Budget for profit

The folks here at the Harvest Group put a major emphasis on the importance of getting the right revenue at the right gross margin. As we have mentioned, more than a few times, the right gross margin of a company serves as the furnace that keeps the financials nice and warm! Gross margin is at the very heart or centerpiece of a company’s success or failure.  

The gross margin in simple terms is what money is left over after you have performed the work. So you pay your workforce their wages plus you pay the payroll taxes and workers’ compensation insurance associated with this payroll and you also pay for the materials needed to complete the job. The money that remains is what we call gross margin or gross profit. 

With this gross margin, you then pay all of the rest of expenses of the business like gas/oil, equipment, rent, salaries with administration, sales, supervision, etc., and hopefully after the gross margin pays for these expenses there remains some money which we call net profit.  

We have found that the vast majority of the companies that the Harvest Group comes in contact with either do not fully understand what gross margin is or if they do, they don’t track it very closely. This was indeed the case for the three companies we are working with on our Turnaround Tour. 

Most profit and loss statements for companies come out well after the month has been completed and if and when they do finally arrive, they do not clearly show what the gross margin has been. This can spell DISASTER for companies that are not paying attention to this critical financial indicator. 

Ask yourself: 
Do you know what your current overall gross margin is for your company in real time?  
If so, can you determine what each revenue stream’s gross margin is currently year to date? 
Can you accurately project what your revenue and gross margin will be at the end of your fiscal year by revenue stream and overall combined?

If you can answer these three questions accurately you are in the vast minority in the industry, congrats! For the rest of us out there here is the Harvest Group’s tip that will help you answer these questions. 

Enter the mini budget.
Here is a tool that we are having all three companies on the Turnaround Tour build and track. We call it the mini budget. This is a very simple way to forecast and track actual revenue and gross margin levels both for individual revenue streams and as an overall view of your company. 

Here are the basics of the mini budget:
Start with revenue projections for each revenue stream by month for the entire fiscal year. Example: maintenance – enhancements – trees – irrigation – snow. Next, predict what your direct cost will be for each revenue stream month by month. Break these costs down into labor + payroll + workers’ comp insurance then with materials. This will show ebbs and flows of workforce needs and expenses throughout the year. Now as each month passes enter your costs with both labor plus materials as you complete the month. Now as you go through the year you can see what you have actually done and what you are predicting to accomplish. This way you will have a timely view of how you are performing in this critical area. You should be able to see at a quick glance where you are performing and areas that need attention NOW vs hoping and wishing things turn after the year is completed. 

Get your mini budget in place and predict and track your progress for getting to the right gross margin.