Why we budget

Labor Day has passed, the kids are back in school and your business has survived the spring rush and the heat of summer. Now it’s time to begin to invest a portion of your schedule thinking about next year. Yes, it’s budget time again.

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, cash flow and capital.

Budgets defined.

A budget is an estimate of all revenue (money in) and expenses (money out) with profit (money left over). It’s a forecast for a 12-month period of sales revenue and the costs associated to support those sales.

10 reasons we budget.

Budgets help you estimate your current needs, future needs (as you grow), spending and monthly cash flow. A budget will help you be proactive – rather than reactive – in managing your business. So why do we budget?

• To set goals and expectations
• To have a tool to measure actual performance against
• To anticipate and plan for cash needs
• To set triggers to buy equipment, vehicles and hire employees
• To establish trends to manage and forecast with
• To project performance to use in order to obtain loans or establish credit lines
• To help you use profit and loss data – actual to budget – to assure profitability
• To project net sales needs to grow – current sales, plus new sales, less lost work
• To set performance goals for managers so they can be rewarded or bonused for performance beyond expectations
• Because you promised – yourself, your team and your adviser

Creating a budget.

Step 1: Establish your production capacity

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

Step 2: Establish your growth goals

• Project your base contract growth goal
• Build growth goal around production units
• Project your extra work growth goal
• Determine the staffing required to produce this quantity of work
• Determine the equipment required to produce this quantity of work
• Project when the staffing and equipment needs will occur

Step 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 + new sales, should equal your pre-established growth or sales goals
• Project when the sales/production of base contract work will occur (historical trends)
• Project new sales of extra work (historical trends)
• Project when the sales/production of new sales of extra work will occur (historical trends)

Step 4: Establish your material usage

• Project material usage/needs by class of service line
• Based on service line
• Based on season/time of year (historical trends)
• At this stage of the budgeting process, you now know the following:
Your revenue by service line
• Your capital investment requirements
Your staffing, equipment and material needs
• The timeline all processes will be in play

Step 5: Build your financial plan

• Create a 12-month operational budget
• Establish revenue stream by class and by month
• Establish direct costs of staffing, subs and materials by class and by month
• Establish the in-direct costs of equipment, supervision etc., by month
• Establish the administrative overhead costs by month

Using a budget.

A budget will indicate:

• The amount of revenue needed to support business operations
• The cash needed to support labor and/or material expenses
• Equipment expenses and purchases
• Projected profit

Reviewing a budget.

After reviewing your preliminary budget and determining that expenses are greater than revenue, re-examine your budget by:

• Reviewing your expenses (labor being the largest). Are they reflective of past performance?
• Looking for expenses that can be reduced or eliminated
• Looking for ways to increase your revenue by projecting more remedial or irrigation services with the same number of employees
• Determining if your profit is really obtainable and within the standard percentage for this industry

Keep this equation in mind:

• Sales Revenue – Total Operating Cost = Profit
• Profits = Success
• Success = Sustainability

Fred Haskett is a green industry veteran with more than 35 years of professional management experience.