Ever since the first known builders of the Nile River Valley in Egypt began to scope out designs for their intricate buildings and structures, architecture has played a central role in helping to provide shelter, encourage commerce, demonstrate power and authority and express elements of the human experience.
The financial plan in your business is just as critical to ensuring its strength and longevity as the blueprint plan is for a building. As the architect of your business, you are integral in deciding where to place appropriate supports throughout the different divisions and departments of your organization.
These supports, in the form of budget allocations, ensure the entire structure remains solid and uncompromised by competitors, market fluctuations, economic downturns and other events and circumstances beyond your control.
Often, business owners and managers confuse planning and budgeting. Of course, budgeting is one of the most important things you can do to ensure your business remains solvent. But, while budgeting requires a degree of planning, it is not the same as creating a forward-thinking, comprehensive financial plan.
If the plan is the blueprint, the budget is the breakdown of components that make up the entire structure. Without the plan as a framework, it is difficult to know how much of your hard-earned revenue to allocate to each portion of the business. How do you begin to construct a plan – a blueprint – that sets up your business for success, and what elements are most important to consider when determining budget allocations? You can begin with these five things.
Define expected revenue
While the best plans are forward-thinking and proactive, looking at the previous year’s – and even the previous several years’ – revenue is a good place to start when determining how much revenue you expect to come in the door during a calendar year.
Consider how much revenue generally comes in from maintenance and recurring contracts. Then, decide how much additional growth you want the business to achieve in the coming year, and set goals accordingly. Remember to consider anticipated one-off, or project work, and any additional revenue from retail sales. Also, be sure to get a clear picture of backlog from the previous year and consider how it will impact the plan year.
Create individual sales plans
Sales are the revenue drivers in your business, so it stands to reason that sales would heavily influence budget determinations and allocations.
Begin at the individual level by working with your sales professionals to develop realistic sales plans and anticipate rolling those plans into the organization-wide financial plan once those sales are converted to revenue.
When developing sales plans, consider each sales professional’s experience, his or her level of comfort with the sales process and the percentage of overall time dedicated to selling. All these factors will strongly determine revenue inflow and, subsequently, budget allocations.
Identify labor costs and COGS
Labor is the most easily managed variable when considering the costs associated with keeping your business operational. Overestimating when determining budget allocations is key when painting a true cost picture of what it takes to keep your crews running efficiently.
When tracking mobilization, for example, you will get a much more accurate idea of the costs associated with getting your crews to and from jobs when you factor in each crew member traveling round trip to and from a job site instead of allocating for the crew as a whole. Also, it is important to factor in stops to and from job sites and site set-up and clean-up.
Do you have a nursery, retail facility or vehicle and equipment repair shop on your property? What general and administrative expenses does the business regularly incur to keep it operational? How much do you have to pay out for managers’ salaries?
The costs associated with each must be considered in the financial plan. Also, consider the non-billable – non-revenue-generating – time involved in completing each job, including repair and warranty work. These costs should be budgeted for and recouped as much as possible.
Expect the unexpected
Unpredictable weather, non-paying and delinquent customers and economic downturns are just three of the innumerable unexpected variables you can count on to affect your business’s operations.
Short of consulting a crystal ball or time-traveling to the future, there is no way to definitively know when they will occur, but you can plan for them by making appropriate budget allocations to offset the loss of revenue associated with each. Again, overestimating is key. The more of a cash cushion you allow for these events, the less adverse impact they will have on the bottom line.
Planning and budgeting are vital for ensuring the continued health, vitality and profitability of your business, but they are not the same. A forward-thinking, comprehensive financial plan serves as the framework that houses the budget.
When building the yearly financial plan and determining appropriate budget allocations, it is important to consider both expected and unexpected variables that can impact your business’s ability to generate revenue and realize a profit. The more time and attention you give to your financial plan and its individual components now, the better able your business will be to remain solvent and structurally sound over the long term. After all, a good plan today is better than a great plan tomorrow.
EDITOR’S NOTE: This article was written by Mike Eisenhuth, a former Success Coach with LandOpt, a business that works with independently-owned landscape contractors across the U.S., helping them increase profitability, cash flow and revenue. To learn more, visit www.landopt.com.