At the end of each calendar year there are a few timely considerations for businesses, for instance, financial moves that affect a company’s tax position. The end of the year, however, is more of a psychologically significant time as people reflect on the past year and look forward to the future. It’s a natural time for planning, review, budgeting and forecasting.
Smart Business spoke with Michael Stevenson, managing partner at Clarus Partners, about what businesses can do to prepare for the coming year.
What should companies review and plan for as they approach a new year?
Among the things companies should do going into a new calendar year is to create a budget for the coming year. Project the costs of any potential big-ticket purchases, such as equipment and hiring new people, and determine at what point of the year it’s anticipated those will happen.
Make budgets measurable so as to not create something that can never be achieved. Do, however, make it a stretch to achieve. And make the budget time bound. If planning to increase annual revenue by 10 percent, map out how much increase the company will need to achieve each quarter to reach that goal. Don’t set goals too high or it will make the budget irrelevant.
Prepare for emergencies by creating an emergency fund that’s at least twice normal operating expenses. This could take the form of working capital or a cash reserve account.
It’s also a good time to manage debt. Many companies confuse what they can borrow with what they should borrow. If the debt on a company’s books makes it highly leveraged, plans should be made to eliminate some of that debt. Some of a company’s investments, then, should go toward paying down its debt.
Prepare for the unexpected. Catastrophes happen, fraud happens, so a plan should be in place to deal with those events. A good first step is to cross train associates to protect business operations against an employee who decides to leave and create a safeguard against a fraudulent employee so someone is able to look over his or her shoulder. Also create a disaster recovery plan to backup critical company data on a daily basis so that if something happens a backup can restore it within 24 hours.
Business owners should make a concerted effort to delegate more to employees in the new year. It’s easy for business owners to fool themselves into thinking they can do everything. Learning to delegate makes for better growth and it makes their work/life balance healthier.
Find a way to give back to the community. Find a cause that matters to the organization and donate, volunteer or become a board member. It goes a long way toward making the community a better place to live and do business.
When should planning begin and how should those plans rollout?
The last quarter of the year is the best time to budget for the coming year. It’s when most of the relevant historical financial information and potential sales commitments are in for the first half of the next year.
Expense-side budgeting is often fairly easy since items such as payroll and operating expenses tend to remain stable from year to year. The hardest task is projecting revenue for the next 12 months. Often the first half of the year’s revenue is clear, but the back half could be a guess. Set a revenue target to grow to and write those numbers down.
Who should be involved in year-end planning?
When planning for the upcoming year, involve the organization’s trusted management team. When the planning meeting is over, everyone has to be on the same page. Goals must be attainable and measurable. Then set out to accomplish them one step at a time so the bigger, annual goal can be achieved.
Be bold when planning. Companies that do the same things they did the previous year aren’t putting themselves in a growth position. Business owners should regularly delegate the tasks they’ve learned, clearing the way for them to take on new responsibilities that position the company for growth. That can be hard for some people to do, but delegating key responsibilities to the management team makes for a stronger organization.
Insights Accounting is brought to you by Clarus Partners