Building A Budget Part III: Completing The Picture

This article focuses on applying the budget you have developed to more effectively manage you business. Operating a green industry company profitably is not automatically assured based on how hard or how many hours you work. The real success of owning a business is having the vision for your business realized. Or expressed another way, having your goal (budget) achieved. But achieving one’s goal for a year requires regular attention to make sure your company is on the right path. Developing a monthly budget will provide the regular reference points to make sure you are on target to achieve your vision for the business during the next year.

REVENUE BUDGET BY MONTH. Revenue/sales/income is the result of securing leads, making a proposal and closing the sale. Most green industry companies have identified the cycle for making sales and developing the sales budget to reflect the interval for the performance of the services sold. The sales budget should reflect the amount of business the company can reasonably expect to execute/produce/perform in a month.

Landscape/irrigation contracts. If income is the result of one-time contracts, the budget needs to reflect the number of average contracts that can be performed/completed in a month. If the size of the company’s projects vary significantly, assumptions will need to be made about the average size of the project for budgetary purposes.

Mowing/lawn care/tree care. When revenue is the result of recurring business, the budget process includes planning for cancellations, new sales and additional services for existing customers. To obtain the best insight for budgeting this income, one should review the past performance of the company and then forecast your new expectations.

When developing the budgeted revenue budget for each service the company offers, it is imperative to know the closure rate based on the proposals you will make. If the historical closure rate on proposals for the company is not more than 40 percent, contractors should consider taking steps to improve the sales skills for all sales personnel before the next selling season starts.

Cost of sales. Materials costs are incurred in direct proportion to the revenue that causes the expense to be incurred. Be certain to allow for warranty expense to replace shrubs if you give a guarantee on your plants, additional materials for retreats or additional visits as part of your green up guarantee, and generally to replace items that the customer defines as unacceptable once they have been installed.

Material costs are usually a set percentage of revenue based on the type of materials being installed or applied on a customer’s property. Landscapers have found a given percentage standard for the type of project they usually install in their market. Lawn care customers often find their materials expense a function of the cost of materials per acre based on the size of the property services. What is the average size of properties serviced at your company?

Labor/payroll/wages. Budgeting hourly labor is a function of knowing the amount of business expected for a given month and the year. Salaried personnel or individuals who will be paid a fixed weekly, biweekly or monthly wage are easier to budget.

Equipment, vehicle, building and computer depreciation. These expenses are based on the allowable tax depreciation system that your CPA has established for your company. This information should be obtained from this individual when establishing this expense for the period being budgeted.

Equipment, vehicle, building and depreciation maintenance and repair. These expenses should be based on prior years’ experiences, anticipated changes that will be undertaken in the year being budgeted and price increases for items purchased from outside resources.

Payroll taxes and fringe benefits. Payroll taxes and fringe benefits are a function of payroll or the number of employees on the payroll. These costs often vary based on compensation being paid to employees or for the number of employees eligible on the payroll.

Tools, small equipment, shop, safety and equipment supplies. These items are costs that occur based on their periodic need by the business. Budgeting for these five items should reflect the month the company expects to have these items available to operate the company.

Training, insurance, dues and subscriptions and professional fees. These costs are usually known for the year along with the month the costs will be incurred. These should be budgeted in the appropriate month based on the billing of the companies from whom these services are to be received. This will help in making certain that the business is on target and heading in the right direction.

CHOOSING AN ACCOUNTING SYSTEM. Determining what accounting system to use can influence the usefulness of the company’s financial accounting data. The cash accounting system services to minimize taxable income during the early formative years of the business, but it provides limited assistance to the owner about how the company is performing.

The accrual accounting system provides very useful financial data for the owner on a consistent basis but will increase taxable income in the early years of the business’ operation. Before a company makes a decision on what accounting system they will be following, they should consult a CPA and discuss the pluses and minuses of the alternatives. Based on the financial condition of the business, different choices will result. Sharing these insights with the CPA will allow him or her to provide the needed assistance in making this decision bookkeeping accounting decision.