Prepare Now for the New Year

At the close of each fiscal year, one of the most important tasks for a shop is analyzing the current year and planning for the coming year. Typically, many of us wait until late November or December to begin this process. However, starting now and identifying some specific areas of focus will kickstart a more thorough and effective approach, helping you begin the new year in a more organized manner.

Budgeting – A Different Tactic
Creating financial budgets for the upcoming fiscal year can be both time consuming and challenging, but it’s absolutely essential to map out a direction for your company. Plus, most of us have had experience with either creating budgets or reviewing them regularly from a management perspective. When putting together a financial budget, most companies begin with sales, but I’m going to encourage you to do the opposite. Begin by determining how much net income you wish to earn in the coming year; allow this goal to be the driver. First, determine with your management team what your budgeted net income will be. Once you settle on that number, you can move on to your sales budget.

If you begin the budget process in October, you’ll have nine months’ worth of sales data at your disposal. You should have a good indication as to whether you will end the year with sales going up, going down, or staying flat over the prior year. Review your net income budget and determine whether you will need additional sales, the same level of sales, or perhaps even lower sales to achieve your net income goal. While most companies build their sales budgets with growth in mind, that may not always be the best strategy if net income is your primary goal. Adding sales every year typically means adding personnel and perhaps even equipment. Both cost money. If your business is currently turning a healthy profit, then perhaps increasing sales isn’t the answer. You may simply need to focus on current sales with existing capacity, utilizing the assets that you have at your disposal to achieve your net income budget.

If you do choose to budget for an increase in sales, you need to figure out how to achieve that. All too often, a company will budget for additional sales without a strategy to accomplish their sales goals. Their answer is typically, “Well, we are just going to sell more.” It doesn’t work that way. Put together a specific plan to reach your sales goals and meet your budgets. As you prepare your sales budgets, make sure you include your sales organization in the process. Your total sales should reflect the commitment that your current sales team and your management team make together. It may fluctuate slightly, but, in general, everyone on the sales team should have “buy in” to the company’s sales budget, knowing that they are individually, as well as collectively, responsible for achieving that number in the coming year.

Once you complete the sales budget, focus on expenses. Direct materials, salaries, and wages should be straightforward calculations based on your prior months’ history. Direct materials are essentially linear to sales fluctuations with some variance accounting for anticipated price increases – unfortunately, these seem to happen regularly. Labor costs are, of course, a factor of how many employees you will need to achieve your sales goals with adjustments made for compensation changes and additional personnel if needed. Pay close attention to these two categories; they are typically the two largest expenses you’ll have on your financial statements. Look for ways to improve these costs through production efficiencies, such as cutting down on waste or redo’s, purchasing better, etc. Often there is low-hanging fruit in these areas. If you are a $10 million company, shaving off 1 percent in each of these two areas will drop $200,000 to your bottom line.

Other expense areas, such as sales, marketing, general, and administrative expenses, also represent areas where close scrutiny can yield cost savings. These should be reflected in your annual budgets so your management team will focus on them from month to month. Once you have completed the cost side of your budget, recalculate a preliminary net income number based on your sales and cost assumptions. The net income number that flushes out of your first budget probably won’t reflect the original net income number you set. That’s OK. Re-examine your sales and expense budgets and determine what adjustments need to be made in order to achieve your budgeted net income. Remember, an accurate budgeting process should take multiple iterations before it’s finalized.

Better Personnel Planning
Just because budgets are finished doesn’t mean your planning is complete. There are other areas of your business that should be evaluated in an effort to formulate business strategies for the coming year. Personnel is certainly one such area. While it’s rather common to conduct annual reviews of your employees as you begin a new year, perhaps a more thorough review would be more useful as you prepare. Begin this process by spending some time on your own to review the members of your management team. Write down their primary strengths and weaknesses, as well as a comprehensive list of the most important tasks they perform each day. Then, create a different list for each of your managers of the most important tasks that you believe they should be doing each day. If you are lucky, those two lists will be the same. Now, you have a great place to begin having meaningful conversations and setting improvement goals for the year.

Once you have completed your planning sessions with your management team, encourage them to carry out the same process with their individual teams. This will allow them to share with all employees the vision of exactly what your business wants to accomplish. Unless you create opportunities to share your business goals with your employees, it will only be by chance, not by design, that you achieve them.

Question Your Processes
One of the dangers of business is becoming rooted in tradition. Often, we find ourselves doing things a certain way and when questioned, the reason given is usually, “That’s the way we have always done it.” This philosophy can paralyze your business. Year-end is a great time to work with your management team in performing a review of your operating policies and procedures. Just how detailed this review might be depends on how successful your operations are. If things are going great, then it may make sense to take more of an overview approach, looking for areas of even slight improvements. Even the most successful businesses always find ways to improve their operations; that’s why they remain successful.

If you are struggling in your operations, scrutinize them closely. The challenge in dealing with problems during the daily course of business throughout the year is that we urgently spend the time to take care of the problem, then we move on to the next item of business. Often, there just isn’t enough time to stop and evaluate the cause of the problem and determine a course of action to fix those problems for the long term – the Band-Aid approach. By allocating time at year-end to focus on overall process improvement, we allow ourselves time to zero in on the specifics and find ways to prevent those problems from resurfacing.

Proper planning for a new year is a very important part of ensuring success in your business. Budgeting is a critical part of that process, but if you stop there, you sell yourself short. Take advantage of this time to get a jump on the planning process. Go beyond the norm and take a detailed approach to reviewing all aspects of your business. Of course, you’ll make some uncomfortable discoveries, but that’s the only way you will sustain continuous improvement and achieve your goals.