How Should a Business Prepare for Next Year?
Just as you’d be foolish to take a long car trip without mapping out your drive in advance, operating your business without a plan doesn’t make sense if you want to arrive successfully at increased profits. Creating an annual plan requires a mix of strategic and tactical planning based on a review of your past performance and projections for the future.
Don’t wait until December or after the first of the year to create next year’s business plan. Many of your partners and suppliers begin making their budgets in the fall, tying up money they could have spent on activities with you. Begin your planning for the coming year after your third-quarter results are in. At the very latest, start your planning well before people start taking off for the Thanksgiving holiday.
Review This Year’s Results
Look at your income and expenses for the current year, reviewing your budget with a variance analysis. If your numbers differed from your projections, find out why. Review your sales reports by more than just gross volumes and revenues. Look at which products or services did best, which locations generated the most sales and what marketing efforts generated the most return. In addition to reviewing your numbers, discuss with your management team their thoughts on why you performed the way you did.
Have your management team create projections for next year based on doing the same things you did this year before you start considering new ideas for next year. Ask your sales team to give their best estimates for the coming year if your operations and the market stay generally the same. Review the likelihood that your customers will buy more or less from you, whether you think your expenses will increase or decrease and if your competitors, customer preferences or new technologies will change your marketplace. After you’ve run this analysis, discuss how you can do things differently. Look at the effects of a cost-containment effort, new promotional strategies, changing your distribution and raising or lowering your prices.
Create Your Budget
Once you’ve projected your sales and expenses for the coming year based on your discussion with management, create a detailed master budget that includes your income and expense projections, a cash flow statement, cash reserves and credit availability estimates, debt-service numbers, profit-and-loss statement and balance sheet. Look at your estimated year-end profit and determine if it’s adequate or if you need to lower your costs, reduce debt or increase sales targets. Don’t forget to review your potential tax burden, calculating the effects of any tax laws, and consider tax strategies to help reduce your burden.
Once you have a detailed analysis of how your company might perform next year, barring any significant, unforeseen disruptions, discuss your financial and operational ability to expand your business. Consider adding a new product or service, opening another location, adding distribution channels such as online selling, increasing your marketing or diversifying into a new market. Calculate the costs to do each, analyze the risk/reward ratio and determine what you can afford to do. Use the amount of money you can afford to lose without seriously damaging your business as your low-end benchmark and your profit potential as your high-end target.
Make Your Commitments
After you’ve reviewed your past performance, made your projections, created your budget and discussed options for new business development, create your plan for the coming year. Have each department head prepare an annual plan and operating budget for you to review and approve. Create benchmarks that alert you when you’re underperforming to help trigger automatic responses, such as reducing spending, arranging for more credit or exiting failed marketing strategies.