Dennis Dlugosz, CPA, on planning for the best 2016 possible:
2015 is long over, and you had a great year- lots of growth in revenue and net income for your company. Time for some much needed rest and relaxation, right? Wrong! Don’t lose that momentum; carry it over to start off 2016 with a bang.
Planning in good times is just as important as in leaner times. Your organization has to be agile and mobile to adapt and change to whatever circumstances come throughout the year, and those changes don’t only come about when you are not having the year that you had hoped. The traits of organizations that can adapt- and more importantly, adapt quickly- are simple. They plan, measure, and redirect if necessary. How do they plan? Well, that is a more complex question than this post can answer, but below are key items that aid business owners in planning:
- Know Thy Cost Buckets: Separate variable and fixed costs and set up your ledger accordingly.
- Determine Gross Margin: In layman’s terms, gross margin is the difference between how much you can sell your widget for and how much it costs to produce that widget. You will need to know your company’s overall blended margin and further dig into each product line or business segment to determine their individual gross margin contribution.
- Budget Your Operating Expenses (Fixed Expenses): Create a budget of your fixed expenses. Be realistic and question all costs.
- Create Your Breakeven Analysis: How much do you need to sell to pay for your fixed expenses? Now, add your expected profit to your breakeven analysis to come up with your yearly sales (revenue) goal.
- Create a Cash Flow Budget: What cash will you need to have available for debt reduction planning, working capital needs, or S-corp distribution planning? Once “have-to” cash requirements are planned for and budgeted, you will be able to properly plan for more discretionary expenditures.
After reviewing the above, you may ask, “Do I really have to do all that to be successful?” The short answer is no. When the economy is good, the dollar is strong, and consumers are buying, it is easy for everyone to make money- you and your competition. But when the opposite exists, can you adapt? How do you get that competitive advantage? You plan for it- plain and simple!
Knowing the importance of planning is imperative to a strong relationship between your CPA and your company. Here at Corrigan Krause, we believe in strategic planning and know for a fact that the clients that we assist in planning have found a deeper understanding of their business and have developed a more adaptable mindset to carry their business into the future.