Financial Health: The Best Time to Review Your Finances is Now

Planning in the calendar’s opening months sets the tone for a company’s financial performance for the rest of the year, especially in a year with as much uncertainty on the horizon as 2023.

With the dawning of a new year, many people’s attention is on the impending annual tax preparation. But those who focus solely on April are missing out on key opportunities to improve during the remaining 11 months of the year. 

“One of the things we see businesses forget to do is look at what are the capital expenditures they anticipate for the coming year, and make sure those are in their projections or budget,” said David Hartman, chief lending officer with Core Bank. “Whether it’s equipment or vehicles, whatever you need to make your business run, you want to put those into the budget on the front end so you can manage your cashflow.

“If you have the ability to pay cash for an item, maybe that’s less of a planning issue. But if you are looking at borrowing, this year in particular, you really are going to have to take into account the higher borrowing costs.” 

Financial experts like Hartman concur over the opening months of the year being prime opportunities for planning and forecasting. This, they say, is even more critical in 2023 when the financial climate is still recovering from the pandemic and recession is on the minds of most economists.

“What all businesses, including us, do on an annual basis is prepare a budget for the following year or, basically, projections for the following year, based on historical performance,” Hartman said. “Right now, some historical performance is a little more difficult because of what we came through with PPP. So, what we’ve been looking at is, where were we at prior to the pandemic? Go back to see what you were looking at for a budget and projections for 2018 and 2019 and start there.”

Uncharted Waters

The watchword in each of the past two years has been uncertainty as the world attempts to moderate the unprecedented upheavals of 2020, and 2023 dawns no differently. Per, economists are all over the map when it comes to economic predictions:  “from OK to bad to very bad,” an article on the matter states. Depending on the source, the industry’s top priorities range from cryptocurrency to ESG to shoring up the supply chain, with seemingly no agreement. All of this is enough to complicate things as business owners attempt to grow or allocate financial resources.

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Chris Bedient, partner with HBE Wealth Management, said not unlike individual New Year’s resolutions, a business should start with tangible goals for the coming year. He recommends setting these by quarter with first-quarter planning devoted to reviewing existing investment portfolio performance as of the end of the previous year and evaluating whether the asset allocation should be changed based on financial objectives.

“Some people naively take the financial results of the prior year, apply a modest growth rate, then set their expectations for the coming year,” he said. “We advise clients to diligently review the prior year’s financials and develop a list of 10 things impacting their business or personal situation that they didn’t plan on happening during the prior year but impacted their financial situation.”

Bedient said all business owners and entrepreneurs should pay particular attention to “what ifs” in this step, especially given the high degree of uncertainty 2023 represents. He also pointed to changes in interest rates as a very important variable, substantially affecting the price of borrowing money.

“Business balance sheets have added significant cash since 2020,” he said. “At that time, interest rates available on cash were very low by historical standards, but significantly increased in 2022. It’s important that people evaluate the rate of interest available and continue to have an appropriate reserve for their situation.  

“Larry Swedroe, head of financial and economic research at Buckingham Strategic Wealth, always says ‘My crystal ball is cloudy,’ when asked about what he thinks will happen in the short-term. This is a helpful reminder to not be too certain about the future.”

Stick To Basics

Kim Kropp, owner of Moylan Kropp, said paying attention to the fundamentals is critical in all industries including keeping overhead costs in line and modeling strategies for worst-case scenarios. She said in addition to looking at historical performance and goal setting, business owners should formulate plans on how to reach the goals they set. This means breaking down resources and leveraging personnel and resources department by department and category by category. 

“Goals should be set for the year by the beginning of the first quarter of the year, and should include team goals, individual employee goals, new and retained money goals and marketing goals,” she said. “These are important to have set and ready to go at the beginning of the quarter because it puts everyone on the same page and at work immediately. Instead of wasting time trying to figure out goals, your business can hit the ground running Day One.”

Kropp said first-quarter activity is among the most important for the fact that it gives decision-makers sufficient time to make adjustments and shore up underperforming areas.

“Nothing’s better than planning at the beginning of the year, because if adjustments need to be made, it could take time to get this accomplished,” she said. “In recessionary times and slowdowns, it is proactive to have extra financial reserves as a backup in case profits are less and inflation causes expenses to increase.  

“As an owner, you always want to be able to pay your employees and fund their retirement and profit-sharing plans. It just makes sense to have extra reserves at the beginning of the year, especially when the economic forecast calls for a recession.”

Adversity Equals Opportunity

Ryan Swartz, partner and managing director for Creative Planning, said another goal for the work done in the first quarter is to help eliminate being unduly reactionary during the coming year, even when the unexpected invariably happens.

“Businesses, entrepreneurs and individuals alike should be assessing cash flow needs in a budgeting process for the following year,” he said. “Any potential investments, equipment, staffing, or large cash outlays should be modeled to determine the actual allocation of funds to meet these obligations.

“It is important to have a projection in order to anticipate seasonal cash flow needs and allocate investment funds in the best way. When you move to being proactive in this regard, it allows you to be more intentional with your funds and mindful of those allocations.”

As for the uncertainty of financial times in the new year, Swartz reminds clients to not only focus on the potential pitfalls of such periods but to also be aware of the opportunities arising out of such markets.

“Being in the middle of a market downturn, or even a bear market, may present unique opportunities,” he said. “Consider being objective regarding your annual investment plan and cash flows to accelerate retirement plan deferrals, evaluate tax harvesting opportunities or rebalancing the portfolio to add to equities during the weakness for long-term investment time frames.

“From a business standpoint this could be a good opportunity to expand, add key employees, invest for the business or restructure long-term debt. Consider engaging a fiduciary and financial coach to help set and adhere to those plans in an objective way. Some of the best times to invest, historically, have been during the most unnerving times.”