2021 is quickly coming to a close and it’s time to focus on 2022 – particularly on setting your financial budget. If you are struggling with putting together this important financial plan, here are a few pointers to keep in mind.
Start with looking at how 2021 performed
Keep in mind that your budget should be able to support your overall business goals for the upcoming year. As you look forward to the new year, reviewing what worked and what did not work in 2021 is a great place to start. In general, your budget should look a lot like your P&L and cover all income and expense categories by month. Often income and revenue follow seasonal patterns, look over the past year to see if there were any unusual circumstances that may have impacted your financials.
If you had a loss, dive into your P&L to see where the miss was. Was it on the income side or on the expense side? If it was on the income side, what can you adjust to reach your goals in the upcoming year? Do you need to allocate more for marketing to drive sales? Does there need to be more funds on recruiting employees to meets sales volume? If you have multiple product lines or revenue streams, be sure to look at each product line or revenue stream individually so that you can identify problem areas.
If you are ending 2021 with a profit, congratulations!
If income was what you expected (or better) it’s time to look at what you can do to keep growing your business. When determining your 2022 budget, follow the same path as above, but look for trends on the income side. Can you expect your income trendlines to continue as the same levels as this year? Is there room to expand on growth, and if so, how? What will it take to do so? Marketing, recruitment, manufacturing, etc. Often, increased income is supported by increased expenses, so be sure to look at all expense lines that support sales and revenue growth.
A few areas to pay attention to:
With such a tight labor market, employee expenses is a category that make require more expenses than in years past. As companies are vying for employees and trying to retain the ones they have, consider what your employee offering is and how that might change in the upcoming year. In addition to recruitment costs, do you need to include increases for employee training, benefits, bonuses and/or employee appreciation events? Also, if you have a retirement plan, are you allocating funds for those programs?
As companies grow there are additional expenses that they take on. If you currently are a sole proprietor, you may be focusing on potentially taking on employees. If so, you will want to consider the expenses items listed above.
If you are currently operating as an LLC, you may want to talk to your tax accountant about whether or not it might make financial sense to re-organize as an S-Corp. If you do decide to make this change, please note that the deadline to do so is March 15th.
Smaller, unpredictable expenses
Your past year’s P&L is a great way to see the general ebb and flow of your income and expenses, however, there will always be unexpected expenses. To prevent a future financial shock, there a few areas to look at than can help minimize unwanted surprises.
- Take stock of your current equipment – will anything need to be upgraded soon? From computers to manufacturing equipment, you will want to stay on top of planning for upgrades, repairs, and replacements.
- Do you have drivers on staff? With gas rates on the rise, you may want to review what you are budgeting for gas for company drivers.
- While you may already be planning on employee recruitment costs, have you allocated for increases is health insurance, office supplies, etc.?
While these expenses may be small in the moment, they will add up over time.
As we head into 2022, a solid financial budget will help you stay on track with both your financial and business goals. If you would like assistance in developing and managing your budget, give us a call at 505-850-3908 – we’d be happy to help.