This is a contributed article from Samantha Novick, a senior editor at Funding Circle.
While COVID-19 has likely put a major dent in your local business's 2020 plans, the upcoming holiday season is prime time for you to make a comeback. With Black Friday, Small Business Saturday, Cyber Monday, Thanksgiving, Christmas, Hanukkah, and more on the horizon, there's ample opportunity for you to get out of the red and into the black.
However, it takes money to make money. You can't go strolling willy-nilly into the holiday season expecting money, money, money. You'll need a well-thought-out financial plan to do everything necessary to maximize your business's sales, like:
- Accurately forecast your cash flow to estimate your revenue and expenses
- Hire the right amount of seasonal help to optimize efficiencies
- Bump up your marketing budget to promote deals and reach new audiences
- Stock up your inventory so you don't run out prematurely (or get stuck with too many leftovers in storage)
- Create a cash cushion to cover any unforeseen expenses or accidents
- Secure a working capital loan to make sure your business doesn't ever have to slow down
Armed with a personalized financial plan, your local business will be ready to tackle the holidays head-on. Below, we'll walk you through everything you need to know to make the most of the remainder of 2020.
How to Build a Financial Plan for Your Business
The business ideology, "If you build it, they will come," is not a recipe for success. Whether you're a brand new business or you've been doing this for years, you need a plan.
Consider how you plan on making sales this holiday season. What amount of revenue are you anticipating? Will this increase in sales require increased expenses, too? How much? How are you going to finance these costs?
Building a financial plan helps you answer these questions and more. You’ll be better equipped to not run out of inventory on Black Friday or not be understaffed during seasonal chaos.
First, let's start with your financial forecasts.
Financial Forecasting for the Holidays
Financial forecasting is the practice of using your historical data to predict your future financial outcomes. To create financial forecasts for the 2020 holidays, take a look back at your 2019 holiday data (or further, if you have the data). What did your revenue and expenses look like? These numbers will give you a good baseline figure for what you can expect in 2020 if you did everything exactly the same.
However, this year is a bit different. COVID-19 has changed everything — from consumer behavior to shopping preferences, several factors are going to shake up your financial projections this year.
Try to predict how sales and costs will change. Will you need to invest in any new shopping accommodations like additional staff, extra hand sanitizer stations, or a digital advertising campaign? Do you have any new products or services that'll perform better (or worse) in the new normal compared to last year?
Once you're comfortable with your forecasts, it's time to move on to the budgeting phase.
Determine Your Holiday Budget and Financial Plan
Budgeting is when you create financial plans to make your business goals a reality. It uses your financial forecasts to influence where you should spend your capital and where incoming sales are coming from. Get your budgeting right, and you can put the ho-ho-ho in the holiday season.
How to Build a Holiday Budget
Building a budget for the holidays is similar to monthly budgeting, but the figures tend to be on a grander scale. For example, you can expect more sales (overall holiday retail sales rose 3.4% in 2019), but it might require additional upfront expenses (like extra inventory or seasonal help).
Let's look at a simple 5-step holiday budgeting process:
Step 1: Determine Your Capital
How much revenue do you anticipate making this holiday season and which channels does this income come through? Do you have money set aside for holiday expenses? What about for an emergency?
Make sure you think about COVID-19 factors. Do you think your product or service will be more or less in demand due to this global pandemic?
If you realize you have less capital than your financial forecasts demand, then now's a good time to consider getting a working capital loan (more on that later).
Once you've established your revenue expectations and available working capital, it's time to start subtracting your expected expenses.
Step 2: Plan for Fixed Costs
Fixed costs are the recurring expenses necessary to keep your business operating. These might occur on a daily, weekly, monthly, quarterly, or annual basis. Here are a few to keep in mind:
- Rent
- Depreciation
- Taxes
- Insurance
- Payroll
- Debt payments
- Utilities (the actual price is variable, but it's mostly a fixed cost)
- Equipment leases
Every local business is unique and will have different fixed costs—possibly more or less than those listed above. Look through your financial reports to find your ongoing fixed costs to anticipate in your budget. Once you've tallied these expenses, subtract them from your estimated revenue.
Step 3: Estimate Your Variable Expenses
Variable expenses are the costs that directly correlate with your sales volume. More sales mean more variable costs—fewer sales mean fewer variable costs.
For example, if you own a pizza joint and sell more pizza, you're going to need to buy more pizza-making ingredients. And if you own a car dealership, you're going to need to pay more commissions if your employees sell more cars.
