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Print ArticleDeveloping an effective budget doesn’t have to be complicated and time-consuming. What it does have to be is realistic, revisited, adjusted and communicated to key personnel within your company.
This was the message of a recent JP Horizons “A Great Time for Business” Webinar. Consultant Jim Paluch of JP Horizons moderated a discussion between three of the Green Industry’s most scrupulous budgeters:
- Jerry Gaeta, senior associate at Vander Kooi & Associates
- Ken Hochkeppel, chief financial officer for Ruppert (Landscape) Companies
- Mark Bradley, founder and president of The Beach Gardener
The trio discussed a range of topics surrounding the budget process. Here are some of the highlights.
Be realistic. Avoid the temptation to over-project sales and under-project expenses. If you do, and business turns south like it did in mid-2008, your company could go down in a heartbeat. At the same time, some people are too conservative on their sales goals and too liberal with expenses. Gaeta says a budget should be realistic, yet attainable.
Look at previous financial information and figure out percentages. Bradley uses a three-year history to figure out his costs as a percentage of revenue. Then go about setting revenue goals for the coming year. Apply your cost percentages and desired net profit percentage, and voilá.
Budget every single cost you have. Start with the direct costs of labor, subcontractors, materials and equipment (if you consider equipment a direct cost). Then move to overhead, from advertising all the way down to bad debt. “If someone in your company wants to buy something, who’s paying for it?” Gaeta asks. “If it’s not in the budget or on an estimate, it’s being paid for with your perceived net profit.”
Revisit your budget continuously. It’s a common misconception that you budget once a year and just wait to see how things turn out. Business conditions change from month to month, so the budget needs to be revisited frequently so your pricing can be adjusted accordingly. “If your prices reflect business conditions that are six months old, you’re leaving plenty of room for loss,” Bradley points out.
Look for opportunities to exchange costs. If you can’t avoid spending $10,000 on one thing, spend that much less on another. “That’s certainly a lot better than taking away from your net profit,” Hochkeppel adds.
Be patient. The first budget you ever do probably will not be the most accurate. But you’ll get better over time. “It’s an evolution,” Hochkeppel says. “As your company matures, you’ll be amazed at how close your actuals come to your budgeted numbers.”
Have a contingency plan. This is especially important during economic times such as these, Gaeta points out. “Identify a timeframe for when certain actions kick in so you don’t get caught short at the end of the year,” he advises.
Who should be involved in the budgeting process?
For smaller companies, budgeting is naturally going to fall on the owner’s desk, since the owner is typically responsible for both selling and purchasing.
