Episode B.018 Your First Real Budget

Author's Notes
We are introducing a new format to our Show Notes and Broadcasts. We received feedback our podcasts are too long (average 26 minutes). The shows have been restructured into 13 minute segments - each with a specific objective. Segment 1: What the show will cover and why it is important. Segment 2: What do you need to know to take action. Segment 3: How do you apply it and the tools available, and Segment 4: Tips and Insights from our experience. Thanx for the Feedback and keep it coming.

What are Today's Topics & Why is it Important?​


Knowledge to Take Action
​The last article covered Accounting & Invoicing with a reference to ABC or Activity Based Costing. Putting together an effective budget doesn’t require ABC but sure helps. We start this discussion with the types of budgets available to a landscape business owner and then focus on where to start. One last thought, a budget has two demands to be effective: accuracy and forecasting.

Types of Budgeting Systems.

• Traditional: created for a period and uses the previous year as a starting point.
• Zero-based: every year starts from scratch. Last year provides insights but instead you start at zero.
• Flexible: ongoing adjustments based on sales forecasts and the impact on production (service delivery) projections.
• Rolling: it takes a year long view and at the end of every period (a month or quarter) it is dropped and a new month or quarter is added to maintain a 12 month budget.

​​
This should have you asking “which is the best for my business?” My recommendation is to start in this order.

1. Traditional Budget. If this is your first attempt to create a budget, go simple. Take last year numbers and adjust as needed. Example - if the cost of materials or labor has increased make those adjustments. The key is to build an accurate forecast for demands on cash and credit so you have a historical base for next year.
2. Zero-based Budget. This is the budgeting system the government uses (don’t let that discourage you). Its power is not accepting that last year was right. In this system every year you determine what is needed.
3. Flexible Budget. This moves the budget from being fixed to include the dynamics of running the business. This approach increases the accuracy of revenue and spending forecasts.
4. Rolling Budget. This is when you have all the pieces right. Tied to a Flexible Budget, it takes your forecasting from just the next month or quarter to 12 months.

​​Start with either the Traditional or Zero-based System, then as your competence and confidence increases move to Flexible and Rolling Budgets. Now the question moves from the system to its use. This is a quick overview, and we choose the choices most appropriate for small landscape companies. 

Your Options: Master Budget, Operating Budget, Financial Budget, Cash Budget, Labor Budget, Capital Budget, and Strategic Budget. Our recommendation is to start with the operational budget and then add the cash budget.

Operating Budget
This is nothing more than taking the statements or reports - balance sheet and profit-and-loss statement and using it to project up coming months. This is simple, on a spreadsheet create the same categories as the balance sheet by the month. Place these in the rows (on the left side). Then across the top create 3 columns for each month: JUNE2019A (this month last year), JUN2020F (your estimated numbers for the month), and JUN2020A (what actually happened). Now you are ready to track this month last year against this year, and what happened.

The payoff - you can ask why it differs from the forecast and make adjustments to the next month.

Cash Budget
Just like the Operating Budget, this budget uses one of the big 3 financial statements - Monthly Cash Flow Statement. Create a new spreadsheet on the same document and do the same thing. Using the items on the Cash Flow Statement, place it in the rows on the left. Then along the top create three columns for each month - this month last year, this months forecast, and actual use of cash for the month.

The payoff - you can track use and ask the why question when something looks off track.

Hopefully we have made this sound as simple as it is. The challenge is the time commitment to keeps this up to date weekly. Once you do it, the power of budgeting is clear. The result - you can control how much you spend on what and when

What You Need to Do

1. Know your BEP - Break Even Point
2. Maintain Cash Reserves
3. Use a Cash Flow Worksheet
4. Sell Underutilized Assets
5. Manage the Accounts Receivable Cycle
6. Manage the Accounts Payable Cycle
7. Cut Costs - the 10% Challenge
8. Get a Line of Credit
9. Lease Rather Than Buy
10. Use Business Credit Cards - not Yours
11. Increase Sales with Innovative Incentives
12. Require Partial Payment for Large and/or Long Duration Projects
13. Assign Time/Person to Monitor Cash Flow
14. Spend on Plan - A Budget

Next Show: Upgrading Your Offer​