By Tom Grandy,
Founder
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.
