Ask Andi: We’re starting our year-end planning. We went into last winter financially thin. Expect expenses will go up, especially health care. Want to hire a salesperson, but where’s the money coming from? Any suggestions on how to plan now to start next year on a high note?
It’s that time of year for year-end planning. It can be especially difficult to plan, given the number of variables business owners are faced with today. Costs are increasing. Health care is in transition. Revenue swings up and down, sometimes erratically. There’s uncertainty about where the economy is going. Opportunities are cropping up. And the cushion that many businesses had, in cash on hand and backup lines of credit, is way down.
Year-end planning
Keep in mind that when planning for 2012, it’s all about making the business healthy. And that includes paying taxes, building reserves, paying down debt, and carefully predicting cash flow. One more thing – especially in turbulent times, take limited, calculated risks.
Many business owners go to extraordinary lengths to avoid tax payments. They run up expenses in order to lower the tax bill. Usually, that results in a cash crunch in the first half of the upcoming year. Money is needed elsewhere and no longer available. Business growth stalls for a lack of funds.
Business owners also take profits out of the business, in the form of distributions. The profits go into personal checking and savings. In a time of need, the business asks for the money back, only to find it was put to use elsewhere, and funds are no longer available.
Entrepreneurs, as a group, tend to be optimists. That includes looking on the bright side when planning cash flow. Plan instead on things going wrong. Conserve cash inside the company, as if it is the most precious resource you have – it is!
How can you get started?
When doing year-end planning, focus on reserve building as a strategy. Plan to put a third of profits into spending for growth and development. Use a third of profits to pay down debt – more slowly than you might otherwise like to do. Keep a third of profits on hand in an emergency fund.
Build a plan now of how you think 2012 will play out. Answer the following questions as if you were an outside investor. Then put your money behind the winning answers.
- What business lines will be the most profitable?
- Which products or services will represent growth?
- What can I do differently in the 4th quarter, to set up for a great next year’s first half?
- How much could it cost me to fix problems if something goes wrong?
- Just in case, do I need to put money into reserves to have 3 months of expenses on hand?
- What is the ratio of current assets to current liabilities?
- Is it possible to get the ratio well over 200%? If yes, what?
Review last year’s goals
It’s all about building up cash on hand, inside the business, so that your company has options. Lending couldn’t get much tighter for small businesses. Don’t expect lenders to help you out if you run short of funds. It’s all about being conservative, having a plan to self-fund business growth, and proving you can do exactly that.
Keep a lid on risks. Remember that according to business guru Peter Drucker, more businesses go out of business from too much growth as opposed to too little. You can’t do everything you want to do at once, and neither can your business.
Make a list of the things that the business could spend money on. Estimate the payoff of each, after calculating for risk that it doesn’t pan out. Compare the list to available cash for investments. Build a plan to get one new idea off the ground and productive before launching the next one.
