EDITOR'S NOTE: For additional budgeting basics from Edward Wandtke, please click the following links:
Building A Budget Part II: Number Crunching
Building A Budget Part III: Completing The Picture
Weather, personnel, equipment, customers, government regulations and competitors are all external factors that the owner of a business has an inability to influence. But, as an owner, you plan for events at your business that may be influenced by actions from these external factors. What is the basis for an owner making changes at his or her business?
For most owners, the reference against which changes are made is the company’s budget. This means the process by which a company’s budget is developed is crucial to that company’s ability to successfully adapt to unexpected events or circumstances over the course of the next 12 months.
BUDGET BASICS. What is a budget? According to Accountants Terms & Formulae Dictionary, a budget is "a plan for the future of the enterprise." Many companies recognize the benefits from developing this plan for the future. A budget provides a company with the following:
- A map the company anticipates following for the next 12 months.
- Financial responsibilities during the next year for each manager.
- Goals for employees to work on together.
- Objectives for sales and customer retention for the company.
Thus, having a budget developed for your business is beneficial for the entire company, not just the owner of the company. Some companies decide they don’t need a budget, however.
"We didn’t have a budget for most of our history," admitted Stephen Hillenmeyer, president of 156-year-old Hillenmeyer Nurseries, Lexington, Ky. "I don’t know how we were able to get along so well without budgeting. It’s easy to be profitable when the industry is doing well, like it is now. But budgets really serve the company during the tough times."
Hillenmeyer acknowledged that companies can in fact be successful without a formal budget. "There are a lot of companies that are getting by without a budget, but until you know where the dollars are coming from, you can’t plan for anything. When we were doing well, we really had no idea what we were doing well or what we were doing to cause the increase," he related.
| Budget Believers |
Whether a company is large or small, a budget better be in place. Just ask Laurie Broccolo or Stephen Hillenmeyer. "Our budget is our road map," pronounced Hillenmeyer, president, Hillenmeyer Nurseries, Lexington, Ky. "The budget gives everybody in the company an idea of the direction the company is headed in. Also, it gives the managers a key reference point, because being busy doesn’t necessarily mean we’re profitable." Broccolo, owner of Broccolo Tree & Lawn Care, Rochester, N.Y., said her company’s budget has been a key in the company’s history of growth over the past seven years. "As the owner, I’m always focused on profitability, but as the business has grown, the budget has become a very valuable tool for letting supervisors see how their department is doing and understand exactly what they are accountable for on a daily, weekly and monthly basis." The budgeting process for both companies starts with the owners, but includes a variety of personnel. "All of our year-round employees are asked to submit their wish list in terms of what they need to do their job, and we’ll meet and review that list and their job responsibilities," Broccolo noted. "What’s really effective about involving all of the employees is that when I send them to pick up an herbicide for $275 per gallon, they have more respect for the value of that product and they understand the importance of not wasting products." "As owners, we set the amount of profit we expect from the company, and we set the budget from a profit standpoint for each department," Hillenmeyer explained. "Then we can plug in some overhead and operating costs, and when we combine that with our pricing system, we can see how much each department needs to sell to meet the goals." |
BUDGET BUILDERS. For years, the budget process originated with the sales department in most companies. In smaller companies, the owner often sat down one day a year and sketched out a plan for the next year. With the increase in external factors effecting businesses, the days of developing a plan for the next year ceased to be a quick process. Today, the development of the budget requires more time and input from as many people in an organization as possible if it’s to be successful.
Participative budgeting involves all of the people in the company in the development of the budget. Each employee provides input for the budget from the perspective of the individual’s role at the business. Customer service employees project their ability to retain customers compared to the previous year. Service personnel project cancel rates compared to the previous year, and production employees project the volume of work that they expect to perform during the coming year.
All employees estimate the cost (in dollars) the company must pay for them to do their job. For example, employees should consider everything from their salary to the cost of their company vehicle to the cost of the office supplies they use. In this manner, all of the individuals in a company can make a contribution to the development of the company’s budget both individually and as a group. Developing a component of the budget can be both rewarding and insightful to employees when they see their contribution to the annual goals the company hopes to achieve. In addition, developing teams of employees by function can provide individuals with a basis from which to better understand the number and complexity of issues that all of their coworkers have to deal with for the coming year.
