Your management team presents the 2027 budget. Revenue will grow. Margins will improve. New investments will increase capacity. The company expects to meet its loan repayments and finish the year with a healthy cash balance.
The numbers may be reasonable. But they depend on assumptions about customers, costs, exchange rates, interest rates and collections.
Before approving the budget, the board should ask what happens if those assumptions change. A useful budget must help management recognize when the business is moving off course and decide what to do next.
Four scenarios can make that conversation more practical.
1. Financing becomes cheaper
Start with a favorable scenario. Assume the company obtains lower borrowing rates during 2027. Management should calculate which facilities can be repriced or refinanced, when the savings would begin, and what fees or conditions apply.
Consider a hypothetical company with ₦2 billion of debt. A reduction in its borrowing rate from 30% to 25% would save ₦100 million a year, assuming the full balance remains outstanding and the lower rate applies for the entire year.
That is useful. However, if the company also plans a new ₦1 billion investment, the interest saving covers only a small part of the cash required.
Does cheaper funding improve an investment that already makes commercial sense, or is management relying on cheaper funding to justify weak economics?
Show the budget without the expected rate reduction. An investment should not depend on a financing benefit the company has not secured.
2. Energy and transport costs remain high
The budget may assume that diesel, electricity, gas and freight costs will ease. Test what happens if they remain high or rise further.
A manufacturer may face higher production costs. A restaurant may spend more on refrigeration and backup power. A logistics company may see fuel absorb a larger share of every delivery. A property business may struggle to recover higher service costs from tenants.
Suppose a company spends ₦400 million a year on energy. A 20% increase adds ₦80 million to its annual cost before any response.
The next calculation matters just as much. How much can the business recover? Higher selling prices may protect margins, but customers may buy less. Improved efficiency may help, but new equipment requires cash and time to install.
The scenario should show the cost increase, management’s proposed response and the remaining effect on profit and cash.
3. The naira weakens
A company can earn all its revenue in naira and still carry substantial foreign currency exposure. It may import raw materials, purchase equipment, pay for software subscriptions or service dollar debt.
Suppose a company expects to purchase $1 million of imported materials during the year. At a hypothetical exchange rate of ₦1,500 to the dollar, the budgeted cost is ₦1.5 billion. At ₦1,800, the same purchase requires ₦1.8 billion.
That creates an additional ₦300 million funding requirement before considering changes in sales, prices or payment terms.
The company may raise prices. But it may need to pay the supplier before collecting from customers. Even if it eventually recovers the cost, it must finance that gap.
Ask management:
- How quickly can prices change?
- What happens to sales volumes?
- How much additional working capital is required?
- Which foreign currency payments are protected?
- Can the business still meet its debt obligations?
4. Sales weaken and customers pay later
This scenario can put pressure on earnings and liquidity at the same time. Lower demand reduces sales. Discounting weakens margins. Slower collections keep cash tied up in receivables. Salaries, rent, maintenance and debt payments still fall due.
A company with annual credit sales of ₦6 billion generates about ₦16.4 million of sales a day. If its average collection period increases by 15 days, approximately ₦247 million more could be tied up in receivables, assuming sales are spread evenly through the year.
A profitable company can still run short of cash when collections slow.
The scenario should identify which customers are most exposed, which costs can genuinely be reduced and which investments can be postponed.
Also test the pressures together
The board should see a combined downside case in which energy costs rise, the naira weakens, sales volumes fall and customers take longer to pay.
These pressures can occur together. The combined effect may be more severe because management’s responses also affect the business. A price increase may reduce demand. Delaying supplier payments may interrupt deliveries. Cutting maintenance may affect production reliability.
The purpose is to identify how much room the company has to respond before its choices become limited.
Five figures the board should see under every scenario
| Measure | What it tells the board |
|---|---|
| EBITDA | How operating earnings change before interest, tax, depreciation and amortization. |
| Operating cash flow | How much cash operations generate after movements in receivables, inventory and payables. |
| Debt service | The interest and principal payments due, including their timing and currency. |
| Covenant headroom | How far the company remains from breaching each applicable loan condition. |
| Minimum cash | The lowest projected cash balance during the year and when it occurs. |
The lowest cash balance during the year may matter more than the closing balance in December. Monthly forecasts are usually more useful than annual totals. Where liquidity is tight, management should also maintain a rolling 13 week cash forecast.
Agree the response before the pressure arrives
Every scenario should end with a proposed action. Management should state what it would do, what would trigger that response, who would be responsible and how quickly the action could take effect.
That might mean slowing capital expenditure, tightening customer credit, changing procurement arrangements, adjusting prices or arranging additional funding.
If projected cash falls below the agreed operating minimum, management will pause discretionary capital spending and report the recovery plan to the board.
A scenario with no response attached has limited value.
Approve a budget the business can manage
The 2027 budget should express the company’s ambitions. It should also show the conditions required to achieve them and the consequences if those conditions change.
The board does not need management to predict the year perfectly. It needs a clear view of the company’s exposure, financial capacity and available decisions.
All numerical examples in this article are hypothetical illustrations, not forecasts or current market quotations.