Steps to Setting Your 2021 Financial Goals
A new year brings new opportunities, but 2020 managed to turn the tables. While well-performing businesses ran into losses, many companies had to shut down due to insufficient demand and sales. Luckily, as we bid farewell to the most unfortunate year, everyone is looking forward to a fresh start. Don’t you want to make the most out of 2021? Whether it is launching a new product or improving the businesses’ financial model – establish some goals with your new year resolution.
More than investing in expansion strategies and new business models, strengthen your financial position to stand in the face of challenges. After all, companies with a robust financial footing hold the power to stay competitive despite market volatility and ambiguities. Therefore, allocate some time to annual financial planning, review goals, and update them as per the current business situation. If you are facing liquidity problems, set a limit on credit sales.
Similarly, if expenses are downsizing profits, adopt effective cost-cutting measures. Remember, there is no one-size-fits-all theory when it comes to setting financial goals. You have to dig into financials and see which area needs attention. In case you are foreign to the finance world, let us help you out. Here we are unfolding five steps to set your financial goals in 2021.
Establish a Budget
Unsurprisingly, you can never know where your business is heading until you understand its current position. And this is where budgeting comes into play. It discloses revenue, costs, income, and expenses, helping you determine how much money is slipping through the cracks. For instance, you might witness a travel expense whereas employees haven’t been anywhere since the global lockdown. In addition to tracking spending, it puts all information in one place, helping you make better decisions.
So, why not kickstart this year with a competent annual budget? Besides number-crunching skills, you have to be financially savvy to prepare budgets. You can hire a professional accountant, but a better deal would be to invest in yourself. Hence, consider pursuing an online masters in accounting and acquaint yourself with auditing, taxation, and accounting standards. It would help you differentiate between variable and fixed costs while predicting one-time expenditures.
Moreover, you will learn to combine income sources to account for incomes in your budget. Pulling all this information together will let you generate a budget and determine the overall business profitability. While the company benefits from your expertise, higher education can open doors for professional development.
Pay Off the Debts
No matter how much capital you invest, every business seeks out external financing to keep the operations running. Besides increasing business liabilities, interest payments consume a massive chunk of profits, which you can utilize for more productive uses. Thus, if you have taken any loans, it is time to pay them and make your company debt-free.
From equipment financing to credit line – list all your debts from the highest interest rate to the lowest. If you any additional funds, try to get some discount and make extra payments to settle the debt. Otherwise, opt for debt refinancing. You can consolidate all your debts – the line of credit, bank loan, credit to secure a lower interest rate.
Create a Reserve Fund
Although analysts predict business risks, they can’t eliminate them once in for all. After all, you never know when a debtor defaults, interest rates decrease, or the market lands into crisis. Suppose you don’t want these external factors to impact business profitability, set aside some money for unexpected expenses. You can create a cash reserves fund to cover financial difficulties that a business might face in the future. It should have enough money to cover at least 12 months of business expenses without revenue generation.
Any idea how to create this reserve fund? Depending on your company size, you can set aside a small chunk of your profits. For instance, if 10% goes to shareholders and 10% for repayments, use 5% for your reserve funds. Nevertheless, if the risk exposure is high, divide the fund into categories. You can allocate some money for market risk to seek financial help when interest rates are high.
Likewise, add some to currency risk to avoid changes in the material costs due to exchange rate fluctuations. In addition to sustaining a financial position, it would give peace of mind since you have a resource to draw in when things don’t go according to the plans.
Account for Inflation
Believe it or not, but nothing could damage your financial goals more than inflation. You might be planning to increase prices by 3%, whereas 5% inflation hits the economy. This increase in price levels will hurt businesses, decreasing demand and profitability. Therefore, you must account for inflation to minimize its impact. Firstly, adjust price levels without comprising on competitiveness. If the inflation rate is 4%, you can increase prices by 5% or 6%.
Secondly, improve your cash flow to ease the financial pressure. You can follow-up on invoices, use electronic payments, or offer early-bird discounts for quick gains. It would improve liquidity while helping you deal with inflation-associated costs.
Explore Investment Options
Undoubtedly, thinking of investments in today’s uncertain market seems like a challenge in itself. But isn’t this what entrepreneurs do, take risks? If you wish to expand your income sources, start exploring potential investment options now. You can crawl into the stock market for stable trading and enjoy moderate returns with minimal risk. Otherwise, explore financial securities or instruments to enjoy higher returns with higher risk.
However, no matter how lucrative it seems, don’t make the mistake of investing all your money in one stock or instrument. If one company goes bankrupt, you could lose all your money. Therefore, use your analytical skills and diversify the investment portfolios.
Usually, people set unrealistic goals far outside the bounds of what they can achieve and position themselves for failure. Financial plans have to be something you can realistically pull off in your current situations. It could be something as small as overcoming a liquidity crisis or something big as paying off accumulated debts. You have to keep taking consistent steps throughout the year and jump on the path to success.
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