The immediate outlook for the hardwood flooring industry is mostly positive. Most players in the industry have a feeling that spending on hardwood floors will remain strong into 2018. Despite these positive perspectives, anyone that has been in business for a long time, or has studied the market, knows that it works in cycles. Periods of growth on a macro level are not sustained forever. You must make yourself indispensable on a micro level and safeguard your assets to survive downturns.
LPL Research (a part of LPL Financial Services) published a Recession Watch Dashboard in June 2017. According to this dashboard, we are in the mature phase of the market cycle. 2007-2008 was a recession, 2009-2014 a recovery, and 2015 to today is maturing. They believe we are in the mid-to-late state of the current expansion. They are showing an overall low risk of a recession starting within the next year, but what about past the next year? Peaks and valleys in the financial markets have an impact on the overall confidence of consumers.
There are some relatively simple things you can do to protect yourself in the long-term by capitalizing on these times of surplus and weathering yourself for the shortfalls. Forecasting is one method for preparing for the storm, but it can be a formidable topic for many. There are a lot of unknowns in the process of predicting and estimating. Even with the uncertainty, there are easy steps you can take that build on each other until, one day, you have a protection plan that is easy to maintain and gives you some relief from day-to-day financial worries.
In addition to the forecasting steps within this article, I will sprinkle in some tax planning ideas that will help prepare you for a successful end to this tax year that could benefit you financially going into next year.
Understand your why
Before you start any new goal or process, you need to think about why it is important to you or how it will help you or your business. Forecasting and financial planning can have benefits for one person that are very different for another.
One person might want to maximize tax savings this year to be able to go on a spring break vacation next year, and another might be deciding that they want to start a hardwood flooring business of their own and needs to understand the financial impact.
Take time to document why it is important to plan for the future. This will give you a clearer direction and a greater chance of success. Then see what action steps you can take to achieve your goals whether that is scheduling a meeting with your tax accountant or preparing a business plan to approach a bank or an investor for financing.
What’s in your toolbox?
Just like you would do before beginning any project, with forecasting you will need to think about the tools that you need to accomplish the task. This won’t be the same for everyone. If you have already been in business for awhile, and are looking for financing in order to grow, you will have historical financial documents and experience to draw from and put in your toolbox. But, if you are newer to the business or have always worked for someone else, you might not. That person’s box might include observations while working for your employer or interviewing the owners of your company.
Ideas for tools include:
- Historical financial statements for your business.
- Financial statements for an organization you
aspire to be like.
- Industry publications to identify industry trends and outlooks, and comparisons to those similar to you.
- Leading indicators like permits and starts, and lagging indicators like completions.
- Your tax accountant or bookkeeper. They will understand your finances and have the experience to help with forecasting.
- Discussions with friends that have done the same things as you.
How to forecast
Now that you understand your “why,” and have your tools ready, it is time for action. Forecasting is the act of predicting or estimating. One popular method is to create pro forma financial statements. This exercise answers the question, “What will happen if X occurs?” Often people will create a worst-case scenario, best-case scenario, and the scenario in between that is most likely to happen. This allows you to be ready to take action quickly as variables change.
For example, calculate all of your fixed expenses. Those are expenses that will not change even if your business has a slow year. That might include your rent, phone bill, accounting costs, legal fees, salaries, and your personal fixed expenses if self-employed. You will want to be sure you have enough gross margin to cover those fixed expenses. Gross margin is your revenue less variable costs.
Variable costs are those that go up and down with your level of business. That would include wood, nails, sandpaper, labor, and transportation costs. This is your worst-case scenario. When business is booming, you will need to get in the habit of saving a portion to help cover those times when you are at your worst-case scenario.
Remember back to the discussion on the market cycles. There are no real surprises; in the long run, a downturn will happen. Prepare for it, and you will outlast your competitors and be able to continue supporting your family when others struggle. Work your way over time to saving about six months of your fixed expenses. You can adjust this some if you have revenue from other sources like a spouse that works outside your business.
Something important to remember at this point is to not cut corners. Don’t assume that if times are bad you can cut most of your expenses. You still need to maintain your tools, support your family and your staff, and have some fun. Without these things, morale goes down, things break down, and you will stop winning business. It’s all related. With that said, your worst-case scenario should contain an action plan for minimum resource needs so you can take action as quickly as possible to mitigate negative situations.
You might be tempted to skip making a best-case scenario because you think it’s not going to happen and not worth the work, but this becomes a push goal for you. It’s motivating and confidence-building, and your clients and investors will also see that. An investor is more likely to support you if you are passionate and excited to keep improving. All of these things snowball onto each other to become a self-fulfilling prophecy of you obtaining your dream goals.
Year-end is plan time
There is something about fall and school startup that makes it a nice time of the year to do a little planning. As you start to look at the future of your business through forecasting, you can also take a look at the more immediate tax needs of this year. There could be many deductions and credits that are still available for this year if you act now.
The IRS website is surprisingly user-friendly. Go to irs.gov and, near the top, you will find a section on “Credits & Deductions.” They are sorted by individual and business. Click through them to see if any might apply to you or your business. Often-unused credits and deductions that may apply to you include:
- Business use of your vehicle
- Business use of your home
- Individual education credits
- Section 179 business personal property deduction
Don’t assume your tax accountant is uncovering all of the deductions that apply to you. If you get a head start in asking them about these deductions and credits now, you are more likely to get the attention you deserve as opposed to waiting until spring when they are busiest.
Do one thing
In closing, I encourage you to take a few moments to dream about the future you want. Surely forecasting or tax planning will not directly make your dream of being a surfer come true, but it may be the difference between being able to take a vacation next year or not, where you can at least take some surf lessons that might build into something more.
Bree Urech-Boyle is Chief Financial Officer at the National Wood Flooring Association in St. Louis. She can be reached at email@example.com.