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The first tool every business manager must have is a business plan, which should begin with an overall vision of your long-term goals. These goals define your overall mission: motives and methods, production skills, quality standards, customers, image, position in community, and financial guidelines.
Next comes the operating budget, which establishes a basic company philosophy that promotes the efficient use of manpower, materials and equipment—while unifying objectives, marketing plans and action plans. Like a road map, a budget shows how to reach company objectives in the shortest, least expensive and most efficient manner.
The budget comprises a five-step process which, when completed, provides you with a written course of action that establishes responsibility and identifies required benchmarks.
Set your net profit goal. Identify the amount needed to retire debt, support future goals and pay taxes.
Forecast overhead. Use the zero-based method, taking one sheet of paper per overhead item (i.e. advertising) to list everything you intend on spending money on. Use history as a guide (so you don't forget anything), but don't think you have to spend X on X because that's what you spent last year.
Understand that net profit plus overhead equals gross margin. In other words, by forecasting your profit goal and overhead first, you have just established the gross margin dollars needed to maintain your standard of living.
Establish your backlog. By type of work, list your known contracts and renewals for the coming year. List both revenue and job costs (labor, materials, subcontracts and equipment) for each project. Subtract job cost from revenue in order to calculate the part of the total gross margin which is already sold for next year's operations.
Prepare a labor budget. Establish your true production capacity in hours by forecasting how much labor you can reasonably field in the coming year. Do this by crew. For instance, if a guy works 40 hours a week and 52 weeks a year, that's 2,080 hours.
But understand that not all of that time is productive due to holidays, bad weather, equipment downtime, etc. So figure out how much of an employee's time is actually salable vs. non-salable, because only salable time contributes to gross margin. Also, determine what you intend to pay in wages and benefits by skill level within each crew.
Prepare a sales budget. Start by adding the amounts calculated in Steps 1 and 2, and then subtracting the amount calculated in Step 3. This tells you how many additional gross margin dollars you must generate in order to hit your profit goal. Next, convert this additional gross dollar amount into a revenue goal within the parameters established in Step 4.
If you determine that you fall short in revenue based on the remaining capacity of your labor force, then you must add crews—and possibly more equipment and/or overhead—or go back and reduce your previously budgeted overhead and profit goal. Either way, the end result is the amount of business you must acquire to cover overhead and produce a profit.