As the end of the year approaches, businesses often start putting plans together for how they’ll approach next year’s market.
“Right about now is when people start planning,” says Kurt Kappa, chief lending officer at First Federal Lakewood.
He says it’s usually right around the months of September and October that companies start to focus in on budget planning, looking for areas of opportunity to expand their sales, and line up equipment purchases to either replace outdated equipment or expand into new areas of business.
“Companies, as they take into consideration all their possible moves in the coming year, should really get their bank involved. That way, whatever their plan, it can be properly funded,” he says.
Smart Business spoke with Kappa about what companies should consider as they set a strategy for how they’ll approach the year ahead.
What should companies review as they develop their strategy for the coming year?
A good place to start is by taking a look at areas where improvements either need to be made or can be made, as well as where growth opportunities exist and how the company will approach those.
Companies should make sure their cash flow aligns with the capital needs of their expansion plans. If a strategic move runs the risk of draining the company’s cash flow, it could mean the company isn’t able to meet a bank’s lending standards or the cash-flow covenants in their loan documents.
Banks have debt service coverage ratios set on the loans they make. If a company spends a dollar, it’s got to show the bank that it will make more than that on the return. If they can’t, they won’t get more money to expand or make capital purchases. That’s why it’s important to plan now so companies can have these conversations with their banker and make the necessary adjustments to get the financing they need.
How should year-end planning align with a company’s five-year strategic plan?
Companies always need to be flexible. While it’s important to stick to a carefully crafted, long-term strategic plan, there will inevitably be things that change during the implementation of that plan, both positive and challenging.
For instance, a company could find itself faced with an attractive potential acquisition that it didn’t foresee, or there’s an opportunity to land a new, large customer. On the other side, a company might have a key piece of equipment break and need to replace it with a new piece that’s more expensive than the current model — something that falls outside of the company’s anticipated expenses.
Changes such as these require companies to adjust their financial plan. They’ll want to stick relatively close to their five-year strategic plan budget but allow for the flexibility to capitalize on opportunity and adjust to unforeseen setbacks.
Who should be involved in the planning?
Planning the year ahead should involve the leadership team, as well as a trusted CPA. The company’s bank will play a significant role in a company’s plans going forward. Often, however, the bank has already set the financing guidelines and it’s the CPA who keeps the company in line with those guidelines.
How can a company’s bank help as they map out their strategy?
It’s good for everyone to understand what the bank’s financing requirements will be if the company looks to acquire. For instance, what will be the out-of-pocket obligation? What will be the debt-service ratios? And how will it all affect the banking relationship?
Have a conversation about the structure, and give considerable thought to whether the company can meet those goals. If not, a major move such as an acquisition might not be possible, or profitable, and the opportunity should be allowed to pass.
Now is the time for companies to start looking at their year-end forecast and compare that to their budget vs. the actual figures. They should project what they anticipate doing for the upcoming year and make adjustments so they can feel confident that the plan is achievable, focus on it and grow.
The whole team, including the banking partner, needs to be on the same page in order to achieve success.
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