DeNae

My father taught me how to budget when I was about seven years old.  Yes, that was a very long time ago!  My initial budget was $2.00 a week for doing certain cores.  I had lunch money, Cub Scout dues, church tithe, etc. within my weekly budget.  I was given a set of Budget Envelopes and a two-dollar roll of nickels.  Once a week I would disperse my nickels into the envelopes and then retrieve them, as the need arose.  My favorite envelope was called Fun!  I got fifteen cents a week (yes, it cost less to live 70 years ago!).  It didn’t take too long to realize that if I saved my 15 cents each week, I would soon have enough money to buy something I really wanted to have, like a new baseball mitt.  Bottom line, it taught me how to manage money and I have lived on a budget ever since.

Ok, Tom, budgeting is great when you’re young.  However, why does my company need to create a budget?  I’m glad you asked that question.  Below you will find a partial list of benefits.

Clear Understanding of What It Costs to Do Business

It may seem odd, but a huge number of small business owners have no idea what it costs to open their doors each day—creating a budget forces the owner or management to understand what is being spent on everything from gasoline to insurance.

Sets Accurate Pricing

It’s not difficult, it’s impossible, to set proper hourly rates until you know what it costs to do business.  The “real” costs of doing business need to spread over the hours the company expects to bill the customer over the next 12 months.  Without creating an accurate budget, it is literally impossible to set proper hourly rates!

Keeps Management from Making Impulse Purchases

How many times have you bought something (Ladder, another truck, storage shelves, etc.) on the spur of the moment?  Guess what?  Every dollar spent over the budget is going to reduce profits if it is not passed on to the customer through a rate increase.  A budget helps the owner/manager think before they go out and buy a large item that is not in the budget.

Keeps Costs in Line Through Accountability

Staff need to be involved in producing the company budget.  Why? Because they need to be held accountable for what they spend.  Every department head needs to review their budget each month.  Any item that is more than 10% over, or under, budget needs to be explained.  This kind of accountability will keep costs under control and projected profits in line.

Forces the Company to Plan Its Capital Expenditures

Tracking equipment repair costs is critical.  If the company has four trucks and three have annual repair costs between $400-$700, that’s not bad.  However, if the fourth vehicle’s repairs are routinely running several thousand dollars a year, which truck do you suppose needs to be replaced next?  If you don’t know what is being spent on maintenance, per vehicle, how will you know which one to replace?

Control Costs

If you don’t know what the cost is supposed to be how are you going to know when you’re over budget?  Creating an annual budget for each item will provide a basis for spending.  Knowing you are spending $3,500 per month on Health Insurance will be of little value if you don’t know what the expense was supposed to be.  If it’s running under $3,500 per month that’s great, profits will be up.  However, if the monthly cost jumps to $4,200 per month guess what happens?  Right, profits will fall.  Again, if you don’t know what was projected to be spent (by creating a budget) how would you know you were over budget…until profits start falling?  Then it’s too late.

Ensures Profitability

A month-end Budget vs. Actual report will force accountability.  If profits are down, why did they drop?  A quick look at the Budget vs. Actual report will pinpoint what is out of line.  Once the problem is known, action can be taken to either control costs or increase pricing to maintain profitability.

Tracks Money for Next Year’s Budget

Creating a budget, and tracking actual costs, will be the foundation stone for creating a budget for the coming year.  Again, the better the budget and more accurate hourly rates will be.

Budgeting isn’t hard but it does take a significant amount of time.  However, once the process is completed, and the results are tracked each month, the owner and/or manager will have a much better understanding of what is going on within the company.

Another great tool for managing a company is the use of a Company Policy Manual.  Like a budget, it forces management to think through important aspects of the company’s policies like vacation schedules, tardy policies, drug testing, grounds for firing employees, and hundreds more.  Fortunately, this month’s Website Special is Grandy’s 96-page Company Policy Manual.  It comes in Microsoft Word to allow easy customization.  It’s normally $134.00 but this month it is only $97.00.  Order today!  Go to our website at www.GrandyAssociates.com and use Promo Code: Policy 37.

