Budgeting for a Green Industry company is too often misunderstood. It’s simply a 12-month plan created by using numbers. It directly ties into my three-fold mantra for success: Price it right, produce it right and produce enough of it. I obtain four key items from the annual budget. Two affect pricing: labor burden and general and administrative (G&A) overhead per man-hour (OPH). Two affect measuring volume: revenue per division and billable man-hours per division. I attempt to project these items as accurately as possible in the budget. Costs for materials, subcontractors, field trucks and equipment (T&E) and rental equipment are projected as accurately as I can, but their costs will be more accurately tabulated in individual projects and services.
Filling in the 2024 budget
In my last article, I filled in the revenue for our 2024 budget. Total revenue projected in 2024 is just under $1.4 million. Notice that I focus on projecting the number of full-time equivalent (FTE) field employees that I will keep busy in each division during the year and the revenue that they will generate. This provides a critical key performance indicator (KPI) for managers to monitor. If they can keep the projected number of FTE staff busy and billable, they’re probably on track to achieve their annual revenue goal. If they can’t, they should recognize a red flag that needs management attention.
Next, I fill in the field labor man-hours and payroll for each division on Tab # 3 at the bottom of my budget. This is where I enter all field personnel categories to include vacations, holidays, PTO man-days, etc. Then I fill in Tab # 4 Labor Burden for all divisions.
Before moving on to the G&A overhead cost category, I like to fill in rough approximate division costs for materials, subcontractors, field trucks and equipment (T&E) and rental equipment using historic percentages. These items will be estimated much more accurately in specific bids and/or services.
Once the above costs are projected, I fill in the estimated 2024 G&A overhead costs. For these and all costs, I review their amounts on the current year’s and previous year’s profit and loss (P&L) statements and project any needed changes for the upcoming year.
General and administrative overhead cost budgeting
G&A overhead costs usually run about 25% of revenue for green industry companies under $5 million in annual revenue. It totals 30% to 33% for chemical companies such as weed control, pest control, lawn care and plant health care. Salaries for office staff and owners (before dividends and bonuses) should total just under 50% of all G&A overhead costs.
Once completed, I spread the G&A overhead costs to each division. My assumption is that if G&A overhead costs total roughly 25% of total company revenue, G&A overhead costs for each division should total approximately 25% of its revenue. The exceptions are subcontractor costs, chemical divisions and snow/ice divisions. I usually apply 5% to 10% G&A overhead to subcontractor costs, 30% to 33% to chemical divisions, and 25% to 30% to snow/ice divisions.
Once I allocate all of the G&A overhead costs to the respective divisions, I then divide the total G&A overhead cost in each division by the projected billable field-labor man-hours in that division. This produces the G&A overhead cost per man-hour (OPH) for that division. I will then use the division’s OPH and its labor burden to price the field labor rates for it. I don’t always use the exact OPH or labor burden figure in the budget. I often round it up or down if I think it’s too high or too low.
2024 Pricing scenarios
Take a look at the three 2024 pricing scenarios for a three-person landscape installation crew, a two-person mow/maintenance crew and an irrigation service tech. You’ll see how I applied the field labor burden and G&A overhead cost per hour (OPH) rates from our budget to them. You’ll notice that I applied a 20% net profit margin (NPM) to the landscape installation crew and the irrigation service tech scenarios. However, I only applied a 10% NPM to the mow/maintenance crew. These margins are driven by the market. In most markets you can get a 20% NPM on installation and service work. However, lawn mowing/maintenance is much more competitive and usually warrants a 10% NPM. If you can get more, by all means do so.
Our 2024 budgeting exercise is almost completed. Remember, every reasonable cost that you incur in your business needs to be passed on to your customer with an appropriate net profit margin added to it. You should be able to see in your pricing system where each and every cost is marked up and returned to you. There should be no “mystery” numbers (numbers that you cannot analytically justify) in it. Next time, we’ll discuss tracking volume and review some of the benchmarks and KPIs that you and your managers need to understand and track in your business.
Explore the December 2023 Issue
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