February 4, 2020
Plan for 2020:
It’s budgeting time!
BY MARK BRADLEY
It’s the start of a new year and if you haven’t started your plan for profit, there is no time like the present. During this time of year I always preach about the value of a budget. This year, I want to highlight three different budgets you should consider to make the most of 2020 and beyond.
THE COMPANY BUDGET
This is a forecast Profit and Loss statement covering your whole company. Your operating budget is a summary of forecast revenue, minus forecast expenses (typically broken down by labour, equipment, materials, subs, and overhead) to create a plan (forecast) for a profitable year.
The biggest challenge for most contractors is just taking the time to sit down and create a budget. Your first budget will be a learning experience — but once you understand how they are built and, more importantly, how they help you set profitable goals and metrics, you will wonder how you ever ran your business without one. Budgets help you to:
- Establish clear goals for sales.
- Help HR and hiring planning — giving you clear goals on the number of staff in each role and the wages you can afford to pay.
- Create an overhead recovery system (to ensure every job is priced right).
- Ensure jobs are priced accurately.
- Reduce the stress and anxiety of not knowing whether you’re on the path to success/profit.
THE DIVISION BUDGET
The division budget is a forecast Profit and Loss statement covering one specific division of your company. Again, it’s a summary of revenue, minus expenses, but in the division budget your goal is to only include the revenue and expenses for one specific division. With budgets for each division in your company, you are able to clearly see which services are profitable and which services need improvement.
For many contractors, the first challenge is isolating costs by division. Tracking revenue by division is simple, but many contractors don’t track and enter costs accurately enough to assign them to a specific division. Technology plays a big role in fixing these problems. A time tracking app, and setting up your accounting software by division, will solve most of the issues in divisional cost-tracking.
Finding balance can also be a challenge. Track too little detail, and you still won’t be certain where you are making or losing money. Track too much detail, and it becomes too confusing for staff to track accurately. You end up with a whole lot of data that no one trusts. This is worse than not having data at all. A good rule of thumb is to try to separate any division in your company that contributes more than 20 per cent of your total revenue. Trying to track anything smaller is probably more work than it’s worth.
Splitting overhead can also present challenges. How do you split something like a utility bill or shop space? Here are three strategies:
- Allocate overhead by percentage of revenue (e.g. maintenance is 40 per cent of revenue, so it gets 40 per cent of overhead costs).
- Allocate overhead by percentage of the year (e.g. snow is four of 12 months, so it gets 33 per cent of overhead costs).
- Finally, a more thoughtful approach is where each overhead expense is looked at individually and split by “thoughtful assignment” (e.g. the install division should recover 80 per cent of marketing costs, but the snow division should recover 70 per cent of liability insurance).
When it comes to benefits, the division budget establishes clear goals for sales by division; helps you focus on areas of strength (and eliminate weakness), and shows clearly which divisions need to raise prices or become more efficient.
THE CREW BUDGET
The crew budget is a forecast Profit and Loss statement forecasting revenue and expenses for one specific crew. Revenue is projected by the projects (design-build) or contracts (maintenance) completed by the crew in a year. Payroll expenses are forecast by number of staff (and hours/wages) in the crew, and other expenses (materials, subs and overhead) are forecast using the same percentages as your company budget. For example, if your company spends 27 per cent of sales on overhead expenses, then 27 per cent of the crew’s revenue is allocated to cover overhead expenses.
A challenge is that most contractors are scared to share too much information with crews. But a crew budget doesn’t have to be too transparent; you can share your overhead as a percentage without actually spelling out your salary or other overhead salaries. You can easily create a balanced approach that shares enough information to motivate, without going ‘open book.’
Some foremen will not like what they see. You might lose them, or need to get rid of them. And that’s okay. Each crew needs to be able to contribute to, not detract from, your bottom line. Subjective statements like, “I work tons of hours but don’t get paid what I’m worth,” or “I don’t think this crew gets much work done,” are made perfectly clear with numbers. Either the crew is beating the goals, or its not. If not, this budget clearly demonstrates why it’s so essential — without making the owner look greedy, unfair or unjust. The biggest benefits of crew budgets are:
- It’s an amazing motivational tool; showing good foreman the financials that drive their successes or failures will likely lead to never-before-seen levels of engagement and care.
- It clearly shows who your best crews are, and which need training or development.
- Helps identify foreman with the most potential, and those who are unlikely to succeed.
- Crystallizes key performance metrics for each foreman.
- Aligns field staff and ownership toward a common goal.
- Becomes the foundation for an effective incentive or bonus system.
I can’t stress enough how these three budgets will change the way you manage your landscape company. If you have never built budgets for your company before, make 2020 the year — no, the decade — that you start.
Mark Bradley is CEO of LMN, and former CEO of TBG Environmental, both based in Ontario.