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How important is the budgeting process?

November 25, 2013 -  By

A budget is a way to realistically combine what you know with what you want to achieve. It asks, “What do we need to do today to make our long term goals a reality?”

Would you ever accept a landscaping job you’d never created an estimate for? Of course not. A budget is basically an estimate of what you anticipate you will do financially in the coming year. It’s through budgeting that you control the profitability of your business.

Additionally, If you know how much product you want to move in the coming year, how much work you intend to install, and how much overhead you intend to spend, your budget will make it possible to effectively set prices for the year ahead.

Here are some questions to ask yourself (and your leadership team) related to budgeting:

  • Do you budget on an annual basis?
  • Do you know where your current prices come from?
  • If you have a budget, do you monitor your budget monthly and make adjustments throughout the year?
  • Do you hold your people accountable, and do they have ownership of your budget’s expectations?

Tough questions – and not such a fun topic – but the bottom line is: If you want to grow your business in a predictable and profitable way, your budgeting process must be a top priority every single month, year in and year out.

The 5 steps in the budgeting process

  1. Determine how much profit you need to make.
  2. Forecast the spending habits of your company’s overhead structure. (Step 1 + Step 2 = the amount of gross margin you need to make.)
  3. Determine how much of that gross margin is already sold.
  4. Determine the revenue goals you need to achieve to generate the remaining gross margin requirement.
  5. Take the resulting annual budget and spread it over twelve months so you can periodically compare how you are performing against your goals.

To establish how much profit you need to make, keep in mind profit is used to provide the cash to meet your company’s needs in five areas: The retirement of debt, the purchase of capital assets, the support of growth, the payment of bonuses or dividends and the payment of taxes.

If you fail to generate the necessary cash through your profits, you put at risk being able to pay for these items.

My mentor, Emol Fails, Ph.D., taught me to make a plan to reduce bad decisions. That’s what a budget is—a plan.

Time to start planning for 2014!

This post is an excerpt from the ebook, “The Landscapers Guide to Integrated Financial Management,” published by A Better Way 2 Learn. LM columnist Frank Ross, co-founder of A Better Way 2 Learn, will take part in A Better Way 2 Learn’s 2013 Financial Management TeleSummit, which kicks off Tuesday, Dec. 3. This live, three-night event is being presented by A Better Way 2 Learn Financials, GoiLawn and Landscape Management Register here.

About the Author:

The author is owner-manager of 3PG Consulting. Reach him at frank@3pgconsulting.com.

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