When it comes to the fourth quarter, one hot item on everyone’s mind is budgets. Planning for next year provides an opportunity to reflect on how your 2017 financial goals are tracking and what has changed. An honest assessment helps you avoid creating an unrealistic budget. By assessing your current state in October, you give yourself enough time to make adjustments to your 2018 plans and forecasts, which can make the difference between setting stretch goals and ending up with “pie in the sky.”
Your assessment should address how your business is performing this year compared to the same time the year before and how your business is tracking to your original plan. These two indicators provide a pulse on your current situation. To conduct your assessment, evaluate three financial indicators: budget progression, tax allocation and cash flow.
The smart place to start with an evaluation is your overall cash position, which will help you understand where you are with your budget from both income and expenses.
BUDGET PROGRESSION – Evaluate both Income and Expenses
Key questions to consider regarding income:
- Do revenue and sales projections need to be revised? Do you need to push your sales team to be more aggressive?
- Determine what is driving cash flow. Is there a particular product that should become your focus?
- Is there anything you can do to advance opportunities and close deals faster?
- Does your marketing plan require any adjustments to target a growing market, or provide a boost to an underperforming market segment?
- Has anything that factored into your projections changed enough that you should re-work your projections entirely?
- Ask your team questions on the expenses side:
- Can any re-negotiating be done to find better deals with vendors?
- Are you maximizing internal processes to minimize billing errors and write-offs?
- Has the income side dropped off enough that there is a need to trim budgets?
- Conversely, are income and projections robust enough to boost budgets in key areas potentially?
Tax
Meet with your tax professional to ensure your tax situation is where you expected it to be. He or she will ensure you are paid up at that point in the year, as well as recommend adjustments to your payments and tax approach based on your revised projections.
Cash Flow Position
The other area to evaluate is your cash flow position. Evaluate your cash flow year-to-date, and project out the rest of the year. Identify any gaps, and be sure you understand when and why outflow is greater than inflow. To maximize cash flow, review slow-paying clients and push to get current with them.
Ideally, you want to have five months of cash reserves on hand to cover expenditures in leaner months. It is a best practice for companies to have a “cash flow management” strategy in place. If you don’t currently have one implemented, the right time to start is now. We’ve all had moments in life where we’ve looked back and said, “I wish I had done things differently.” This is one fire you want to keep from ever starting.
We also regularly hear from customers who begin to dig deep into reports on cash flow that there was an opportunity right in front of them all along — whether that was improving agreement terms with vendors, speeding up payment collections or more efficiently managing inventory. To drive home the importance of reporting, it’s valuable to bring in a standard management school of thought, “If you can’t measure it, it doesn’t exist.” The more data you have on-hand and analyses you can conduct, the faster and smarter your decisions will become.
After conducting your assessment, make sure you put it to use as a guide for your budget. It’s your sanity check to make adjustments that will help you hit your budget and stretch goals.
One final piece of advice: Stop and take a moment to be thankful for your clients, employees, vendor partners, and suppliers — maybe even tell them so! This is great for your bottom line, too. According to a Bain & Company study, a 5-percent increase in customer retention can lead to well more than a 25-percent growth in profitability. Now, that’s a stretch goal we can all get behind.
Together, there’s no stopping you. We encourage you to visit enterprisebank.com/blog to learn more about topics covered in this article.
Enterprise Bank & Trust offers learning opportunities, at no cost to you, on many of the subjects addressed in this report. For a schedule of classes, visit the Enterprise University website: enterprisebank.com/eu
