If 2020 has taught us anything, it’s that you simply cannot be too prepared. That goes double for your year-end business financial planning. It’s almost certainly far from the sexiest topic on your mind this time of year (no judgement if it is), but it is definitely one of the most necessary.
Starting out 2021 on sure financial footing is vital to the health of your business and your personal well-being, especially in unpredictable times. Although 2020 is forecasted to be the best year in the history of mortgage lending, nothing is promised moving forward. Your best bet is to have a firm grasp on those financials.
What Happened in 2020?
In case you’ve been too covered up in loan applications to notice, according to HousingWire, 2020 is poised to reach a dollar-volume record high of $3.9 trillion in loan originations, boosted by a surge in refinance volume. Refinances are forecasted at $2.4 trillion—a figure not seen since 2003. That means as an industry, purchase volume made up 39% of the overall mortgage volume, yet for American Pacific Mortgage, over 50% of our volume in 2020 is purchase business.
What does this mean for you? This has been a great year, but the industry as a whole knows that it cannot continue on this way forever. Before you spend away your increased earnings, we recommend that you complete your year-end business financial planning.
What to Consider in Your Year-End Business Financial Plan
Putting together a year-end business financial plan can be tricky. Not only do you need to consider what’s happened in 2020, but you also need to predict what 2021 will look like. In a normal year, this is much more an art than a science. But in 2020, when literally anything goes, your best bet is to take all of your own predictions conservatively.
Here’s what you should be evaluating at the end of the year.
1. Your Income
Take a hard look at your income for this year and compare it to years prior. Depending on how long you’ve been a loan originator, you may have quite a lot of info to examine. Although this year is the kind that breaks patterns, you can still use past years to help predict future performance. Make a note of the percentage growth you’ve seen this year and how it compares to previous years.
Part of the reason you should look at past years’ income is to get a feel for what drives that income—you might be surprised by what you find. If your business has grown because you’ve been building a strong referral system, or if you find that certain marketing efforts have increased refinances, it’s important to recognize those patterns over time.
Even if this year was an anomaly, the connections you’ve made about your business’s growth over time will continue to help you increase your income steadily and help you decide where to focus your efforts for the calendar year.
Look at the bigger picture to get a best guess as to how much growth you can expect next year. Once you’ve extrapolated that, you can make decisions about important things like how you want to invest in your business or develop your team. It’s hard to make big-picture plans without having some income projections on December 31.
2. Your Budget
Now that you have some income projections, it’s time to sit down and make a realistic budget for your business based on your expected cash flow for next year. You should plan at least quarterly if you feel that you can’t plan the entire year.
This will give you a sound framework for making business-related decisions throughout the year, both big and small. You’ll also be able to set financial milestones and goals. When you can see that you’re veering off track, you’ll be able to alter course quickly. That will be especially important as we continue to navigate through an uncertain economy that may lead to swings in loan volume.
3. Investing in Your Business
We all know it takes money to make money. What investments do you plan to make in 2021? Is there anything you need to upgrade? What about for personal career development? However you choose to put money back, you should make a concerted effort to earmark money for specific things your business needs in the future.
There are certain expenses you know you’ll need to cover throughout the year, plus periodic investments that must be made for things like personal development and coaching, staffing, technology resources to improve your business, marketing opportunities, and standard business operating costs. These should be budgeted and set aside specifically for investments in your business.
4. Financial Obligations
What kind of financial obligations does your business currently have and what is their ROI? This is the time to go through all of your recurring monthly and yearly expenses to make sure that you’re not spending money on things that aren’t really helping your business.
It’s surprising what turns up when you look at everything you’re spending. You may discover that you’re spending $500 a month on a subscription you don’t even use, or you may find that you’re spending several thousand a month in leads or co-marketing that don’t bring in much business. Scrutinizing these expenses will help you give money back to your business that could potentially go to other, more useful things.
5. Charitable Giving
Not only does giving to charity make you feel good in all kinds of ways, but it’s a good source of business tax write-offs. For many loan originators, write-offs can be few and far between, so make a note of any charitable giving you may be actively engaging in. If you’re not already giving to a charitable organization, it’s high time for a line item for it this year in your financial planning.
Consider charitable giving that might not be straight dollars donated, too. For example, if you donate your services or assets to a registered 501(c)(3) or other non-profit organization, you may be able to add that to your increasing pile of tax deductions. You get to feel good, do good, and have a little more paperwork to give your accountant—what’s not to love?
6. Invest and Save
We mentioned earlier you may have a big purchase on your mind, but first do an evaluation of your investments and savings. If this was one of your best years for earnings, is it also your best year in savings? Setting money aside for use in retirement, children’s education or other priorities that are important to you, and your family, is a smart practice with your business financial planning. Those things matter, and it would be wise to save a little extra not fully knowing what the future may hold.
7. The Future
We’ve already talked about how this year might be a little different from years to come, so when you’re making projections for the future, it’s important to keep that in mind. Ask yourself:
- Is it realistic for next year’s refinance volume to match 2020?
- Do market conditions point to an increase in purchase volume in 2021?
- What I can do now and throughout next year to make sure my volume stays where I want it to be?
- What did I do this year that I don’t want to do next year?
You’re not being a pessimist to recognize that you may have done boom business in a very unusual year. In fact, projecting more pragmatically means you’re far more likely to be successful in 2021 and beyond, since your budget will be based on these projections and evaluations you’ve done. You may be able to extrapolate future trends by looking at years prior, too.
Year-end business financial planning can be fun as you look back at your work, success and financial results. It’s the sort of thing that will make all of your next year and even the years after that run a lot more smoothly. For more information about year-end business planning, check out our blog about Q4 planning or this blog about tax planning.