Annual planning means it’s time for optimism!
After reaching Q4 of the calendar, the end of 2020 and the beginning of next year is finally in sight. This means it’s time (or about time) to make your annual financial plan. The plan that will guide your business for the next 12 months.
Needless to say, a lot of time and energy is invested in making sure the annual plan is as realistic, effective and as useful as possible. Because no one likes to make major adjustments after only just a couple of months.
So in order to avoid any big adjustments or setbacks that can prove detrimental to reaching your goals, this article is going to cover 4 of the most common mistakes that businesses come across when putting together their annual plan.
Mistake One: Not having a tax plan
“In this world, nothing can be said to be certain, except death and taxes.” — Benjamin Franklin.
This quote from Ben Franklin is from 1789, and still rings as true today as it did 231 years ago. Everyone earning income has to pay taxes. It’s inevitable and businesses of every size must prepare for it. Not having a tax plan can quite literally take you out of business.
- Failing to pay the right amount at the right times means fees and fines
- Not understanding tax law also means your business could pay too much in taxes
- Both of these problems equals fewer funds to grow and run your company
Small businesses in particular have a higher risk of getting themselves into a situation they can’t recover from since you may not have robust access to quick funding and lines of credit.
Is a tax plan part of annual planning?
A tax plan is a way for your business to make the most out of any deductions or tax benefits that your business can qualify for so that you can reduce your tax liability. This is why tax planning has such a big impact. If done properly, you can save significant amounts of money that you could use to reinvest in growing your business. Also, this is why tax planning is not to be taken lightly, because if you make a mistake you can end up having to pay a lot more in penalties.
3 steps to building a tax plan
Getting started with tax planning can often be overwhelming if you’re not an accounting professional. Here are 3 steps to help make sure you have a tax plan you can rely on.
- Work with a tax advisor: A good tax advisory service pays for itself since the right counsel will save you thousands of dollars. In 2020 with so many relief and aid programs available, it will pay off to get the help of a professional to help you make the best decisions.
- Plan your tax-paying schedule: There are several options for you to pay your taxes so that you can go about it with minimal impact to your cash flow. These range from setting money aside with a tax fund to applying for a line of credit with the IRS.
- Take advantage of equipment deductions: This can be a very significant deduction, in particular for small businesses that have additional bonuses for depreciation. Look into whether the equipment you use is eligible since these discounts apply for both used or new equipment.
Mistake Two: Re-hashing last year’s plan
There’s no need to reinvent the wheel, which means it’s not necessary to start from scratch each time you are working on your annual plan. However, if there’s a lesson that 2020 has taught us is that this year was not like other normal years. With this in mind, take a step back to gain a better perspective with how you dealt with the challenges this year sent your way. This can provide great insight into how you can improve next year’s plan. Here are 3 reasons why you shouldn’t just use last year’s plan.
- Learn from this year’s biggest challenges: This year changed a lot of things for most businesses, so if your business was impacted in either a negative or positive way, you should take the time to look back at the data you collected to make sure you are making the necessary adjustments. Ask yourself, “What’s the biggest correction of errors to make from last year’s plan?”
- Prepare for the impact this year will have on the next: This will be industry-dependent, but if your particular industry suffered significant disruption this year, then it will pay off to reshape your annual plan to the new state of your industry.
- Prepare for the new opportunities that weren’t there last year: Due to the shift many businesses had to make to stay in business, they also ended up coming across opportunities that weren’t available through their previous business model. For this reason, if you come across new opportunities you couldn’t capitalize on, then you should adjust your plan to make the most out of what the new year brings.
Mistake Three: Not making a yearly budget
Figuring out how you’ll manage cash flow, expenses, payroll and any other money-related decisions on a monthly basis can be exhausting and simply isn’t an efficient way to manage your finances. This is the reason why budgets were created. A budget will give you a roadmap that you can follow so you can stay on track to reach your financial goals. So winging it by not having a yearly budget is universally considered a poor business practice.
If you’ve been shying away from putting together a yearly budget because it’s too complex and work-intensive, here are a couple of suggestions to help you get the most out of the budget without the headache.
- Use a template: Avoid staring at a blank spreadsheet and use a proven framework for building a budget. It’s quicker and you can adapt it to your specific needs.
- Keep it simple: Budgets don’t need to be overly complex for them to be useful, in particular for small businesses. Avoid the overwhelm and start off with the most basic budget you can get by. Any budget is certainly better than none at all.
- Get an accounting service to help: Most companies use accounting services to do bookkeeping and annual tax filing. However, a quality service also offers budgeting, tax planning and forecasting. All of these things are vital when it comes to your annual plan.
Mistake Four: Not developing a yearly forecast
A forecast is a tool that can give you a data-backed idea of what you can expect when it comes to revenue and expenses. Forecasts are a critical part of annual plans since they can give you realistic scenarios of what to expect during a given timeframe. Once you have these scenarios mapped out you can then add the necessary contingencies to your yearly plan.
Difference between a financial plan and forecast
The main difference between these two tools is that the financial plan is a step by step guide on how your business’s resources will be utilized, whereas a forecast is focused on giving you amounts that you can use as reference points. It’s for this reason that they complement each other so well.
Seen from a different perspective, a forecast is a tool that you can use to prepare for a worst-case or best-case scenario. So besides giving you peace of mind, it’ll set you up so you can have the best outcome possible of whatever the new year throws your way.
Make the Most of Annual Planning
Having a solid annual plan is the most efficient way to make sure that your business stays on track to reach its goals. Understandably, planning can be overwhelming and even dismissed as a waste of time since conditions can change quickly. The shifting landscape is exactly why you should have a solid roadmap and the best possible picture of your finances. Using an accounting service, like Pasquesi allows you to be better prepared to face changing conditions.