Finance for Landscaping Business Owners of All Sizes, Part 4

There are many types of budgets available to landscaping business owners. Here’s how to start your budgeting journey.

Dollar Puzzle

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Part 3 covered accounting and invoicing with a reference to activity-based costing or ABC. Putting together an effective budget doesn’t require ABC, but it helps.

A budget has two demands to be effective—accuracy and forecasting. This discussion begins with the types of budgets available to a landscape business owner and then focuses on where to start. Types of budgeting systems include:

  • Traditional, which means created for a period using the previous year as a starting point.
  • Zero-based in which every year starts from scratch. Last year provides insights, but instead you start at zero.
  • Flexible, with ongoing adjustments based on sales forecasts and the impact on production projections.
  • Rolling, which takes a year-long view and, at the end of every period (a month or quarter), it is dropped, while adding a new month or quarter to maintain a 12-month budget.

You should be asking: “Which is the best for my landscape business?” Start with either the traditional or zero-based system, then as your competence and confidence increases, move to flexible and rolling budgets, in this order:

  • The traditional budget. If this is your first attempt to create a budget, go simple. Take last year’s numbers and adjust as needed. For example, if the cost of materials or labor has increased, make those adjustments. The key is to build an accurate forecast for demands on cash and credit so you have a historical base for next year.
  • The zero-based budget. This is the budgeting system the government uses (but don’t let that discourage you). Its power is not accepting that last year was right. In this system, every year you determine what is needed.
  • The flexible budget. This system moves the budget from being fixed to include the dynamics of running the business. This approach increases the accuracy of revenue and spending forecasts.
  • The rolling budget. Save this budgeting system for when you have all the pieces right. Tied to a flexible budget, it takes your forecasting from just the next month or quarter to 12 months.

Now the question moves from the budgeting system to its use. The following is a quick overview of the choices most appropriate for small landscaping companies: master, operating, financial, cash, labor, capital or strategic budget. It’s likely best to start with the operational budget, then add the cash budget.

The Operating Budget

The operating budget is nothing more than taking the statements discussed in Part 1, the balance sheet, and profit and loss statement, and using them to project upcoming months. This is simple: On a spreadsheet, create the same categories as the balance sheet by the month. Place these in rows. Then across the top, create three columns for each month: JAN2018A (this month last year), JAN2019F (your estimated numbers for the month) and JAN2019A (what actually happened). Now you are ready to track this month last year against this year, and what happened.

The payoff is you can ask why what happened differs from the forecast and make adjustments to the next month.

The Cash Budget

Just like the operating budget, the cash budget uses one of the big three financial statements—the monthly cashflow statement. Create a new spreadsheet on the same document and do the same thing. Place the items from the cashflow statement in rows in your new spreadsheet. Then along the top, create three columns for each month—this month last year, this month’s forecast and the actual use of cash for the month.

The payoff is you can track use and investigate further when something looks off track.

Budgeting is simple. The challenge is the time commitment it takes to keep budgets up to date weekly. Once you do it, the power of budgeting is clear—you can control how much you spend on what and when.