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We're down to the fourth quarter: It's time to plan your next moves

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The fourth quarter of the calendar year and the fiscal year of most businesses are upon us. This is an important quarter for a variety of reasons.

For some businesses, it can make or break the year. For many, it is a period when workloads can be higher than normal while manpower can be lower because of holidays and vacation.

Tax changes in 2013 loom. Now is the time to plan ahead and avoid last-minute surprises.

The first step is to make a preliminary forecast of new orders, sales, capital expenditures and income for the fourth quarter and year. Given where the business is now, the backlog, monthly run rates and any seasonal effects, what is the most likely outcome for the next three months and the total year?

The first cut at the forecast is preliminary for several reasons. The first, and one that is often missed, is that November and December are short months and, in many businesses, vacation is not managed well and can build up to the point where the businesses are seriously understaffed around the holidays. It is important to check the preliminary sales forecast against the reality of manpower.

If the effect of excess vacation is seriously negative, then the next step is determining what can or should be done about it. A first step would be soliciting vacation plans for the quarter from all employees. It might be possible to work with them to make adjustments, such as not having all the key people in one area out at the same time.

Some businesses in this situation allow and even encourage some level of vacation carryover to the following year. Some pay a premium for vacation that is not taken. In any event, the important thing is not only discovering a problem, but also deciding what to do about it and then, if necessary, adjusting the forecast to fit the manpower available.

Another factor to consider is bonuses. A forecast of the year should include the impact of bonuses. I recommend to my clients that they put bonus money aside throughout the year by accruing a portion every month. That way, the bonus is treated as an ongoing expense and any income hurdles in the bonus formula include the impact of that expense. Monthly profit-and-loss statements reflect the true cost of doing business.

Accruing bonuses has other benefits. Bonuses can be a large expense and, like any large expense, it is psychologically easier to put away a small amount every month. In addition, in a year that starts out well and then goes downhill, bonus money that is accrued but won't be earned can provide a rainy day fund for the business.

Small businesses that borrowed or renewed debt in the last couple of years might have new loan covenants that will be calculated based on the year's results. I recommend that businesses not only forecast sales, income and capital expenditures but also use those forecasts to determine if all loan covenants will be met.

The purpose of this analysis is not only to see the future but also to react to it and change it, if necessary. If forecasted sales and profits don't meet the needs or expectations of the owners, or if they project a problem with bank covenants, the business has three months to react. Actions could include pulling sales forward, including sales currently scheduled beyond December by reshuffling schedules, expediting suppliers or working overtime. Incentives could be offered to customers for placing orders early or for taking early delivery.

While forecasting sales and income is important, don't forget to look at capital expenditures. If the capital expenditures have been delayed or just not managed well, the budget may be underspent and there may be capital needs that have not been properly addressed.

If a business should be making capital investments and has the resources, now is not the time to let things slip into 2013. Favorable tax treatment in the form of bonus depreciation is available on certain capital expenditures until Dec. 31. Letting an investment slip due to inattention could be a serious financial mistake. Look closely at capital needs now and talk to your CPA.

It's clear that forecasting of this sort must be an iterative process. Each discovery and reaction alters the parameters. However, with sales, production and accounting working together, a preliminary forecast can be completed in just a couple of days. Iterations due to vacations and holiday, bonus calculations and calculation of bank covenants can be done quickly and should be to provide the maximum window for exploring alternatives to improve the outcome.

The time invested early to make a good forecast will be well spent, giving managers the visibility to avoid unpleasant year-end financial surprises.

Richard Randall is founder and president of management-consulting firm New Level Advisors in Springettsbury Township, York County. Email him at info@newleveladvisors.com.

Write to the Editorial Department at editorial@cpbj.com

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