How do you keep score in your business? How do you know if you are winning or losing? Is it money in the bank? Profits? Growth? All of the above! Sticking to your annual budget is key to your operational and financial plan. But how do we formulate a common sense budget that is useful that is simple to understand and prepare? We start by understanding our vision. Knowing what you want to accomplish strategically is absolutely vital and measuring against this objective is paramount. An annual budget is your game plan.
Budgeting is nothing more than formulating a coherent financial plan for some period in the future, usually one or two years. As the plan is implemented we are able to rate our efforts compared to the budget that we created. Budgeting allows us to predict the amount of technicians, vehicles, equipment, etc. that we will need in the future based on our revenue projections.
Keys to a Successful Annual Budget:
- Create realistic sales and expense forecasts
- Make realistic goals based on your current income and expenses
- Look at it often and adjust to achieve your goals
Specify a Timeframe
Budgets are prepared for a specific time period. They are often created for a year at a time, but you may also want to budget on a monthly, quarterly, or semi-annual basis. Even if you prepare a budget based on a year, you should seriously think about breaking it down on a month by month basis. Accounting programs such as QuickBooks makes this easy by offering a variety of formatting options.
Your assumptions are extremely important to the budgeting process. They should be listed as part of the budget document as you may have questions in the future as to where certain numbers come from. Consider the following assumptions when preparing your budget:
- What percentage growth do you expect in revenue? How much will you sell to existing customers? How much do you expect to sell to new customers?
- How many technicians or laborers will be in your organization and what will they be paid (total direct wages)?
- Vehicle leases / payments as well as total auto costs
- Material costs – this will be a function of your projected revenue above
- Advertising costs – How many leads do you want and how much are you willing to pay per lead?
- General and Administrative Costs – what will it cost to maintain the office, the functions performed in the office, and the people to run the office?
Annual Budget: Budgeting the Gross Margin
The gross margin concept is extremely important in that it allows a business to understand how much business must be done in order to breakeven. Using the gross margin approach a business owner can analyze his pricing strategy in order to determine if and how much profit can be made based on the current capacity of his firm (i.e. number of people and assets). The gross margin must be budgeted for depending on the service line (i.e. lawn care, maintenance, irrigation, etc.). Each service line will have a different gross margin. For more on gross margins see my article “Why Gross Margins Matter” in Landscape Management.
Timing of Revenue and Expenditures
It’s also a good idea to consider when income and expenses will be incurred. For example, if your firm is highly seasonal most of your income will be received during the warmer months. Budgeting your annual income evenly over twelve months would not accurately reflect your situation. A much better approach would be to budget the income and expenses for the months you actually expect to receive or pay.
Use a Line Item Method
When you created your chart of accounts, you created a list of general categories such as various revenue types, office expense or repairs and maintenance. When creating your budget look at your chart of accounts and code your revenues and expenses in those categories. If you use QuickBooks, you can actually enter your budget into the program and produce actual vs budgeted numbers reports.
Give Annual Budget Authority to your employees
A critical element in delegation of work and authority is assigning responsibility for expenditures and bottom line outcomes. At the beginning of each period, identify the amount of money budgeted for in each area of your business and assign that area to a manager. Then on each reporting period, check the results of their expenditures against the amounts budgeted and how that person did in terms of working within the budgeted amounts. Perhaps you can include an incentive program for those who come in under budget. Whether in the corporate world or the world of small business, it is human nature to spend all the money in the budget because there is always some piece of equipment to upgrade or replace. Put a price on resisting that urge, and don’t forget to explain all the reasons behind the budget decisions.
Know where you want to go in your business in terms of growth, profitability and timeframe. Make a plan. Reduce the plan to a line by line budget and execute on the plan. Read the clues to financial statements and If you take these steps in the future you should find that you have better visibility and may avoid costly errors.