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Preparing Your Business For The New Year

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With the impending year-end upon us, it’s a great time to get your business organized for year end activities and reporting, as well as planning for next year. Not only will this make tax season easier for you and your accountant, but it will assist you in ensuring your business is ready for next year while at the same time saving time and money.

Use the last few weeks of December to organize your receipts; ensure all your paperwork is in order, and that you have sent out all customer invoices. You should also use this time to double check for customer billings which have been missed or are incomplete. Studies have shown that most businesses miss billing for work done.

Talk to your accountant to ascertain if there are any tax changes you should be aware of. Obviously, you need to be prepared for any tax changes that come into effect during the next year. By talking to your Accountant before the end of the year, you may find that the added professional fees will actually save your business money over the coming year.

One very important year-end item is the budget for the upcoming year. All businesses need to put together a budget for next year, taking into account any changes you expect to occur in both revenue and expenses. The usual method for creating a budget is to take last year’s actual financial statements or budget and add a percentage based on the expected inflation rate. A rate of two to three percent would be acceptable for this year.

Review your operating budget from last year, comparing actual figures to budget. You will need to estimate the remaining portion of December. Of course, if you don't have a budget you can use the previous year’s financial statements as a guide. Look for the following:

Expenses that are over budget. This is where you determine if your business is over budget by comparing each separate line item. For example, compare the budget versus actual expenses for phone, Internet charges and cell phones. If you find you are over budget by say ten percent you should analyze the actual bills to ascertain why your actual expenses are higher then projected. Choose a percentage that you are comfortable with.
Some possible causes of over spending could be; higher fees than originally quoted, unexpected price increases, over use by the business, personal use by employees and customers, or just plain theft. Once you have determined why your actual versus budgeted expenses are higher, you then need to determine if this is a one-time event or if these added costs will take place year after year. If it's year after year then you will want to ensure that your budget for next year reflects this. If this increased expense is a one-time event, you need to take steps to ensure it doesn't occur again.

Expenses that are under budget. Congratulations! However, you may want to double check to ensure you haven't missed some bills or haven't posted expenses to the wrong expense item. Again, you will want to check on whether this is a one-time event or not. One of the keys to increase net profit is to continually reduce expenses as a percentage of revenue.

Revenues that are over budget. Again you need to look at each line item and compare the actual to the budgeted. While this is similar to the exercise you have completed with expenses, you actually want to have all line items over budget. However, if you do find revenue that is significantly over budget, this might be a clue as to where you need to shift your business or look for opportunities. Take a look and see why each line item is over budget, sort by product and customer. You may find that a small customer is now purchasing more from you or that a product or product line has now become a hot seller. Both scenarios represent opportunity for your business.

Revenues that are under budget. This should be an area of major concern for the business. Again, you need to break down each line item to ascertain where your revenue has been shrinking. Sorting by product or product type, customers and sales people, will help to identify where your sales are slipping. Decreasing sales based on product types indicates that you have either lost market share to a competitor or that the specific product type has become mature and is no longer in demand.
If you find a decrease in revenue from some customer during the last year, this could be an indication that they have moved to other suppliers or themselves are experiencing a downturn in sales. Either way, you should take the time to talk to them. It’s quite possible that there is a misunderstanding or an opportunity for both businesses to work together to increase sales through the use of a joint venture and/or the introduction of new products or services.
Sorting by sales people will help to identify who is producing and who needs more coaching, training or replacing. Your business is likely to be underperforming if you don’t have high performing sales people. This is a good time to do employee evaluations with your sales people. It’s also a good time to review sales targets and your customer base. Don’t forget to review the products that are being sold. It’s quite possible you are trying to sell the wrong product to your customers.

By taking the time to review this past year and prepare for next year, you will save time and headaches next year. This in turn should result in a growing and prosperous business for 2006. 

-Myron Gordon owns TMSG Management Services Group, which provides management and financial services to growing businesses. 


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