Certainty. If there is one reason why entrepreneurs invite me into their business life, it’s to help them to develop certainty. Certainty leads to confidence. That’s why I call my initial consultation with a new client “Bidding with Confidence.” It’s an intuitive rather than an analytical thing. You may not know why but you know if you are confident or not.
The primary tool that I use to develop certainty and confidence is the annual estimating budget. This is not a tax budget or a cash flow budget. Rather I call it a fair-market-value (FMV) estimating budget. The figures that I include in it are neither driven by the tax code nor cash flow requirements. They are driven by what the realistic costs necessary to run a business are. It does not include accelerated depreciation or tax driven deductions.
Yes, the paragraph above contains words that makes some of you want to turn the page. Don’t.
Budgeting isn’t all that bad if you have some assistance and the right tools for doing so. Mastering the art of properly formatted and prepared budgets is one of an entrepreneur’s most important tools. It allows him or her to benchmark a company, set goals, track progress, delegate the business process to division managers, and so forth.
A few years ago, a CPA for a large irrigation company in New York almost had convinced an entrepreneur to get rid of his service division because it wasn’t making him any money. Fortunately, I was able to show him that his service division was making him money – lots of money. The CPA, of all people, didn’t know how to properly benchmark such a business. This entrepreneur didn’t get rid of his service division but he did get rid of his CPA.
Why budget? It really boils down to certainty and confidence. Once this process is mastered and permeates a company, it can face the future with confidence, no matter what happens in the economy. It makes the company much more sustainable and its survivability increases dramatically.
When should you prepare a budget? I like to prepare a “preliminary” budget for my clients in July or August for the upcoming year. At year’s end, we make any necessary adjustments. Clients like going into the fall with next year’s budget already established.
What’s involved in the budgeting process? I like to sit down with owners, key managers and the bookkeeper when creating the budget. It takes about three hours for companies with $2 million or less in sales to create a budget – a little longer for larger companies.
First we review past performance and financial statements as we make realistic projections for the upcoming year. The budget is usually divided into divisions for revenue and direct costs (material, field labor, labor burden owned and rented equipment and subcontractor costs). G&A overhead costs are then calculated and allocated to individual divisions.
This process allows us to benchmark not only the whole company but individual divisions. It’s during this review process that we identify division margins – where the company is making and possibly losing money.
Tying into the big and little picture. This is where the budget “rubber” meets the road. Do you remember my three-fold business success mantra: “Price it right, produce it right and produce enough of it?” A properly formatted and prepared budget gives you four key items. They are: sales revenue, labor burden, and billable labor hour projections for each division, and then G&A overhead.
The labor burden and G&A overhead calculations help you to price it (jobs and services) right. An accurate estimate allows you to job cost in order to see if you are producing the work right. The division sales and billable labor hour projections allow you to track work and to see if you are producing enough of it. Jobs (the little picture) may be coming in on budget but if you do not have enough of them (the big picture), you’re going be in sorry shape at year’s end.
Conclusion. When you spend the time and learn how to master the budgeting process. It will not only make you money, it will help you develop certainty and confidence in your business systems. For a free copy of my estimating budget worksheet, email me at the address above.
JIM HUSTON runs J.R. Huston Consulting, a green industry consulting firm. See www.jrhuston.biz; mail firstname.lastname@example.org.