If there is one lesson we have all learned from the year 2020, it is that there is no such thing as a sure thing. The economy, the ways we conduct business, and even our family and social life has been drastically altered in the past eleven months.
To survive and thrive in 2021, every business leader needs to focus on financial flexibility and agility to maintain the strength and longevity of his or her business. How will your business adapt to the challenges of 2021? Here are some tips to help you start preparing now for a more successful year.
Use Profits for Maximum Effectiveness
Too many businesses have favored their bottom line margins instead of putting them to effective use, and it has ultimately resulted in their downfall. In times like these, the name of the game is sustainability.
There’s always the temptation, especially within young companies, for owners and executives to convert profits into cash bonuses and individual salary increases. It is only natural for everyone making money to want to reap the benefits, but every company needs to consider whether this is the right approach for the uncertainty of the upcoming year.
While using some profit to pay out cash bonuses and increase salaries is fine in moderation, the most effective use of your profits is to keep reinvesting funds into your cash reserves or cash emergency fund, or by paying down existing debt. Both of these actions will ensure future growth and increased revenue, providing more opportunities for cash bonuses and salary increases in the years to come.
Develop Better Budgeting
Your spending plan needs to be as detailed as possible. Not controlling your outgoing cash is a surefire recipe for putting severe limitations on your financial flexibility and your ability to adapt to sudden changes that may present themselves in the year to come. The key to a successful budget is controlling expense creep. Those little unanticipated extra expenses month after month add up quickly whether you realize it or not.
When you review your budget a few years down the road, you may find your expenses are a few thousand dollars more per month than they were when you planned your budget initially. There is always some fluctuation with any budget, but you have to be proactive about those creeping expenses. Better budgeting to control expense creep always leads to better margins and increased flexibility.
Create an Effective Strategy for Your Financing
No large or successful business operates debt-free, nor should they plan to do so. Debt applied with a specific strategy in mind for how and when the money is to be used serves many useful purposes. To that end, you need to create an effective strategy for your financing to maintain your financial flexibility.
Once they can account for how financed money will be used, many businesses engage a loan broker to find business lines of credit or other financial products and to secure better interest rates that fit within their business’ long-term financing strategy. One caveat about debt though: never overestimate your need for credit. You want to have enough to meet your needs, but not so much that it starts to affect your bottom line and financial flexibility.
Find Ways Increase Your Working Capital
One of the most important considerations you will likely need to make to face the challenges of a challenging new year is increasing your working capital. Some crucial questions to consider include:
- Are there ways to improve your current business model to mitigate or eliminate unnecessary expenses or payment delays? (Some businesses do this by adjusting their contract terms with buyers)
- Can you find an alternative approach to operations that requires less working capital without affecting your sales revenue?
- Can you leverage existing assets to generate additional funds?
If you decide you can answer in the affirmative to any of the questions above, here are some suggestions for practical ways you can increase working capital:
- Shorten your operating cycle by invoicing on time, doing thorough credit checks on potential customers, observing past due accounts closely and collecting on outstanding invoices promptly.
- Find and eliminate unnecessary expenses from the budget by analyzing the purpose of every spending item.
- Find ways to increase sales revenue by expanding your sales-force and exploring new marketing channels.
- Do not limit your liquidity by stockpiling inventory.
- Lease or finance operational equipment instead of buying it. Financing is always less expensive long-term than purchasing since you will need to upgrade it periodically anyway.
- Maintain good relationships with your creditors to negotiate the best terms, or employ the services of a loan broker to maintain your good standing and help you secure the best financing available.
Start making a plan now so you are prepared for the challenges of 2021. The reed that bends is not easily broken, and the business that is geared for maximum flexibility will be the business that flourishes in 2021.