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With a fresh set of batteries in the calculator, copies of P&L statements, last year’s budget, a fresh pot of coffee, and a generous supply of aspirin, managers across the country are being asked to put together next year’s budget. All the while knowing that as soon as it is submitted it will be revised, they try to guess what owners or upper management what them to do. This is the annual Budget Games and like the movie “Hunger Games,” if you don’t play the game well it can have dire consequences.
Here are some things to keep in mind while creating your budget. And may the odds be ever in your favor!
3 Parts to a Budget
There have been books and entire college courses devoted to budgeting so don’t expect all the details here. A budget is not a goal. It is a roadmap for how you will guide your department through the upcoming year. In general, a budget is made up of three parts: sales (the money coming in), expenses (the money going out), and profit (the money left over). A budget is a lot like a checking account with checks, debits, and a balance.
Avoid the Red Flags
Be realistic. If you submit a wildly inflated budget, you are sure to get red-flagged and you will be asked to redo it or worse you will be asked to do it.
Don’t be too conservative. If you submit a flat budget or a budget that increases by 5-10 percent it will be sent back to you.
Do the work. Simply adding a percentage across the board isn’t going to fly. Rent, depreciation, equipment, vehicles, etc., do not increase in direct proportion to sales. In other words, if you are a three-truck department and you submit a 20 percent increase, you are not going to buy 6/10th of a truck and put it on the road.
What Owners Want to See
Plan for a 20 percent increase. This is a 20 percent increase over what you are on track to do this year — not what this year’s budget is. If you are beating this year’s budget, you are not going to get to skate by next year.
Submit yearly and monthly budgets. Home services are a seasonal industry regardless of your particular trade. Fixed costs won’t change, but things like advertising will occur in some parts of the year and not others.
Be prepared to explain your numbers. Being able to justify why you increased or decreased a certain line item will go a long way in getting your budget approved.
Play “What If…”
One of the most valuable things you can do as a manager, especially when budgeting, is to play “What if…?”
This allows you to run through difference scenarios and the potential outcomes. When budgeting, I played “What If” using an Excel spreadsheet. I took my P&L statement and copied it into an Excel spreadsheet. I created a different worksheet for each month, and one for the year.
Keep all fixed costs like rent, etc., the same. Create a formula for all variable costs like material, labor, employee tax, etc.
I was then able to test different scenarios and come up with the best budget possible. Setting up these worksheets is not as difficult as it sounds. It takes a little time and patience (and if you are like me you will be reading some Excel tutorial to figure it out). In the end, however, you will have a tool you can use year after year.
The Budget Games occur every year, and if you play the game well not only will you survive, you will have a profitable company in the process.