As the year draws to a close, many businesses are feeling the pressure of approaching deadlines and the need to secure their financial future. Accounting teams, at small and medium businesses in particular, may find themselves grappling with their monthly responsibilities while gearing up for the last quarter of the year. It's that time of year when forecasting and financial planning become crucial for business success in the coming months.
Looking Ahead with Cash Flow
One of the critical questions to ask as the year wraps up is whether your cash flow extends at least through the end of the second quarter of the following year, and ideally, for the entire year. While we recommend a 12-month rolling cash flow, predicting the timing of expenses and revenue that far out can be challenging.
Have you finalized your sales plan for the upcoming year and have you incorporated it into your cash flow based on anticipated receipt dates? Additionally, is your Income Projection forecast for the coming year updated in line with the sales plan to reflect anticipated revenue recognition? These questions represent just a fraction of the checks and balances necessary as we approach a new year.
The Annual Expense Budget: A Key Component
When it comes to preparing for the upcoming year, one of the most critical pieces of the puzzle is the annual expense budget. It's not uncommon for businesses to be hesitant about committing to a full-year budget picture. However, the process may be less daunting than it initially seems. Consider this - many of your larger expenses are well-known for the entire year.
Payroll expenses, for instance, tend to remain static until a known change occurs, allowing for easy year-long forecasting. If your sales plan includes new business ventures in the latter half of the year that require additional resources, you can project this by adjusting your expected loaded payroll expenses in the relevant months. This approach also accommodates any expected increases in loaded payroll costs, such as insurance, 401(k), HSA contributions, or other company programs.
Similarly, expenses like rent, utilities, software licenses, and other recurring office costs are often known well in advance for the entire year, simplifying their inclusion in your annual budget. Does the onboarding of new resources involve new hardware, software licenses or training licenses? Why wait until you pay for the new laptop before planning for it? Add them to the budget now!
Don't Forget Discretionary Expenses
While the above-mentioned items may cover a substantial portion of your expenses, there's still a critical area to consider – discretionary expenses. These costs may not significantly impact day-to-day operations but have the potential to affect your forecast. Think of company outings every quarter, or monthly pizza parties for staff. Are employees flying in for company events? How many hotel nights are needed for each of them?
Failure to account for these discretionary expenses can result in unexpected financial hits, potentially adding thousands of dollars to your credit card bill that you weren't prepared for. For those businesses with a tighter cash flow, this could be catastrophic.
Perhaps most importantly, a proper budget, cash forecast, and income projection ensures your preparedness for emergencies. Can you handle an unexpected tax liability to the government without warning? How about an internal technical snafu resulting in company-wide downtime?
Measuring Success
Lastly, an accurate budget forecast is essential for measuring your success. Without clear revenue and expense goals, you might not realize that you are just a few months away from being unable to cover payroll. Taking the time to create a budget in advance will help ensure that you are actively deciding how to spend your money and are considering the impact that your expenses will have on the big picture.
The end of the calendar year may be a busy time, but taking the time to look forward while managing immediate tasks is crucial for any business' financial health. Proper financial planning and forecasting not only set the stage for a successful year ahead but also ensure your business is prepared to weather unexpected challenges and capitalize on opportunities as they arise. So, as you wrap up this year, remember that what you do now lays the foundation for what's to come.
