It’s Q4. How are you feeling about the year so far? Overwhelmed? Stressed? Concerned about your business’s future? All the above?
This year has been a year like no other. One might describe it as unprecedented. Regardless, if you are reading this and thinking about the future of your business, you have weathered the storm.
Take a minute. Breathe and reflect.
As you reflect, here are some things to think about.
- We have gone through a pandemic that caused the closure of virtually all businesses. People were told to stay home to be safe. Going out to restaurants to eat, shopping at the mall, going into the office to work, all of this was halted. Our “normal” everyday activities were turned upside down, and we were in fear for our health and the health of our loved ones.
- To slow the spread of the COVID-19 coronavirus, businesses had to temporarily close, adjust the way they interact with customers, and pivot their business models to survive. According to Yelp’s September Economic Impact Report, 163,735 businesses remain temporarily closed with 97,966 being permanently closed. Who could have predicted this at the beginning of 2020?
- In March, the President signed the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) into law providing funding for the Paycheck Protection Program (PPP loan) and certain other relief intended to provide aid to individuals and small businesses. With this piece of legislation came amendments, clarifications, changes, and much uncertainty.
- Change came fast, forcing us to act fast to keep our businesses moving forward and surviving.
What changes did you make in your business this year? Were these changes that you had originally planned coming into 2020, or were they changes that you needed to make in response to the pandemic and very uncertain economic environment of 2020?
The one thing that 2020 has taught us is that the future is immensely unpredictable and uncertain. We must be alert and able to pivot quickly to survive and thrive.
Now that we’ve reflected on 2020, let’s look forward and plan for 2021.
Uncertain as the future is, having a plan is the best safeguard for your business and your peace of mind. Let’s walk through the best approach to take by exploring some key questions you should be asking yourself as you plan for 2021.
#1) Your Sales Forecast
Of course, you know that sales are the key to your business. Sales volumes will drive decisions you’ll make in the rest of your business. Staffing levels and composition, facilities management, equipment, and purchasing decisions all depend on sales volume.
Approach your sales forecast by first thinking about and understanding what drives your target market and ideal customer.
- What is your target customer concerned about now?
- How will their needs change during the next year?
- How will changes in the economic environment influence your customers’ buying decisions?
- How will the November 2020 election outcome impact your customers’ ability to purchase your goods and/or services?
With this expanded knowledge of your target customer’s outlook, you will have a much better sense for how their buying habits may impact on your sales.
I recommend calculating at least three different sales forecasts.
- One that’s the best case/optimistic. This one may be reaching a sales target that achieves a 50% growth rate year over year. This would be your stretch goal.
- Another forecast would be more realistic/doable, less of a stretch. Maybe reaching a 20% growth rate year over year would be realistic.
- Lastly, you’d want to look at a worst-case scenario. Your worst-case forecast should reflect the results should your customer decrease or stop spending and you experience a decline in sales year over year.
In each case, determine not only the level of sales that you desire to achieve but also think about how you would go about realizing those sales.
- What will your marketing strategy be?
- How will you engage with and reach your customers?
- What will your business look like in each of these scenarios?
- What decisions will you need to make in each scenario to ensure your business remains profitable?
Having a solid sales strategy will equip you for the uncertain road ahead. As you move through the year, you will have this information in your back pocket and available to help you drive your business forward.
#2) Your Expense Forecast
Now that you’ve got your sales forecast (or forecasts depending on how many different scenarios you have decided to calculate), it’s now time to look at your expenses.
The first expense you will want to tackle is your cost of sales. What does it cost you to deliver your goods and/or services to your customers? Do you have key vendors that you rely on to service your customers?
Just like your customers, you will want to gain valuable insight into what the outlook looks like for your vendors. Some questions you may want to ask are:
- How did your key vendors fair during the pandemic? Did their business contract stay the same or expand?
- What changes are your key vendors planning to make during 2021?
- Will your key vendors need to change the terms with which they do business with you?
- Do your key vendors plan on increasing prices during the next 12 months?
Your cost of sales/cost of goods sold is the key driver to your gross profit and in turn, your ability to cover operating expenses. Having a healthy gross profit margin (one that is consistent with your industry) will go a long way towards ensuring your overall profitability and ability to not only survive, but thrive.
#3) Your Operating Costs Forecast
Now that you know what your gross profit is (basically what is left over from your sales revenue after you pay your costs related to your sales), you’ll be able to calculate and project what your operating costs will be. Some of these will be dependent upon your sales volume (variable costs) and others will be set based upon agreements or other factors (fixed costs).
Some items to think about here are:
- Occupancy costs. These would include rent, utilities, internet, maintenance, and other costs to maintain your office or warehouse space.
- Staffing costs. Salaries for employees would be included here as well as any benefits you provide to your employees. Don’t forget that the employer portion of payroll taxes is really a benefit you provide to your employees. If you plan to hire employees, make sure that you include an estimate for what it will cost to find and hire those employees.
- Office supply costs. This would be paper, pencils, pens, printer ink, bottled water, and basically anything that helps the back office run smoothly and get their job done.
- Insurance costs. Your general liability, auto, and workers’ compensation insurance would fall into this bucket. This would be a good time for you to go through your policies with your insurance agent and make sure you have the right coverage and are only paying for what you need.
- Software subscription costs. The costs of software subscriptions can be significant and can be a key component of your business model and your ability to deliver quality service to your customers. I would highly recommend taking time right now to take inventory of your different software subscriptions. Make a list of what the subscription is, the length of the subscription, when it renews, the monthly or annual cost, and what you use it for. This would be a good place to find waste and cut it out.
- Credit card processing costs. If you accept credit card payments from your customers, the cost associated with accepting these payments could be significant, anywhere from 2.5% – 4% of your sales transaction amount. This is one cost that you will want to project based upon your sales volume and the percentage of your sales collected via credit card.
- Advertising and marketing costs. This is the cost that relates to our question above regarding how you plan to reach your customers. Will you use digital marketing techniques, Facebook, Google Ads, Twitter Ads, or Yelp? This is where you’ll want to put some serious thought to how much of your budget you want to spend on marketing and advertising. Not only that, but you’ll want to make sure you answer the question, “How many dollars in new sales must I land in order to pay for my advertising campaign?”
These are just some of the major costs you’ll want to consider. I also recommend adding a miscellaneous cost category to capture costs that you may not have thought of yet but are bound to pop up during the year.
Related: The 6 Essential Financial Metrics Every Business Owner Must Know
Create a Plan to Get Your Business Ready for 2021
About this time, you are probably thinking, “I don’t have time for this! I need to drive sales and keep things going. How can I do this too?”
I hear you, but I would urge you to think twice before abandoning your plan and giving up on it. The time you spend going through your plan for 2021 will be time well spent.
Would you drive somewhere new without a map or your GPS? Probably not. Well, trying to drive your business growth without a plan is worse than trying to drive to a new destination without a map.
Don’t plan on driving your business into and through 2021 without a plan.
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