Ten critical steps to effective budgeting.

It’s a new year, a time to start fresh and unleash new “resolve” for increasing revenue and profit in 2012. But the reality is this new energy is often coupled with a dose of fear of what it takes to make it happen. You know you need a solid budget and a plan for reaching your financial goals, but you’re not always certain of how to pull it together, efficiently and realistically.

Don’t fear the new year. Think of your budget as your compass to financial success. It will help you iron out kinks in your operation before they become major issues and give you a clear vision of the direction your company is going. You will make adjustments along the way, depending on what you run into, but if you stay the course and stick to the plan, you will reach your destination even amid economic roadblocks.

Step 1: Getting started

I’ve built a lot of budgets in my 36 years in the industry. The hardest part is getting started, so get out of your office so you can focus on the task at hand, without interruption. Set aside two or three days and tell your office staff that you and your leadership team are not to be interrupted, <period. It sounds drastic, but it’s important for your success.

So you’ve set the stage for getting started, now what?

Step 2: Start with the end in mind

Set your top and bottom-line goals with your team and assign the goals so everyone can work toward making budget. When goals are clear, you can hold your team accountable for reaching them. If you are the only leader, then clearly communicate your goals to your staff and holdthemaccountable.

Step 3: Pull together stats

Here’s what you need (this year’s and last year’s): marketing tactics (cost per call/lead); number of technicians; calls/leads run; conversion rate (service techs and/or salesman); sold hours/days; and average sale.

Step 4: What's changing?

  • Marketing
  • Techs
  • Calls/leads
  • Conversion rate
  • Average sale

  • Step 5: Generate the revenue plan

    Ask yourself this important question: If I budget for significant revenue growth, how am I going to achieve it? Will I need more calls, train my people, hire more people, increase expenses? If so, write it into your plan.

    For example, you may ask, “What is my plan to increase conversion rate and increase my average sale?” These are the assumptions you will create to build your plan. Document these assumptions and refer back to them when you start to analyze your plan in Step 6. The simple revenue calculator on the previous page will help you.

    Estimated dispatched calls = Booked calls that your techs ran.

    Estimated conversion rate = The percentage of booked calls converted to sold work.

    Estimated average sale = Average dollar amount of all invoices.

    Estimated total trade revenue = Total revenue from all work sold.

    Step 6: Do an overhead analysis

    Review and compare benchmarks in areas such as office salaries, advertising, vehicles and others. Shoot for these overhead targets:
  • Office salaries and benefits - 15% or less
  • Advertising/marketing - 11.5% or less
  • Vehicle expenses - 5% or less
  • Other overhead - 14% or less
  • Total overhead - 45.5% or less
    Make a final decision on your overhead cost.

  • Step 7: Do an assessment of all your employees

    What changes will you make?

    Step 8: Create your selling price

    Don’t forget about adding in your profit!

    Step 9: Sanity check on your direct cost

    When your price is right, your direct cost will meet the following benchmarks.

  • Residential plumbing and electrical service
    - 24% direct labor, including all taxes,  benefits and apprentices.
    - 10% material.
    - 34% total direct costs.
    - 66% gross margin.

  • Residential sewer replacement
    - 15% direct labor, including all taxes, benefits and apprentices/helpers.
    - 12% materials and equipment rentals.
    - 8% sales expense.
    - 35% direct costs.
    - 65% gross margin.

    When reviewing these, it is important to remember that the targets are annualized. You should be exceeding the targets during seasonally heavy periods to compensate for lower margin months during seasonally slower periods.

  • Step 10: Analyze your sales and cost variances

  • Year-to-date to last year’s same time period.

  • Current month to last year’s same time period.

  • Current month to current month’s budget.

  • Year-to-date to year-to-date budget.

    Isolate causes to determine whether they’re one-time events or potential re-occurring problems. Use this as a basis for decisions about changes in strategy or expense management.

    For example, plumbing labor is 30% this month. Your plan was to be at 24%. You missed by six percentage points. Dig in and find out why. Was overtime managed correctly? Did you have low sales, yet paid the men so they didn’t go looking for another job? Are your selling prices too low? Did you discount jobs to keep your techs busy? Do you have poor-producing techs due to lack of training? Do you have a lot of callbacks?

    There are many reasons your labor figures could be off track. It’s your job to find out why those figures are off track and create a plan to fix them. Do this with each line item in your income statement.

    But wait, there’s more!

    Is your plan set up to address the seasonality of your business? Said differently, are your sales figures 1/12, 1/12, 1/12 - straight-lined for 12 months? Your budget has seasonality, right? Your business may look something like this: January represents 5.1% of sales;February represents 4.3% of sales; March represents 4.8% of sales; April represents 7.4% of sales; May represents 8.9% of sales; and so on.

    Review your results monthly and compare them to budget expectations. Analyze your variances, take corrective action and monitor for improvement.

    These reports will keep you laser-focused.

    I have the privilege of facilitating workshops and coaching Nexstar Network member contractors through the budgeting process. It’s rewarding to witness the business success that comes from their labor.

    I circle back each month and review their monthly variance reports after their budgets are created. I love seeing the lightbulb go on when they tell me what they are doing to fix the variance, before I even ask. Talk about laser-focused. While many contractors were suffering during the recession, the contractors I worked with were flourishing and they point directly to the business planning and review process as a key to their success.

    If you don’t create a budget, you’re making a big mistake. Do it now. It doesn’t have to be complicated. Just get the numbers on paper, set your goals and set out to accomplish them. Make it a Happy New Year!

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