2020 has been a political, environmental, social and economic maelstrom of chaos and disorder. The impact of COVID-19 has been beyond any powers of prediction, and it has been exacerbated by global challenges that range from natural disasters to social unrest. May you have a joyous holiday and a happy new year, in lieu of more of the same.
As we close out the calendar year, many business leaders, analysts and entrepreneurs are beginning to plan for what we all hope will be a fresh season of economic renewal in 2021. Do you have the capital you need to make the new year your best yet? Here are some tips for evaluating your capital and ensuring you have enough to thrive in 2021.
Calculating Capital Needs
If you are a business owner, you probably have a plan in place for how funds will be used in the coming year. Working capital is calculated by subtracting your liabilities from your assets, and it provides a measure of how much leeway your business has to make adaptive decisions. To calculate your business’ capital requirements, determine the sum of both your fixed and variable costs at multiple levels of production and service delivery, then estimate what you believe sales will be. What kind of capital outlays should you anticipate? Here’s a quick list:
- New or existing facilities, buildings, etc. (a capitalized item, mortgage payments become a part of fixed costs and can provide tax benefits through depreciation)
- Major equipment used to operate the business or specific divisions. (equipment is depreciated over time, making it a fixed capital asset)
- Furnishings and office equipment. (Often financed, these are paid down over time and form a component of fixed costs until they are paid off)
- Raw materials, supplies, parts, miscellaneous other components for operation. (expense line items that fit within the variable category)
- Initial inventory of products/services (which counts as an asset in working capital calculations)
- Unpaid invoices (an asset toward working capital)
- Cash on hand (an asset to be counted against liabilities in your calculation)
Once you determine projected spending and projected assets in each period, you can estimate your available working capital funds in any given period. What many businesses find is that in cyclical or seasonal industries there are periods where working capital is flat or negative, and others where working capital abounds. Finding strategies to even out cash flow to provide available funds in order to remain flexible, to fulfill new invoices or to capitalize on an emerging opportunity, and to keep the team moving forward during a dip in demand is of utmost import in today’s shifting economy.
Once forecasts have been rendered, businesses engage the services of a loan broker to help them determine funding sources and opportunities and to secure money at the right interest rates to keep business operating smoothly.
You still have a serious consideration to make, though: while loans and lines of credit provide additional working capital, your business still needs to look at the economic forecast and to look for opportunities to adapt.
Reality Check: 2021 Contracting Market Projections
The current outlook for quarter one of the 2021 US economy compared to June 2020 is quite challenging. Per a recent survey of economists conducted by the National Association for Business Economists, quarter predictions of growth in the final months of 2020 are decreasing steadily despite moving into the traditionally robust end of the year season.
Currently, the anticipated October-December growth rate is 4.9 percent, which is a significant decrease from June’s prediction of 6.8 percent. While the economy has rallied since the mass decline of 31.4 percent between April and June 2020, economists currently forecast that quarter three earnings for this year may still fall short of predictions.
Overall, the data indicates that lean times may be ahead for some industries, while others are seeing striking growth due to consumer adaptation. Many economists are describing a “K-shaped” recovery. This means businesses must be smart about how and where to invest your capital if you want 2021 to be a successful year.
The K-Shaped Market and What it Means for Your Business
Keep in mind, not all economic forecasts are predicting further disaster or a “double-dip” recession on the horizon. A “K Shaped” economy means that while some industries will continue to decline severely, others are experiencing unanticipated growth.
Growth is actually accelerating in specific markets according to many economists. If your business gets into the right markets, your chances of surviving and even thriving increase dramatically. Consider the difference between a theme park and the local target. Shoppers were playing bumper carts in the TP and canned goods isles instead of Disneyland. So, what markets have economic forecasters feeling hopeful?
Finding and Joining Growth Markets
Currently, economists are predicting outside even above the general economic upswing for the following markets:
- Health & Science: Driven by the pandemic response and finding solutions to climate change, health and science markets are poised to see even greater investment and interest in the months and years to come.
- Media: With lockdowns in force for months and more lockdowns on the horizon, the media is definitely a growth market for your business to establish and expand a foothold.
- Real Estate: Always a sound investment that retains its value, real estate has also seen exponential growth in the past year. Due to the seller’s market for homeowners and many people looking to upgrade their living accommodations due to extended lockdowns.
- Energy: The number of people at home and working from home means consumer energy usage is up and so are earnings.
- Communication: The demand for internet bandwidth and infrastructure has dramatically increased, largely driven by the boom in the work-from-home and distance learning economy.
- Transportation: Online ordering and delivery have the transportation industry scrambling to keep up with demand, and with new lockdowns potentially being imposed in the next few months, that level of demand is unlikely to change.
- Industrial: As consumers buy more goods, more goods need to be produced to meet the demand. Whether it is home improvement materials, bulk chemical components or any other production of raw and refined materials, the industrial market is booming. The explosion in demand also provides ample opportunities for any business to hitch their wagon to that shooting star and grow right along with them.
To continue to grow your business, determine if you have sufficient capital to take advantage of these growth opportunities before the new year begins. Do you have what you need to thrive in 2021? If you are unsure of how much capital you will need, consult a loan broker to ensure you have secured sufficient capital. It truly makes the difference between renewal and restoration, or defeat and disaster.