I hope that the third quarter has been a bounce back from the second quarter. As we approach the final quarter of 2020, I wanted to share a few thoughts to help you and your business finish 2020 strong and be prepared to grow in 2021.
1. Losses: Remember that the regulations about operating losses have been amended so that losses you incur in 2020 can be applied to offset up to 100% of your income in years 2018, 2019, and 2020. Therefore, take a look at your year-to-date P&L and if you are running close to breakeven (or below), I suggest talking to your accountant about ways to increase your expenses. A loss in 2020 could allow you to retroactively create refunds in 2018 and/or 2019, which could help your cash flow in 2021.
2. Depreciation and Write-Offs: One way to incur losses in 2020 that could offset income in prior years is to be aggressive when taking depreciation expense and when writing off balances on equipment. Again, we suggest talking to your accountant to figure out what might work best for your business.
3. Review Your P&L: Take a close look at each line item in the expense section of your P&L. This is a good time to make a plan for reducing or eliminating those expenses you know are not necessary but that you never got around to when business was strong.
4. Review Payroll Costs: Look at your payroll costs in 2020 versus 2019 to make sure they are comparable. Also, reach out to your national trade group or association to get guidelines on what the average business in your industry spends on payroll (as well as other expenses). Then make sure that you are planning to keep payroll in-line or better than national averages. Properly compensating your "A" employees while limiting or eliminating costs for less productive workers can save you money now and set up your business for growth next year, which can ultimately increase the value you will receive when you sell the business.
5. Monitor Your Cash Conversion Cycle: When business conditions are volatile, cash becomes your most important asset. Therefore, we encourage you to monitor your inflows and outflows. How long does it take to collect cash and can this be improved? How long do you have to pay cash and can this be lengthened or the terms of the loan altered? Monitoring these inflows and outflows on a monthly basis can help you spot potential cash flow issues before they become serious.
6. Spend Time at the Strategic, not Tactical, Level: It can be easy, especially during a crisis, to get wrapped up in the day-to-day operations of the business. Therefore, we suggest setting aside 2-3 hours a week to think strategically about your business. Who is your core client? Do you have the right people on payroll? Does my physical space accomodate my growth plans? How quickly am I turning inventory into sales? Are my borrowing costs as low as they could be? As a business owner, spending time as the conductor is just as important as spending time playing the instruments.
We hope this helps you as you plan to wrap up a strange year and prepare yourself for better times next year.