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In 2021, challenges remain

2020 will certainly be a contender for one of the most extraordinary years in our lifetimes. The COVID-19 pandemic (and the ensuing shutdowns) has had a devastating effect on a large number of businesses. Others have been lucky enough to survive, and others even thrived. What the pandemic has taught, if anything, is the need to adapt, be in tune with our finances and adapt some more.

California once again introduced new laws that provides additional challenges to businesses including the following:

  • Minimum wage increases
  • Pay data reporting (SB 973) for larger employers
  • California Family Rights Act affecting employers with 5 or more employees rather than 50
  • Additional safety regulations including provisions for COVID reporting.

Previously we had stated that the beginning of a new year is a great time for business owners to review and consider financial performance against the previous year. The impact of the pandemic makes this comparison meaningless for some, but for others it is still well worth the exercise.

Generally, we would guide business owners to measure 2020 against past years. Your own circumstances will determine if this is the right approach. If you are looking to develop a budget for 2021, then using your financial accounts for 2019 may well be a more appropriate year to develop benchmarks against.

Whichever year you use to set your budget and benchmarks, some guiding principles apply: if your business primarily sells products then focus on your gross margin; if your business is a service business then your operating margin is key.

These are key ratios used to measure business performance, and ultimately this will impact the value of your business too. More importantly, by comparing margins over several years, you can evaluate the fluctuations and trends in profitability.

Manage operating expenses

The pandemic has caused many of us to evaluate what our general day-to-day spend is anyway. Operating expenses are associated with the general running of your business. Here are some areas to evaluate:

  • Has your business gone more virtual? Are there fixed operating expenses associated with running a physical office that you no longer need?
  • Review your ongoing (forgotten) expenses. Do you have the best cellular and internet plans for your business? It’s amazing how willing the big carriers are in continuing promotional discounts in order to retain your business.
  • If you have found that your staff can work remotely, what other opportunities are there for remote workers? Can you improve the productivity of your staff? What additional training would benefit the overall output of your staff?
  • Outsource functions: Can you outsource high cost non-core functions such as human resources, technology and finance? Could you use a lower cost state to remotely support your business?
  • Technology has continued to improve. Robotic Process Automation is emerging as a powerful tool to automate repetitive tasks such as data entry.

Keep a financial dashboard

Keeping a financial dashboard is one of the most efficient means of tracking performance of your business. However, there is an old computer programmer saying, “garbage in, garbage out.” Even when using accounting software, it’s important that you have a defined chart of accounts and that your bookkeeping and administrative staff clearly understand which expense is entered into each category. Your chart of accounts should reflect the type of business you are in: a small service company will survive on 10 to 12 categories. Larger businesses are likely to need more.

Track your performance throughout 2021 against your previous year and budget targets. Ensure that you track the important metrics to your business whether it be sales growth, margins, employee turnover or customer satisfaction.

The better your understanding of your profit drivers, the better you’ll be able to maximize the value of your most valuable investment: your business.

Kevin Lowther, AM-ASA, ABV, FMVA is a partner with Bakersfield-based Central Pacific Valuation. He provides business valuation and financial analytics services.

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