Developing 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.
For larger companies, managers will likely be involved. Basically anyone authorized to make purchases should have a say in the budgeting process, or at least be involved to help answer questions.
Branch managers are not only involved in the budgeting process at Ruppert Landscape, they are responsible for it. “The branch manager pulls his or her entire team together to do the budget,” Hochkeppel explains. “But the branch manager is the final decision maker when it comes to expenditures and pricing.” Ruppert Landscape operates 11 branches and one wholesale tree nursery in Maryland, Virginia, Pennsylvania, Georgia and North Carolina.
“Field supervisors should be included so they get a better understanding of your company and its current capacity,” Bradley says. “Sometimes owners and managers get a bit ambitious with sales goals, but you need to make sure those goals are attainable.”
Other employees can also be involved in the budgeting process, regardless of the size of your company. Examples are administrative staff and salespeople. “The sophistication and maturity of your employees will play a role, because they need to be able to understand what the data means—and that it is confidential,” Gaeta points out.
Who do you share your budget with?
Everyone. Everyone?! “I believe your budget has to be totally transparent,” Bradley says. “We hang our budget on the wall, along with sales to date, for all 35 of our employees to see. We don’t want to hide anything. We want to make sure everyone on the teams knows that we’re keeping score—and knows when we’re winning or losing.”
“We’re very much an open-book business,” Hochkeppel says. “It amazes me that some companies aren’t, because not being open creates a totally different culture. We’re big proponents (at Ruppert Landscape) of sharing information, because it’s empowering—employees feel like it is their company.”
Foremen and crewmembers might need the budget information communicated to them in a different way. “Sharing indirect costs can be confusing to these employees,” Gaeta says. “I prefer to talk to them about only those costs they can help control: labor, materials and equipment.” Then you can talk to them about overhead in terms of a percentage of sales, at least so they understand that the company does need to generate a certain amount of profit to pay all these other bills you call overhead, Gaeta adds.