Why Budgeting is the Answer to Better Business Management and Productivity
The idea of budgeting is certainly not revolutionary. For most of us, the concept was introduced to us at a young age and it is something that we’ve been educated on numerously throughout our adult lives. We’re often told that it’s a basic practice that should be applied to both our personal and business life. Yet the fact remains that many of us do not budget for business.
A survey conducted on unsuccessful small businesses revealed that only 10% of those businesses failed because they couldn’t sell enough work. And only 12% failed due to the economy. The real reason most businesses failed was due to management or, more appropriately, lack thereof. In fact, 69% of them went out of business because of poor management. Interestingly enough, of those unsuccessful businesses, only 10% say they had a budget in place. Further speculation proved that only 1% actually had a budget that was written and in place. The survey also revealed that of the successful businesses, 98.75% had created a written budget and used it to manage their everyday business.
Moral of the story? Having a budget in place and using it is one of the biggest differentiators of successful businesses from unsuccesful businesses. Why? Because when you have a plan, you know how much you can afford to spend on things like equipment and materials. But it’s more than just that. When you budget, you have the ability to set clear, measurable goals. And when you have measurable goals, you can actually communicate your plans to your employees and reward them for having a stake in helping you achieve them. We’ll get to this in a bit, but first let’s look at the four major components of an operating budget:
1. Revenue (sales)
2. Direct expenses
Direct expenses are best described as “billable expenses,” which refers to variable costs or costs to goods sold (labor, equipment, materials, subcontractors)
3. Overhead expenses
Overhead expenses are best referred to as “non-billable expenses.” You can’t recover jobs in overhead so you need to have a markup system for direct expenses to cover overhead. As you grow, your overhead percentage of sales grows much smaller. Overhead doesn’t change, it might spike a bit with advertising or hiring new people, but overall your overhead should remain relatively constant.
4. Profit
Budgeting and Better Business Management
An operating budget is a proactive planning tool. It allows you to force your decisions to serve your goals and it alerts you when things are wrong. By calculating your numbers, you can ask yourself: is this doable if I did this change? How will it affect things? And actually have viable information to refer to to answer questions such as these in confidence. Your operating budget will also help you make a clear distinction between what you can and can’t charge your customers for.
Which brings us to our next point: A budget is revealing. It reveals gaping holes in your operations management and, as mentioned before, it alerts you when things are wrong (i.e. your guys aren’t working as productively as they should be). This is where budget comes into play in better business management. Knowing your productivity rates and where your company needs to be to be profitable will reveal the areas in your business that need to be improved. And knowing where you need to improve will save you money and costs.
Your operations should work like an assembly line – everything needs to work smoothly to be productive. There can’t be an error in the system. If there is an error, your budget will help you pinpoint where you may be lacking. It’s one thing to grow, but it’s another thing where everyone is more productive. Creating a budget is like putting your business under a microscope. You’ll see real numbers and where real improvements need to be made. Making the right improvements now will lead to less mistakes and more productivity, so you can start winning the jobs that will make you money.
Aside from the basic components of your budget, here’s another number that you need to know – your Field Labor Ratio. Your field labor ratio will tell you what percent of your sales is spent on field labor wages (to calculate this ratio: divide your field payroll costs, not including labor burden, by your total sales). Your Field Labor Ratio measures productivity, identifies superstars, and creates differentiation so you can pay on productivity. The higher the percent of sales you spend on your labor is, the less productive you are. The lower the percent of sales you spend on your labor is the better. It means your crews are showing good productivity and you are spending less on labor per sales dollar.
You may have a company goal of 25 % – some crews are operating at 21%, while some poorly managed crews (with not-so-great foremen) operate at 30%. You don’t want the guys working at 30% working for you. As for the guys working at 21%, you want to keep them around and pay them more. You can afford to pay 100,000 a year to foreman, but you need 400,000 in sales in order to do that. Therefore, it’s a team effort – they’re worth what they’re producing. To use your labor ratio to your advantage and start paying your guys what they’re worth, bring your budget to the crew level. That means breaking down your sales goals by crew so that you can assess performance for each one of your crews and make corrections where needed. If you’ve got the work, but the crew can’t meet its production goals – they’re overpaid or mismanaging their work. They need to fix their production levels (get more productive) or earn less. Your company’s profits depend on crews meeting (or coming in under) their labor ratio. It’s a simple equation. Crews who beat their labor ratio, on the other hand, are crews that you want to hang on to. If a crew managed to do more sales in the same hours – or met their sales goal in fewer hours, they deserve to be rewarded. The reward could be a bonus or higher wages next year.
When you can manage your crews with a Crew Budget, you can really take managing your company to the next level. You run each crew like they are their own company. Even better, teach your foremen about their crew budget and how it works. You don’t necessarily need to break down all your overhead wages and expenses for your foremen, but you can show them how a simple budget works. It’s so much more profitable to have guys that perform well. Saving 10% in wages by hiring the average Joe will end up costing you thousands in lost productivity. You should be happy to pay as long as they make the revenue. Give people a chance to build a career in a landscaping company, which is rare!
Once you get your first budget down pat, there are endless possibilities for how you can use your budget to better manage your business. For instance, aside from creating separate crew budgets, you can divide your company budgets into divisions – for instance, you can create a budget for snow and a separate budget for design and build. Once you get a handle on budgeting, you’ll understand your business better than ever before.
Read how Mike Beadle of M&S Architectural created a system for distributing bonuses based on employee/crew responsibility and productivity.
The Landscape Management Network is the ultimate profit toolbox for landscape contractors. Developed by landscape contractors for landscape contractors, LMN’s suite of online tools and systems offer landscape contractors anytime, anywhere access to tools that drive productivity and profit.
Profit: The path to success starts with a plan for profit. LMN’s budgeting tool helps contractors build an operating budget that helps contractors make the tough decisions that determine success, or failure.
How much sales revenue do I have to drive to be profitable? How much can I afford to pay my best people? Can I afford to purchase new equipment? How do I price my work to make sure I cover my overhead and make a profit? How much can I afford to pay myself? Are my people productive enough? How much revenue should we be doing?
LMN’s estimating software ties directly in to your budget, so that you price work accurately and effectively with a few clicks of the mouse.
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