If you’re thinking to yourself that you can coast into the new year, think again. The time to think about your 2020 budget is now. It’s the end of the year, and there are thousands of things going on. But this is perfect time to start to get your budget in order for 2020 if you haven’t done so already. Don’t wait until the new year to make your resolutions. Your best chance of starting the year right is to plan now for saving. Let’s tell you about our client “Daniel” and how we got his budget back into shape as well.
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Daniel’s Dilemma – Great at His Job, Not with his Books
Daniel owns a small but growing wellness center in the city. He offers a mix of holistic healthcare treatments, from massage to acupuncture. He loves what he does. His sense of accomplishment and pride shines through when a patient feels better. It’s infectious. It’s what keeps his clients coming back. While Daniel loves his patients, he hates his finances. Sound familiar to anyone? This isn’t to blame Daniel. He loves treating patients and that’s why he’s a success. But avoiding something you hate can cause problems later, as it did with Daniel. Daniel is a great guy, but he’s not a guy who likes to budget. While this is great when things are good, it can be disastrous if things go south.
How to Budget Burden-Free for 2020
While planning may be fun for some of us, most people see it a chore, a necessary evil at best. It’s doesn’t have to be so hard. There are some easy steps you can take to help reduce the drudgery.
Why is planning so important now? Well, let’s face it. 2020 is going to be a year of uncertainty from the impeachment, tariffs, global slowdown/recession, and the elections… and your budget, too. This year is full of potential pitfalls, and that’s why planning is so important. So, let’s talk about how to do it, without too much effort.
1. Know where your largest costs lie
The first step in effectively budgeting is to know where your largest expenditures lie. If you are a service–related industry, it will likely be labor. If you are product–based, it may be marketing and sales. Wherever they lie, the top 3-4 expenditures are where you should focus the most. Big swings in those categories can wreak havoc.
For Daniel, it was labor and rent. As a provider, the bulk of his costs were staff and practitioners. Living in a high commercial real-estate market like New York City, space is at a premium. This was his second largest cost. Marketing and lead generation was third.
2. Your “Break Glass Here” fund
As we’ve said in earlier posts, we believe that holding 2 months of expense either in cash or as a line of credit is a wise strategy, especially in uncertain times. Like we said, 2020 is shaping up to be a very uncertain year and your budget may need that help
Excluding acupuncture, most of Daniel’s business is fee-for-service, which means if discretionary spending is impacted by a downturn, he is at risk. It’s always easiest to save when times are good, so we counseled David to put a little of his profit into this fund over the past 12 months. He now has a balance of cash and cash equivalents to cover 2 months of operating expenses.
3. The time to borrow is now
It’s always easier to get a loan or line of credit when times are good. Banks want to lend, but people don’t usually go to them until they are in dire need. That puts the bank in the driver’s seat. If you go to them when times are good, you are in control. Ironically, the best time to seek capital is when you don’t need it. It’s when your financials will look their best. If you are considering a line of credit to cover you in case of downturn, now is the time to apply. If you wait until a crisis is at hand, you’re chances of receiving a fair deal are reduced significantly.
Daniel’s sales were good. We didn’t need a line of credit, but we took out a small one, just in case. Why? For two reasons, one a line of credit doesn’t cost you anything until you use it, and second, it helps build your business credit rating. The better your rating the easier it will be to secure financing in the future.
4. Focus on the ROI of your discretionary spending
Some costs you can’t avoid, such as cost of goods/services, rent, and the like. But for things like marketing, it is important to focus on the return on the investment. By having the ROI for each tactic or strategy, you can make informed choices about where to spend.
For Daniel, it was looking at his marketing ROI. We ranked each tactic by performance. We could then fund the tactics that were working and cut those which were not.
5. Finally, Try to Reduce Your Fixed Costs
In uncertain times, flexibility is an asset. Some costs are unavoidable, but some costs could be cut. For example, taking a 1-2 year lease vs. a 5 year commitment. This may be a slight hit to your profitability, but it does allow you the option to reduce fixed costs if things take a wrong turn. Another option is to use hourly workers vs. full-time staff. This gives you some flexibility to ensure labor tracks demand. When appropriate, utilize contract workers in lieu of staff. For many reasons, you need to careful in how you use contractors, but if done correctly, it can reduce expenditures. For example, contracting accounting services vs. having an internal accountant.
Daniel uses hourly employees. For a multitude of reasons, we did not recommend using contractors for any of our service delivery. They are highly directed and would be at risk of being challenged by the state. We did, however, use contactors to help with accounting and some of our lower ROI marketing tactics, where we could give them free reign to do their work, saving us both time and money.
While this is a very exciting time to be a small business owner, with growth opportunities everywhere, it is wise to plan for contingencies. So, if the happen, you are well prepared to handle them. The better prepared your budget for 2020, the greater your chances of surviving the storm in one piece.