HUNT & GATHER. You can never have too much information when developing a budget. The challenge is to dissect all of the data and put it in a useful form so that it can actually be helpful to the individuals who are actually creating the budget. For many companies, the identification of what data is necessary becomes a burden for their data collector.
"It usually takes me at least two days just to collect all of the data we’re going to need for the budget," noted Laurie Broccolo, owner, Broccolo Tree & Lawn Care, Rochester, N.Y. "There’s definitely a lot of information that is necessary if you’re going to do the budget properly."
Here is a list of data that will help most businesses to develop their budget:
-
SALES
- New sales by number of customers (by month)
- Average new sales value per customer
- Sales value of customer cancellations
- Number of customers who cancel (by month)
- Number of leads received (by month)
- Sales closure rate (by month)
- Time to close a sale with a customer
- Customer renewal rate or percentage
- Number of proposals expecting to pro- vide potential customers
-
PRODUCTION DATA
- Number of production days per month (during past three years)
- Number of production stops serviced each day
- Number of production vehicles
- Average production per day acheivable by a typical crew
- Average production per day for each service offered
- Average drive time between jobs
- Number of service calls visited per day
- Average length of time for a service call
- Number of production jobs (estimated by service for the year)
- Number of square feet serviced by type of service
- Number of work days (by month)
- Number of lost production days due to weather
- Number of production days lost by month due to vacations
- Number of production days lost per month due to illness or absence
- Number of hours of overtime pay in-curred this past year
Collecting this data for the current year may be troublesome and time consuming, but the benefits that will be enjoyed in terms of a more efficient budget development process and a more effective budget will far outweigh the effort.
"The information should be readily available already," Hillenmeyer noted. "But the budgeting process certainly has helped us become better organized in the office, and I think the people responsible do a better job of tracking the information which is necessary."
In the future, companies should start files to collect this data from each month efficiently so the above information is readily available for the next year’s budget effort. I may also be beneficial to use one of the computer software scheduling/billing and collection systems that have been specifically developed for the green industry.
LOOKING BACK TO MOVE FORWARD. The data to be collected for developing a budget should cover the past 12 months of the opera-tions for the company. Realize that you most likely will be preparing this budget before you complete your current operating bud-get’s 12-month tax return. This is normal, and it is likely that the company will need to adjust last year’s data for the months that will occur after the budget date this year. The following data will prove helpful:
- Prior 12 months financial statements
- Prior 12 months payroll data
- Prior 12 months costs and quantities of materials used (broken down by type of material)
- Schedule of equipment lease and loan payments still to be made
- Insurance and health care costs per individual based on current contract
- Insurance cost per piece of equipment or revenue volume
- Office supplies requirement
- New office equipment requirement
- Telephone line and usage charges (anticipate any rate increases for coming year)
- Building rent or lease terms
- Building maintenance and repair costs
- Computer upgrades and operating costs
- Business-related utilities costs
- Costs for professional services such as an accountant, lawyer, consultant, etc.
- Dues, subscriptions, memberships
- Any other corporate costs
Getting prepared with documents on the historical performance of your company will make the development of the budget more efficient and reliable. "There’s a lot of guessing involved when a company first comes up with a budget, but it gets easier as time goes by because you start to determine the various percentage levels that remain pretty constant for the company," Hillenmeyer said.
With the financial history in place, using the employees’ insights while developing the budget is essential. Otherwise, employees will not see the budget as an indicator of what they can expect to achieve the following year,Lboth individually and as a company.
"Involving all of our year-round employees in the budgeting process gives them a greater awareness of the influences on the company’s books," Broccolo agreed. "Now they understand why we charge $40 per hour for a job but we can only pay them $10 to do that job."
Wandtke is a green industry consultant with Mollica & Associates, Westerville, Ohio. He can be reached at 614/267-6361.
Explore the September 1997 Issue
Check out more from this issue and find your next story to read.
Latest from Lawn & Landscape
- DLF launches 4Most Seed Enhancement
- John Deere rolls out new 326 P-Tier Telescopic Wheel Loader
- Takeuchi-US adds TB395W wheeled excavator
- Senske Services acquires Tee Time Lawn Care
- Doran Manufacturing debuts Doran 360 SmartLink TPMS Tablet
- TB395W wheeled excavator
- Fairway Lawns acquires Tri-County Lawn and Ornamental
- The X Factor