When you were a child, I suspect there was more than one incidence when you asked your parents “Why?”.  Why do I need to go to bed this early?  Why can’t I go to Jimmy’s house?  Why can’t I stay out past 11:00 PM or perhaps why can’t I use the family car?  Some children had very patient parents who would take the time to explain the reasoning behind the answer, no.  Other parents simply said no.  It really didn’t matter how the response was framed; the end result was the same.  You did what you were told whether you understood it or not.

When it comes to your company’s pricing, be it the service rate or an installation bid, things tend to revert back to when you were a child.  This is the price…charge it!  The question, however, is “Do your employees believe in your pricing?”  The answer to that question can have dramatic effects on the company’s bottom line.

How a company sets its rates can make a significant difference in how the owner or manager might respond to that question.  Some companies simply call all over town and find out what others are charging.  Once the data is collected their rates are arbitrary set based on what others are charging.  If the company wants to get more of the work (regardless of profit) they will tend to lowball their service rates and replacement pricing.  Most who follow this method of setting rates find themselves really busy for a couple of years…until they go out of business!

Other companies realize that their pricing really has nothing to do with what others are changing.  They walk through the process of gathering all their costs of doing business (Overhead and markups) and go through the detailed process of finding out exactly what they need to charge per hour, in each department, to generate the profit they desire.  The final pricing may be higher or lower than others in town.  It really doesn’t matter because they now know what they must charge to cover their real costs of doing business while generating the profit they desire.

Now back to our original question.  Do your employees believe in your pricing?  Stated another way, do they think your pricing is fair? How they view it makes a huge difference.  Likewise, how you answer makes a huge difference.  We will talk about that in a couple minutes.  Let’s take a brief look at how the lack of confidence in the company’s hourly rate affects employees and company profits.

Technicians

If service techs don’t believe in your hourly rate (pricing) they will tend to undercharge the customer.  “Ghee, Mrs. Smith is 87 years old, and living on Social Security, she can’t possibly afford a $213 repair bill.  I’ll only charge her $179.”  The tech’s heart is in the right place but from the company’s standpoint he just gave away their 10% net profit, plus some (Assuming the rates were properly set!).  However, if the tech truly understood that the company needed to charge $213 to make a fair profit the results might have been different.  Not charging the full rate consistently means something will eventually not get paid.  It might be gasoline, rent or perhaps even the tech’s health insurance or hourly rate! 

Salesperson

How many times do you have specific pricing guidelines for installing equipment only to have the salesperson drop the price.  Mr. and Mrs. Jones are given a replacement price of $3,750.  The customer says something like, “It all sounds good, and I really like the system.  However, I already have a bid for $3,200.  Can you match it?  If so, I will sign right now.”  If the salesperson is on commission the answer is definitely yes!  The thinking is that there “must” be at least $800 profit in this pricing. Some profit is better than none and I still get my commission.  Again, like the service technician, the salesperson did not fully understand, or believe, in the pricing, therefore the discounted price is just fine.

Office Staff

Mrs. Brown calls the office.  “This $187 repair bill seems pretty high based on the time the technician was here.  Can you help me out?”  Sure Mrs. Brown says, how about a 10% discount!  Again, if the office staff does not fully understand and believe in the company’s pricing the tendency is to keep the customer happy and therefore to drop the price.  After all its only $18.70!

If you set your rates based on what other companies are charging chances are the owner or manager has never had a discussion with the staff and/or technicians about why the company charges what it charges.  Why?  The pricing can’t be justified.

However, if the company has gone through the detailed process of setting rates based on their actual costs of doing business it is quite easy to have an open discussion of why you charge what you charge.

Knowing what to charge, based on the real costs of doing business, will help ensure profitability and provide the foundation for justifying the rates charged.  Next time little Johnny asks why you charge what you charge you will have numbers to back up the pricing.

If you have never gone through the process of helping your employees understand why you charge what you charge you might want to check out this month’s Website Special.  Our industry acclaimed streaming program called “Why Do We Need to Charge So Much?” will walk the listener through the details of what goes into setting proper hourly rates therefore installing confidence in your pricing.  The normal investment is $139 but this month it’s only $99.  Order today.  As always, it comes with a 100% money back guarantee.  If you don’t like it send it back for a full refund!