With 2020 coming to a close (thank goodness), it’s time to reflect on all you’ve done this past year to adapt, grow, and move forward with your business. As you do, it will be natural to also start thinking about what’s to come in 2021. Just like your personal finances, it’s important to take some time to sit down with your business finances and evaluate what worked, what didn’t, and what you’ll need to do to thrive next year. Quite a few things have changed in the wake of Coronavirus. Below we’ve outlined a few next steps you can take in preparing your business’s finances for the new year.
Step 1: Review Your 2020 Budget
Now’s the time to sit down and review your business's 2020 budget it line-by-line. This past year brought unprecedented changes and adjustments. If you found yourself focused entirely on staying afloat, you may have missed some critical insights from your 2020 spend due to the changes you made.
Yes, this might sounds like a tedious task, but understanding your expectations versus realities of the past year can offer crucial insights into what you can expect for the new year. Do the actual numbers line up with how you remember the year? Do the changes you made reveal any new opportunities for 2021? This is a crucial first step to building a new, 2021 budget for your business.
Step 2: Begin Building Your 2021 Budget
After assessing 2020’s expenditures and gaps, you can begin building your 2021 budget.
Project Your Revenue For the Year
Begin by doing your best to estimate how much income your business will bring in during the next year. Coronavirus may have thrown a wrench in your trend lines, but having a renewed grip on expectations for the year can restore a sense of normalcy and direction.
If you’ve been in business for a few years and have seen steady growth, it may be easier to project future earnings and create a more accurate estimation. If you are still in the early-stages of growth or have irregular income, it may be more difficult to project. If that’s the case, do some research and speak to other business owners in the area. Find a general range you can pull from that’s realistic for your business type and location. Most importantly, it is almost always better to be conservative and project lower revenue than higher. Expect growth, but plan for highest and best use of resources.
List Out Your Fixed Expenses
As a business owner, there are a few fixed expenses you just can’t avoid. In terms of building a budget, these fixed expenses can make it easier to estimate how much you’ll be spending month after month. These could include the cost of rent or mortgage, utilities, insurance, association dues, employee salaries, or any other fixed expenses you know will be standard.
A key strategy to emphasizing profitability is to assess not only which sectors of your company produce the most revenue, but assess which are the most profitable as well. What fixed expenses are required to support your deliverables? As you plan for 2021, identify which areas of your business are poised for the most profitability especially in view of your required fixed expenses.
Consider Flexible Expenses
Don’t forget to leave room in your 2021 budget for costs you may know are coming, but don’t know how much they’ll be. Cushioning your budget for some flexibility now can alleviate financial concerns throughout the year as you look to replace older equipment, replenish office supplies, host employee appreciation events and more.
It can be helpful to project a reasonable range to set aside in your budget. In doing so, you leave yourself flexibility along with accountability to stay within what you can afford.
Step 3: Rethink Your Long-Term Commitments
We’re turning into a subscription-based society. Think about your personal life and the long-term commitments you’ve signed up for - gym memberships, music streaming services, cable packages, even home gourmet meal kits.
Now think about your business. Are there any software subscriptions, technology renewals, or other long-term contracts coming up for renewal in the new year? While there’s still time, sit down and consider what you’ve really utilized in the past and what you’ve continued paying for only because you were stuck in a contract.
When possible, think about searching for flexible options, paying for services on an as-needed basis or switching to a month-by-month contract you can cancel at any time. These options bring about flexibility to your business, which can help lessen the stress of cutting back when times get tough.
Step 4: Build Up Your Emergency Fund
We've all known what life has been like under the Covid-19 lockdowns. We're hoping for better days ahead, but we know we need to be prepared for more unexpected developments. This is especially critical since many businesses depleted emergency funds to sustain their companies through lockdowns.
In 2021, you and your business need to be more prepared than ever for a natural disaster - think hurricane, wildfire, flooding. Or, if your business relies on technology in our remote-heavy world, a cybersecurity attack. According to the U.S. Small Business Bureau, cyber-attacks are always evolving, and they can come in the form of malware, viruses, ransomware and phishing.1 Should you need to hire an outside agency to help gain back control of your systems or rebuild from a natural disaster, you’ll be thankful you took the time now to prepare.
With the holidays here, you have a lot on your plate. But getting your business and its finances ready for the new year is a gift you can give to yourself. And if you’ve evaluated your finances for 2020 and wondering if you’re doing everything you can for yourself and your business, you may want to consider working with a financial advisor or CPA who can take a closer look into the specifics and help you plan for the future.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.