Most business owners make a number of financial resolutions for the New Year. They have the responsibility of looking forward into 2012 and trying to determine how to make their business profitable and their shareholders money in a challenging economy. It is uncertain if the economy is starting to recover although there are hopeful signs. Even if an economic recovery is in progress, most economists agree that demand for products and services is likely to remain flat, at least in the early stages of the recovery.
Given the difficulties facing all businesses due to the Great Recession and the slow recovery, here are some financial resolutions for the new year a business owner should make:
1. Forecast Demand for Your Product for the Next Two Years at a Minimum
Demand for your product or service depends, to some extent, on what type of industry you are in. For example, demand for high-end luxury items, such as expensive jewelry, did not fall has much as demand for mid-price range products during the Great Recession. This is because the recession did not impact those who could afford the high-end luxury items as much as it did those consumers who buy the mid-range products.
Unless you are selling high-end luxury items, the demand for your products or services is likely to be flat or even declining in 2012 and even beyond. Most economists think that it will take a long time for the U.S. economy to recover from the recession we just experienced. A good rule of thumb when trying to forecast demand is to look at your sales for 2011 and for the sake of safety, reduce them by a factor of ten or twenty percent in your 2012 forecast. If your sales exceed that level in 2012, great! If not, you are prepared because of your foresight.
2. Resolve to Hold More Cash Than Usual
Cash flow management is one of the most important functions of a business owner or financial manager. Even in good economic times, it is crucial for a business to have an adequate amount of cash on hand to be able to pay the bills and handle any emergencies. During a slow economic recovery, it's even more important to have a cushion of cash.
Holding cash is called liquidity. Liquidity is the ability of a firm to pay its short-term obligations on time, so you can see why it is so important to hold a cushion of cash in poor economic times particularly. If possible, hold 20% more cash than you normally do. You don't want to hold too much cash as you lose interest on your cash holdings.
3. Don't Buy New Equipment Yet
Since we seem to be coming out of recession, it may be tempting to fire everything up and focus on increasing your productivity. That's a great idea, but increase your productivity at this time by using existing assets, not buying new ones. You can also use creative ideas to increase your productivity as referenced in the article. Now is simply not the time to make an investment in expensive, new capital assets.
There is a lot of new technology out there that is currently in style. New equipment that may make your business more productive if you are a manufacturer. New computer technology no matter if you are a product or a service industry. You have to remember that our economic recovery is slow. Most top economists think that the recovery will continue to be slow. Since demand is likely to be flat, you may be spending cash that you need to hang on to at a time when demand is not going to justify your purchase.
4. Prepare Your Business Budget Based on Your Sales Forecast
Prepare a master budget for a one or two year planning period until we see how long the economic recovery is likely to take. A budget is a planning document with two major parts - an operating budget and a financial budget. The operating budget should be based on your sales forecast from Resolution 1.
5. Institute Smart Cost-Cutting Strategies
Since your sales are likely flat or increasing slowly, it is important to cut costs. I am not going to suggest layoffs because, chances are, you are operating with as few employees as possible already. I am going to suggest hiring temporary employees if you need some help. That is one cost-cutting strategy. Temporary employees may, hopefully, turn into permanent employees as the economy gets better.
There are literally hundreds of possible cost-cutting ideas. Do you really need a listing in the yellow pages of the phone book? Do you need a website? Is there a way to cut your telephone and internet costs? How could you cut your utilities? Is traditional advertising still relevant or should you try something new? These are just a few of cost-cutting ideas that are possible. If you think about it, I'm sure you can come up with many more.