Year-End Financial Planning: 12 Ways to Finish Strong

Family, friends, and festivities define December for many of us. It’s a time for reflecting on the past 12 months and looking forward to the coming year.

Do the same with your business planning, and your company can finish the year strong as well as take on new opportunities in 2020. Schedule time in your December business calendar to plan ahead, and you’ll start the year with your most essential goals already in place.

Wrap Up the Year in the Green

Your December business moves will be tactical, emphasizing specific, short-term actions aimed to keep day-to-day operations on course and finish the year closer to your longer-term plans:

  1. Keep your eye on year-end cash flow. Our recent blog on tax planning provides detailed guidance on year-end financial information-gathering and calculations that can also inform how you navigate operations in December. Review financial results weekly, or even more often if necessary. For cash-basis taxpayers, the flurry of financial chores surrounding year-end collections and payments demand more frequent and closer management.
  2. Prepare a soft close by booking expected transactions and collecting timesheets a few days early for the end of the year.
  3. Recognize that taxable gross receipts affect your North American Industry Classification System (NAICS) code(s). These are six-digit codes that classify businesses into 20 industry sectors. NAICS codes also define what constitutes a “small business” in each sector, most frequently based on annual gross receipts. The U.S. Small Business Administration uses NAICS code(s) to qualify your company as a small business for federal government contracting opportunities. Know how your expected gross receipts will affect your overall size standard calculation.  You do not want to get bumped out of a size standard if you could have proactively managed your year-end plans.
  4. Determine whether you have a sufficient line of credit to close out the year. Your credit line is an invaluable source of quick funding for short-term needs. It helps ensure you can seize opportunities and/or cover unexpectedly large expenses by accessing only the cash you need, with flexible repayment options. Keep a close eye on credit during December’s more frequent financial reviews (see #1 above) and update your banker as necessary.
  5. In the spirit of no surprises for your banker, calculate whether you are hitting covenants for the year. A covenant is a loan agreement clause that requires or forbids specific actions on the part of the borrower. Covenants you want to pay close attention to at year-end are financial compliance ratios or levels.  Make sure your year-end plans do not violate a covenant or call your banker early.
  6. Assess your indirect rates and determine if you have the capacity for year-end spending. CAVU has already blogged at length about the importance of indirect rates in maintaining a profitable operation. Now is the time to calculate whether you have hit or exceeded your target rates so you can plan your spending accordingly. The amount of cash you have on hand will affect final decisions on a variety of year-end items, including bonuses and 401(k) profit sharing.

Hit the Ground Running in the New Year

Our blogs on the benefits and how-tos of budget forecasting provide a foundation for setting your sights on a profitable 2020. Here are some important questions to ask as you flesh out your financial strategy:

  • What cash resources do you need and how much borrowing is required? Remember that cash flow goes beyond sales revenue to encompass how you collect payment for goods and/or services and your fixed and variable costs. Your banker will want to see your plan so you can jointly evaluate credit needs and covenants.
  • Do you submit forward pricing rates or provisional billing rates to the Defense Contract Audit Agency (DCAA)? DCAA is responsible for reviewing Govcon accounting systems, along with costs proposed and costs incurred, to ensure agencies pay a reasonable price for goods and services. Be prepared to submit your new year rates for review and approval and ensure no holdup in billing.
  • Is your indirect rate structure competitive to win business? Pricing strategy is a delicate balance between beating your competition and making a profit. Forecasting indirect rates is a must.
  • What is your distribution plan, and how much is required for taxes? Distribution tax requirements vary according to your business type (S corporation, single- or multiple-partner LLC, etc.).
  • What are your revenue and profit plans for the current year and future years? Do you have enough in your pipeline to achieve these objectives? Your balance sheet and income statement for the current year can help identify where you excelled in the marketplace and business management and where you can make improvements. When you set your future profit and growth goals, examine whether the projects in your pipeline match these plans and adjust capture and marketing strategies accordingly.

Chart a Course for the Future

It’s a cliché because it’s true: If you don’t know where you’re going, you could end up anywhere. As the year winds to a close, take time to contemplate…

How much do you want your business to be worth in 5 years? In 10 years? Are your current plans in line with meeting your goals?

Having an end goal in mind that is achievable, measurable, and in sync with your personal life is critical to your probability of success. It’s the starting point for more specific goal-setting and a guiding directive for day-to-day decisions. A multi-year vision helps you ensure that your plan for 2020 is moving you in the right direction.

Reach out to CAVU Govcon accounting experts for experienced advice on closing out the year strong and putting practical plans in place to support your big dreams for the future.