By: Lance Geda, Director of Strategic Finance and FP&A — Embarc Advisors

Since the COVID-19 pandemic, inflation and the resulting high costs of financing, supplies, labor, and general operating costs have remained elevated. While there are signs of stabilization, the economic climate is still challenging for small businesses.

A wise financial strategy is the key to surviving and thriving in an uncertain world. Here are five things that can help businesses this year.

1. Assess Your Current Financial Health

Many businesses are likely already benchmarking performance across many areas of their operations, and their financial strategy should be no different. The first step toward improvement begins with a detailed and honest assessment of the company’s current position.

Review financial statements (P&L, balance sheet & cash flow) for the past 3-5 years. Look at revenue trends, profit margins, expenses, and EBITDA:

• Is revenue increasing, decreasing, or fluctuating?
• Are there any identifiable trends?
• How does the profit margin compare to industry standards?
• Are there any areas where costs have increased disproportionately?
• Is there any one-time or non-recurring activity?

This analysis will clearly show how many come in, where they go out, and the bottom line. Next, expand the view to review assets like cash reserves, inventory on hand, and receivables. Examine any debts and the cost of financing them, and keep a close eye on the liquidity ratio.

These analyses will give a high-level look at a business’s financial health. For many small businesses, higher operating costs over the past five years may have led to a decline in operating cash flow, an increased reliance on credit, and an overall trend of delayed receivables. For those not tightened up in these areas, now is the ideal time to right their ship.

2. Fix Your Budget

Budgeting is an essential financial activity. If your business does not operate with a budget or is more theoretical than practical, completing this step may have an enormous impact.

Begin by categorizing and prioritizing all expenses. This step will provide workable numbers for creating a budget breakdown by department for the entire organization. Next, examine historical trends and strategic growth plans to rough out realistic and optimistic numbers. 

Then, review the entire budget, refining it from multiple perspectives. Consider how inflation and changing market conditions impact operational costs and revenue over time.

Plan this into a 2025 budget by increasing supplier costs for materials and inventory, cushioning wages for staff retention, and allocating high interest rates on loans and lines of credit. 

3. Get Proactive About Diversifying Your Funding

The ideal time to get funding (e.g., favorable terms and the great possible rates) is when it isn’t needed. This allows decisions to be made strategically rather than out of necessity, which benefits the business in the long run. 

For example, if a business can strategically use credit cards for short-term needs without relying on the line of credit to sustain operations, it effectively builds its creditworthiness. Later, lenders will offer more favorable terms and rates when money needs to be borrowed. 

Businesses operating on loans or a single line of credit should consider restructuring some debt or taking on a strategic investor to strengthen their financial health. If the company is already diverse, consider refining financing options to help suit its growth needs. 

4. Assess Economic Risks & Challenges 

Inflation and elevated interest rates aside, many challenges are still impacting — and threatening — small businesses in 2025. Labor shortages and talent retention are common across most industries. In construction, rapid infrastructure expansion driven by technological advancement has widened the gap between the number of jobs available and the number of workers needed to fill them.

Fewer younger workers entering trades like construction and manufacturing also contribute to labor shortages, directly impacting supply chain stability across nearly every industry. Additionally, skilled roles requiring advanced study or specialized training are notably bottlenecked. 

While these challenges are present for all businesses, small and mid-sized firms generally have a harder time competing against larger corporations to attract and retain necessary talent.

Without talent, businesses fail. Maintaining continuity in business operations or the finesse necessary for smooth customer relationships relies on a stable workforce. This challenge directly impacts the business’s financial strength.

Open positions negatively impact product development or service delivery, harming customer relationships and retention. As a result, businesses spend more money to acquire new customers and replace the ones they lose. This results in a disproportionate increase in marketing costs, decreasing cash reserves, and limiting growth.

In other words, everything in business is connected. When strategizing for 2025, remember to take a “whole-picture” approach to assessing, planning, and mitigating risk. 

5. Put Together a Tax Strategy

The beginning of the year is also the ideal time to plan a tax strategy. The laws and regulations impacting tax scenarios change frequently, so what worked last year — or the previous several years — may not be the option for 2025.

Businesses may benefit from evaluating their relationship with their tax advisor to ensure they have the right support for their 2025 strategy. If their needs have evolved, exploring other advisory options earlier in the year could be worthwhile.

A knowledgeable tax advisor can provide guidance on business structure, deductions, tax-advantaged investments, and available credits. Thoughtful tax planning may help businesses manage their tax obligations effectively and maximize available opportunities.

Building a Thoughtful Financial Strategy for 2025

Navigating the year ahead benefits from a proactive and strategic approach to financial planning. Each decision—whether related to cash flow, financing, or talent retention—plays a role in shaping a business’s overall stability and growth.

Lance Geda is a Director at Embarc Advisors, where he expertly leads the Strategic Finance and Financial Planning & Analysis (FP&A) functions. With his MBA in Management from Villanova University and a Bachelor of Arts in Finance from Michigan State University, Lance brings a wealth of knowledge and a robust educational background to his role. At Embarc Advisors, Lance’s primary focus is on aiding clients to develop and refine key performance metrics, providing deeper insights into their businesses. His guidance is instrumental in uncovering new opportunities and pinpointing potential areas for improvement, thereby fostering continuous growth. Residing in Milford, Connecticut, Lance’s unique charisma and presence led to an unexpected foray into the world of advertising. He made a brief yet memorable appearance as a paid pitchman for Honda in a Super Bowl commercial – a testament to his versatility and adaptability beyond the confines of finance.

Disclaimer: This article is for informational purposes only and does not constitute financial, tax, or legal advice. Business owners should consult with a qualified financial advisor, accountant, or legal professional to assess their specific situation before making any financial decisions. The author and publisher are not responsible for any actions taken based on the information provided.

Published by Stephanie M.