Here are a few examples of common variable costs:
- Direct materials: the raw materials necessary to produce your product or service
- Supplies: the supplies necessary to maintain your equipment, vehicles, or machinery
- Sales commissions: the part of your employee's salary that fluctuates based on sales
- Credit card fees: fees you must pay to provide credit card services to your customers
- Local marketing costs: the costs associated with driving a purchase
During the holiday season, you may have other expenses to plan for, too:
- More inventory: You may need to invest in additional inventory (and possibly extra storage) before the holiday season to accommodate an increase in sales volume
- Seasonal help: While salaries are usually a fixed cost, you may need to hire more hands on deck in relation to increased business during the holiday season
- Marketing campaigns: If you're running holiday promotional campaigns, you'll need to plan for this increased expense
Step 4: Prepare for the Unpredictable
Now that you have a reasonable estimate for your income and expenses, it's time to build up your contingency fund. While it'd be nice for everything to go according to plan, that's usually not how things happen.
A COVID-19 resurgence might disrupt sales, or perhaps you'll need to close your storefront. It's impossible to predict what will happen—which is why you need a cash cushion ready to tackle any problem.
Set aside a portion of your budget in case of an emergency. If your budget is tight and there's not a lot of wiggle room, you might consider putting a business line of credit in your back pocket—just in case.
Step 5: Analyze Your Results
Once the holidays are good and gone, take a look back at your numbers. What did your revenue and expenses look like? Is this the amount you forecasted and budgeted? If not, what changed, and why?
Answers to these questions can shape your strategy for next year. Maybe your sales skyrocketed, but your profits didn't go up as much as you'd like—that might be a sign you need to reduce your variable costs. Or perhaps you didn't hit your revenue goals because your store was understaffed. Don't beat yourself up—instead, learn a lesson and start planning for 2021.
Secure Working Capital
The holiday season is a moneymaker for small businesses, but it's also a time where variable costs can soar. Costs like inventory, additional labor, and marketing expenses can escalate before you receive the income necessary to afford them.
When you need more money to make money, it's time to look at getting a small business loan. Here are a few working capital options to consider:
Term Loan
A term loan gets you a lump sum of cash that you'll pay back in regular increments over a set borrowing term. You can use a term loan to finance everything from a new touchless checkout setup to additional staff.
Who it's for: Businesses who need to finance medium-to-large-size projects and want to enjoy predictable payments.
Invoice Factoring
Invoice factoring turns your IOUs into ready-to-use cash. If you have a bunch of outstanding invoices road blocking your cash flow, use invoice factoring to get back to business as usual.
Who it's for: Businesses with slow-paying (but reliable) customers that can afford to lose a portion of their sales in exchange for speed.
Business Line of Credit
A business line of credit gives you additional working capital to tap into whenever you need it. Unlike a loan, it's revolving, meaning you get access to the capital again simply by repaying the portion you've used. Plus, you only pay interest on the funds you use—not the entirety of your loan.
Who it's for: Businesses who need additional working capital to support their cash flow. It's also perfect for any business that wants a financial safety net.
Business Credit Card
A business credit card acts the same way as your personal credit card—you get access to increased working capital (while also enjoying cashback, 0% introductory rates, travel rewards, and more).
Who it's for: Businesses who want access to working capital with less paperwork and lower commitment. Plus, it's great for businesses with little-to-no credit history who want to build their credit score to qualify for bigger loans down the road.
Inventory Financing
Inventory financing is a line of credit or loan used to purchase (you guessed it) inventory. This is a great financing option if you need to boost your inventory before the holidays but don't have the finances available to pay suppliers and your warehouse.
Who it's for: Businesses who need to stock up on inventory (especially before a period of higher sales volume) but don't have capital on hand.
Working Capital Loans
Working capital loans get you access to cash to cover day-to-day expenses or gaps in your cash flow. They're typically easier and quicker for small businesses to obtain.
Who it's for: Businesses who need extra cash to cover everyday operational needs.
Plan for Holiday Success
Whether you're expecting a holiday rush or a holiday hush, get your ducks in a row so you can make the most of any situation.
Don't let COVID-19 make all of 2020 a downer. Make a plan to turn the holidays into your business’s top sales season. Start with a financial forecast, move on to budgeting, and then secure the working capital you need to make it all happen. The holidays will be here before you know it — so don't wait to get started!
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