March 1, 2011

Managing your budget guarantees success


In order to guarantee a profit every year, it is critical to ensure that sales are aligned with expenses. Should sales go down, so too, must expenses. The key here is to make decisions pro-actively, not re-actively, or the bottom line will definitely suffer.

Inflation must be addressed within each year's budget, so that you will recover the increased costs you will surely incur.

Raises to staff must be given only within the context of the labour budget, which must be a fixed ratio of sales. If someone gets a larger-than inflation-increase, it must take the Average Crew Wage into consideration. For example, consider the following pay scales:

Crew A
Foreman - $40.00
Lead hand - $25.00
Skilled labourer - $18.00
Summer student 1 - $13.00
Summer student 2 - $13.00
Average Crew Wage - $109.00/5 = $21.80/hour

Crew B
Foreman - $30.00
Lead hand  -  $25.00
Skilled labourer - $18.00
Average Crew Wage - $73.00/3 =  $24.33/hour

If the foreman on Crew A can manage two additional people, and produce more work proportionately, you will be able to afford paying better wages to your top people, while at the same time becoming more profitable.

When hiring new workers, always consider the average crew wage in addition to the individual's wage. Productivity is a huge consideration when considering what to pay an individual ... this will help you pay people what they are worth, and build a great team.

Raises given automatically for seniority or length of service only bloat wages as a ratio to sales. Most companies fail to control their expenditures, and actually increase their costs, without increasing revenue. Over a few years this can add huge costs that need to be pared down rapidly.

I never get stressed out about wage increases, because I know that the cost must be relative to productivity and the average crew wage at our company. If I give someone two dollars an hour more, then the new recruit coming in must be paid two dollars less. This guarantees that undisciplined, self-imposed cost inflation does not creep in and erode profits.

At our company, I typically explain this process to all my people. They need to understand that if they are to get more money, either they must be more productive, someone else gets paid less, or both!

There are only a few ways to earn more money: work harder, work longer, work smarter or marry rich!

Tough choices
Managing a budget means making choices throughout the year, not just at the end. In essence, to control your budget is to control your success. The better we become at doing this, the better we become at making profits.

In the past we have used Excel spreadsheets to manage our budgets; last year I signed up for a Landscape Management Network budgeting workshop, and now my budgets translate right into my estimates.

If you know your sales goal, and you see that you can beat it, while controlling costs and overhead, you can start to make tons of money. Once you have exceeded your sales goal, virtually all of your overhead turns to profit.

Good luck, and stick to your budget.
George Urvari has been a partner in a Toronto-based design-build landscape firm for over 20 years.