financial information that arrives several months late may be useful for tax preparation and historical reporting, but it is far less useful for making decisions about what needs to happen next month. Business owners cannot manage today’s company using financial information that describes conditions from a previous quarter.

We Cannot Predict 2027, But We Can Prepare for It

There will always be uncertainty in business. Elections occur, administrations change, laws are enacted, taxes and fees change, interest rates move, technology disrupts industries, competitors enter and leave markets, major employers expand and contract, consumer behavior shifts and unexpected events occur. No business owner, accountant, economist or financial model can perfectly predict all of those variables.

That does not mean the future is completely unknowable. We have historical financial statements. We have economic statistics. We have payroll information, expense trends, tax data, margins, debt obligations and cash-flow history. We know many expenses that are already scheduled to increase. We can make reasonable assumptions about others, and we can calculate what happens when those assumptions change.

Statistics and economic models are not crystal balls, but numbers have an important advantage: they force us to quantify what we are discussing. A business owner may feel that expenses are getting high. The financial statements can tell us how much they increased. An owner may believe payroll is becoming difficult to sustain. The numbers can tell us what percentage of revenue payroll consumes and what revenue is required to support it. An owner may be concerned about a recession or slowdown. A financial model can tell us what a 10, 15 or 20 percent decline would actually mean to that particular company.

That is where accounting becomes more than recording what already happened. It becomes part of managing what happens next.

Build Several Versions of 2027

Before entering 2027, business owners should sit down with their accountant and build several versions of the coming year. Build the version where revenue remains relatively steady and expenses increase as expected. Build the version where revenue falls 5 percent, then 10 percent, 15 percent and 20 percent. Build another where wages, rent, insurance, taxes and other costs rise faster than anticipated. Build a scenario where several unfavorable conditions occur simultaneously, and build another where the company experiences unexpected growth.

Then determine what management would do under each scenario. Establish the revenue level at which expenses would need to be reduced, the point at which staffing would need to be reconsidered, the amount of cash that should remain available, the purchases that could be postponed and the financial indicators that would trigger those decisions. Instead of simply hoping that 2027 develops favorably, management begins the year knowing how the company intends to respond to several different possibilities.

The purpose of financial forecasting is not to perfectly predict the future. It is to make certain that when circumstances change, the business owner already understands the financial consequences and has options available.

At Pivotal Forensic Accounting & Audits, we believe the numbers tell a story. Historical numbers tell us where a business has been, current numbers tell us where it stands, and thoughtful financial modeling can help reveal where that business may be headed. We may not have a crystal ball for 2027, but we do have something considerably more useful for running a business: the ability to examine the numbers, test the possibilities and prepare before decisions become emergencies.

Your taxes, your business and your financial future deserve professional oversight, experience and accountability.

Pivotal Forensic Accounting & Audits
2602 N Proctor Street, #201
Tacoma, WA 98407

(253) 752-3920