Budgeting is key to an operational and financial plan. But how do you formulate a common-sense budget that is useful and simple to understand and prepare?
You start by understanding your vision. Knowing what you want to accomplish strategically is 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 period in the future. As the plan is implemented, you can rate your efforts compared to the budget you created. Budgeting allows you to predict the number of technicians, vehicles, equipment, etc., you will need in the future based on your revenue projections. There are four basic steps for budgeting success:
1. CREATE ASSUMPTIONS
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 originated. Consider the following assumptions when preparing your budget:
- Revenue percentage growth. How much will you sell to existing customers? How much do you expect to sell to new customers?
- Vehicle lease/payment rates, and total auto costs.
- Material costs, which are a function of your projected revenue.
- Advertising costs. Ask yourself: “How many leads do I want, and how much am I willing to pay per lead?”
- General and administrative costs. Include not only what it will cost to maintain the office, but also to maintain the functions performed in the office, and the people to run the office.
- How many technicians are needed.
- Attrition rate.
2. BUDGET THE GROSS MARGIN
The gross margin concept is extremely important in that it allows a business to understand how much business must be done to break even. Using the gross margin approach, you can analyze your pricing strategy to determine if and how much profit can be made based on the current capacity of your firm — the number of people and assets.
3. USE THE 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, for example, you can enter your budget into the program and produce actual vs. budgeted numbers reports.
4. GIVE BUDGET AUTHORITY TO YOUR EMPLOYEES
One 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 in each area of your business, and assign that area to a manager. Then on each reporting period, check the results of the manager’s 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.
EXECUTE YOUR PLAN
Know where you want to go in your business in terms of growth, profitability and timeframe. Plan. Reduce the plan to a line-by-line budget, and execute the plan. If you take these steps in the future, you should find you have better visibility — and may avoid costly errors.
3 KEYS TO A SUCCESSFUL BUDGET
- Create realistic sales and expense forecasts.
- Set realistic goals, based on your current income and expenses.
- Look at the budget often, and adjust to achieve your goals.
GORDON owns PCO Bookkeepers, an accounting and consulting firm that caters to pest management professionals throughout the United States. He can be reached at email@example.com.