From the ground up

Budgets come in all shapes and sizes. Different types of budgets can be drafted to monitor various financial aspects of the business. Some of the many types of budgets include operational budgets, cash flow budgets, capital budgets and static budgets.

There are two basic formats for any type of budgeting: Traditional and Zero-Based. Business planning is usually a combination of the two.

Traditional budgeting is based on a review of historical performance and then the projection of such findings to the future with modifications are then added. Zero-based budgeting is the creation of a completely new budget from the ground up – as if no history existed. When using this method, the operation must justify and document every item of expenditure and income anew.

Zero-based budgeting aims to put the onus on management to justify expenses, and aims to drive value for an organization by optimizing costs and not just revenue.

In zero-based budgeting, every line item of the budget, rather than only the changes, must be justified. Zero-based budgeting requires that the budget line be re-evaluated thoroughly, starting from the zero-base; this involves preparation of a fresh budget every year without reference to the past. This new process should be rolled out in stages to allow time for training staff on the necessary tasks and should require collaboration among much of the office.

1. Establish your production capacity.

• Calculate your revenue per production person / per unit or crew
1. Based on service line
2. Based on season / time of year

2. Establish your growth goals.

• Project your base contract growth goal around production units
• Project your extra work growth goal
• Determine the capital required to fund production unit investments
• Determine the staffing required to produce this quantity work
1. Project when the staffing needs will occur
• Adjust your goals as needed to reflect reality

3. Establish your revenue streams.

• Factor in your historic /typical retention of existing base contract work
• Project new sales of base contract work
• The total of these two lines, retained work plus new sales, should equal your pre-established growth goals
• Project when the sales / production of base contract work will occur (Historical Trends)
• Project new sales / production of extra work (Historical Trends)

4. Establish your material usage

• Project material usage / needs by class of service line and season / time of year
• Create purchase plan and bid process for vendors

5. Build your cash flow budget

• Create a cash flow budget to determine funding capability
1. Utilize the revenue stream projections you have created
2. Utilize the capital investment projections you have created
3. Utilize the staffing projections you have created
4. Utilize the material purchasing projections you have created
• Create operational budget
1. Establish revenue stream by class and by month
2. Establish direct costs of staffing, subs, and materials by class and by month

6. Create your sales action plan

• Create a base contract sales plan
1. Establish sales goals, by salesperson
2. Build sales goal around your pre-established revenue goals
3. Totals sales needed to replace cancellations plus new sales equals total Sales needed to achieve overall revenue goal
4. Establish sales / proposal activity goals

7. Determine your measurement plan and metrics

• Establish a timeline for implementation of the action plans
1. Sales action plan timeline
2. Staffing and recruiting plan timeline
3. Capital acquisition plan timeline
4. Materials purchasing plan timeline

It is important to think of your budget as a living document. By careful planning, it will help you anticipate and prepare for changes in your business. But it can also be adjusted to accommodate the changes you couldn’t anticipate (for instance, weather).

Contact Fred Haskett at harvest@giemedia.com