Will your 2023 budget survive contact with the economy you are actually about to operate in? As December 2022 opens, the planning backdrop is unlike anything most British Columbia owners have budgeted against in years. The Bank of Canada has lifted its overnight rate to 3.75 per cent — up from 0.25 per cent at the start of the year, with a further increase widely expected at the December decision — financing costs have repriced across the board, input and wage inflation remain elevated even as headline CPI eases from its summer peak, and forecasters are openly discussing a possible mild recession in 2023. A budget built on 2021 assumptions will not just be wrong; it will be wrong in the direction that hurts cash flow most.
This post lays out a budgeting framework for established BC firms heading into 2023 — one that treats higher rates and softer demand as the base case rather than the downside, and that builds in the ability to adapt as the year unfolds.
Why last year's budget process will not work for 2023
For most of the past decade, a serviceable budget could be built by taking last year's numbers and adding a few percent. That extrapolation breaks in 2023 for three reasons:
- Interest expense is materially higher and partly variable. Debt that cost 3 per cent a year ago may cost 6 per cent or more in 2023, and floating balances could move again.
- Costs and revenues are moving at different speeds. Wages, inputs, and rent are still rising, while demand may soften — so you cannot assume revenue growth will outpace cost growth as it often did.
- Uncertainty is wide enough that a single-point budget is misleading. Whether 2023 brings a soft landing or a recession changes your plan materially, and you should not bet the business on one outcome.
The answer is not to budget more precisely. It is to budget in scenarios and to identify, in advance, the actions you will take if reality drifts toward the downside.
Start with the cost lines that have actually changed
Build the budget from the lines most affected by the 2022 shift, rather than escalating everything uniformly:
- Interest expense. Take your debt schedule and budget interest at rates consistent with the current 3.75 per cent policy rate — or higher, given that further moves are expected — for at least the first half of 2023. Model floating balances at a stress rate, not today's rate.
- Labour. Account for wage pressure carried over from 2022's tight market, plus statutory costs. BC's general minimum wage stood at $15.65 through 2022 and is expected to rise again on June 1, 2023, reflecting 2022 inflation — factor a mid-year increase and its compression effects into your payroll plan.
- Inputs and cost of goods. Use supplier quotes where you have them; assume continued, if moderating, input inflation where you do not.
- Occupancy and overhead. Rent renewals, insurance, and utilities have all moved; budget them from actual renewal terms, not last year's figures.
How do you budget for softer demand?
The revenue side is where optimism quietly destroys budgets. Rather than penciling in growth by habit, build your revenue plan in scenarios:
- Base case: flat to modest growth, reflecting cautious consumer and business demand.
- Downside case: a revenue decline of, say, 10 to 15 per cent, reflecting a mild recession.
- Upside case: continued growth if demand holds.
For each, carry the budget all the way through to operating profit and, crucially, to cash. The value of this exercise is not the forecast itself — it is discovering, before the year starts, at what revenue level you stop generating cash, and what you would cut first if you got there.
A worked example: budgeting two ways
Consider Sea-to-Sky Distribution, a hypothetical BC wholesaler with $5 million in 2022 revenue, a 35 per cent gross margin, $1.3 million of fixed operating costs, and $1 million of debt that is now largely floating.
Scenario A — Last year's habit (3 per cent growth, old interest). Revenue $5.15M, gross profit ~$1.80M, operating costs $1.3M, interest budgeted at the old 3 per cent ($30,000). Projected pre-tax profit: roughly $470,000. Comfortable — and dangerously detached from 2023 reality.
Scenario B — A realistic 2023 base case. Revenue held flat at $5.0M (cautious demand), gross margin compressed to 33 per cent by input inflation (gross profit ~$1.65M), operating costs up to $1.38M with wage pressure, and interest budgeted at 6 per cent on the floating debt ($60,000). Projected pre-tax profit: roughly $210,000.
The difference between the two budgets is more than $250,000 — and Scenario A would have lulled the owner into spending and hiring decisions that Scenario B shows the business cannot afford. The downside case (revenue off 12 per cent) tips the company toward break-even, which is precisely the signal to pre-plan discretionary cost cuts now rather than scramble mid-year.
Build triggers, not just numbers
A budget for an uncertain year should come with a short list of pre-agreed triggers and responses:
- If monthly revenue falls below the downside threshold for two consecutive months, then pause discretionary spending X and Y.
- If the policy rate rises a further 0.50 per cent, then revisit the debt-fixing decision.
- If gross margin slips below the budgeted floor, then implement the prepared price adjustment.
Deciding these responses while you are calm, in December, is far better than deciding them under stress in April. This converts the budget from a static document into a control system.
Should the budget be revisited during the year?
A budget built for an uncertain year should not be set in stone in December and ignored until the following one. The conditions that shaped your 2023 base case — the policy rate, demand, input costs — will keep moving, and a static annual budget loses its usefulness within a quarter. Two practices keep it alive:
- Compare actuals to budget monthly, and ask why the variance happened. The discipline is not to celebrate or lament the variance, but to understand it: is revenue soft because of a one-off, or because demand has genuinely turned? Is the interest line over budget because rates rose again, or because you drew more on the line than planned? Each answer points to a different response.
- Reforecast at least quarterly. Rather than amending the annual budget continuously, keep the original as your reference point and run a fresh forecast each quarter that incorporates what you now know. By mid-2023 you will have real data on demand and rates that simply was not available in December — use it. A budget you reforecast is a steering instrument; a budget you file away is a historical document.
This is also where the scenario work pays off a second time. If, by spring, actuals are tracking toward your downside case rather than your base case, you already decided in December what you would do — so the reforecast becomes a confirmation to act on a prepared plan rather than a scramble to invent one.
Protect liquidity above all
In a year of higher rates and softer demand, liquidity is the variable that determines whether you weather a downturn or are forced into bad decisions by it. Build a minimum cash buffer into the budget, confirm your operating line has room before you need it, and tie the budget to a rolling cash-flow forecast so you see pressure coming weeks ahead, not after it arrives. Profit is an opinion; cash is the fact that keeps the doors open.
Key takeaways
- Do not extrapolate last year's budget; rebuild the lines that actually changed — interest, labour, inputs, occupancy — from current terms and stress rates.
- Budget interest expense at rates consistent with the current 3.75 per cent policy rate (with further increases expected), and stress-test floating balances.
- Build revenue in base, downside, and upside scenarios and carry each through to cash; find your cash break-even before the year starts.
- Attach pre-agreed triggers and responses to the budget so you act early, not under pressure.
- Make liquidity the priority: build a cash buffer, confirm credit headroom, and run a rolling cash-flow forecast alongside the budget.
A budget is not a prediction of the year you hope for; it is the plan that lets you survive the year you get.
If you want help building a scenario-based 2023 budget and the cash-flow controls to run it, RN Canada's advisory team can support you. Reach out to discuss fractional CFO services for your BC business.