Now that we’re halfway through August, it’s time for mid-year client check-ins. This is just something I like to do to help clients evaluate their business’s financial health. It’s a great way to review the first half of the year and wrap up the rest of it. Performing this check-up creates a solid foundation for a successful conclusion to the year, and the best part is that you can do one for your business as well. Here’s a breakdown of the essential steps to consider during this financial health assessment:
Step #1: Craft a Forward-Looking Projection
To begin the assessment, start with constructing a projection that outlines your financial trajectory for the remainder of the year. Don’t worry about creating an overly intricate model; a simple estimate will work. Begin by consolidating your income, expenses, and profit figures for the first seven months of this year.
Then, merge this data with your anticipations for the upcoming five months. If historical data from the prior year is at your disposal, utilize it as a baseline for comparison. Apply a growth multiplier that takes into account variables like inventory expansion and overall business growth.
It’s essential to scrutinize this projection against the performance of the previous year. Additionally, factor in potential constraints such as limitations on Amazon storage and potential disruptions in the supply chain.
Take a holistic approach by assessing the cash reserves available for inventory replenishment. Through this preliminary exercise, you’ll gain a comprehensive understanding of the focal points that will require your attention in the coming months.
Example
Suppose your year-to-date income stands at $500,000. After accounting for Cost of Goods Sold at $200,000 and operating expenses of $150,000, you have accumulated a $150,000 profit for January through July. If you anticipate consistent sales from August to October, projecting a profit of $21,429 per month ($150,000 profit over 7 months) is reasonable.
Round this to $21,000 for simplicity. Multiply this figure by three months to yield an additional projected profit of $63,000. When combined with the original $150,000, you’re expecting $213,000 for the first ten months.
Proceed to address November and December. Examine historical figures from the previous year to gauge their potential similarity. For instance, if last year’s sales quadrupled during these months, use that as a basis.
Additionally, assess the ratio of profits to revenue in those months from the previous year. Once you establish this correlation, apply it by multiplying your average monthly profit of $21,000 by a factor of 4 ($21,000 x 4 = $84,000). This will yield projected profits of $84,000 for both November and December.
The profit projection can be summarized as follows:
- January – July: $150,000 (historical information for 7 months)
- Aug – October: $63,000 (historical YTD profit projected to continue 3 months: $150,000/7 = $21K rounded x 3 months)
- November: $84,000 (21K average monthly profit for current year x 4 last year multiple increase for busy season)
- December: $84,000 (as calculated above)
Projected Profit: $381,000
Step #2: Validation of Projections
With a projection in hand, the next step involves validating its feasibility. Determine the volume of sales necessary to achieve the projected profit, all while considering your gross margins. This analysis will give you insight into the scale of inventory procurement required to meet the anticipated sales levels.
It’s important to assess the efficacy of your supplier’s logistics in ensuring timely product delivery. It’s also important to note that precision isn’t the primary objective here—this process is a planning exercise designed to provide you with a strategic overview of profit optimization.
Step #3: Collaborate with Your CPA
An additional avenue for leveraging your profit projection is by engaging in a dialogue with your Certified Public Accountant (CPA). Given the relatively lighter workload for CPAs in August/September, this is often an ideal time to initiate discussions.
Share your profit projection with them, allowing them to provide you with an estimate of your potential tax liability based on your projected profit. Armed with this information, you can strategically allocate funds to cover taxes.
Furthermore, use this time to ensure that you’re consistently meeting your estimated tax payments before the year’s conclusion. A proactive approach in this regard will mitigate the burden of having to manage a significant tax payment during tax season.
If you’ve incorporated a system like Profit First, which factors in tax allocation in each budgeting phase, you’re already on the right track. Be mindful, however, that estimated tax payments are based on the previous year’s earnings and may not fully account for substantial year-over-year growth. Adjustments might be necessary to cater to the increased tax burden your growth indicates.
By investing some time and consideration into these strategic planning exercises before a crazy Q4 unfolds, you can effectively direct yourself and your business toward a successful conclusion for the upcoming year. This proactive approach not only lays a strong foundation for financial accomplishment, but also instills a sense of preparedness and assurance as you progress along your business journey.
If you need help along the way, reach out to the bookskeep Team today!
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