How do you keep score in your business? How do you know if you’re winning or losing? Is it money in the bank? Profits? Growth? It’s all of that. Budgeting is key to your operational and financial plan, but how do you formulate a common-sense budget that’s useful and simple to understand and prepare? Start by understanding your vision. Knowing what you want to accomplish strategically is absolutely vital, and measuring against this objective is paramount. A budget is your game plan. Budgeting is nothing more than formulating a coherent financial plan for some time period, usually one or two years. As you implement your plan, you can rate your efforts compared to your budget.
Budgeting allows you to predict the amount of technicians, vehicles, equipment, etc., that you’ll need based on your revenue projections. Three keys to a successful budget are:
- Creating realistic sales and expense forecasts;
- Making realistic goals based on your income and expenses; and
- Reviewing and adjusting the budget often to achieve your goals.
Specify a time frame
Budgets are often created one year at a time, but you also might want to budget monthly, quarterly or semiannually. Even if you prepare a budget based on one year, think about breaking it down on a month-by-month basis. Accounting programs, such as QuickBooks, make this task easy by offering various formatting options.
Create assumptions
Your assumptions are extremely important to budgeting. They should be listed as part of the budget document because you might have questions about where certain numbers originate. Consider the following assumptions when preparing a budget:
- By percentage, how much 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)?
- How much are vehicle leases or payments and total auto costs?
- What are material costs, which are a function of projected revenue?
- What are advertising costs? How many leads do you want, and how much are you willing to pay per lead?
- What are general and administrative costs? What’ll it cost to maintain and staff the office?
Budgeting the gross margin
The gross margin is vital because it allows you to understand how much business you must do to break even. Using the gross margin, an owner can analyze his or her pricing strategy to determine if and how much profit can be made based on his company’s capacity (i.e., the number of employees 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 information about gross margins, read my article, “Why gross margins matter.”)
Revenue and expenditure time
It’s also a sound idea to consider when income and expenses will be incurred. For example, if your company is highly seasonal, most of your income will be received during the warmer months. Budgeting your annual income evenly throughout 12 months wouldn’t accurately reflect your situation. A much better approach would be to budget the income and expenses for the months you expect to receive or pay.
Use a line-item method
When creating your chart of accounts, you create a list of general categories for revenue and expense types. When creating a budget, look at the chart of accounts, and code revenue and expenses in those categories. If you use QuickBooks, enter the budget into the program and produce actual-versus-budgeted-numbers reports.
Employee budget authority
A critical element of work and authority delegation is assigning responsibility for expenditures and bottom-line outcomes. At the beginning of each period, identify the amount of money budgeted in each area of the 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 well that person worked within the budgeted amounts. Perhaps you can include an incentive program for those who come in under budget. Whether in the corporate or small business world, it’s human nature to spend all the money in a budget because there’s always a piece of equipment to upgrade or replace. Put a price on resisting that urge, and explain all the reasons behind your budget decisions.
Choose a Direction
Know where you want to go with your business in terms of growth, profitability and time frame. Make a plan, reduce the plan to a line-by-line budget and execute the plan. If you take these steps, you should have better visibility and avoid costly errors.
Daniel Gordon, a New Jersey-based CPA, owns an accounting firm that caters to lawn care and landscape companies throughout the U.S. Reach him at dan@turfbooks.com.
