Do the Math, Part 2: Budgeting for Profitability

This is the second in an updated multi-part series about the importance of business calculations and reporting in the landscape and snow industries. To read the first post in the series, visit "Do the Math, Part 1: Reporting for Accountability."

To make money, you must manage your resources effectively. To manage your resources effectively, you need to employ a cascading reporting structure that starts at the top of your company(big picture) and drills down to the bottom (little picture). This reporting structure maximizes visibility and accountability in your business.

Big Picture vs. Little Picture Big picture: Rolling Budget

Business KPIs (Key Productivity Indicators) Functional Reports (Sales, Client, Production, Finances) Little picture: Process Dashboards

There is a right way to do this. Let’s start with the big picture—the budget—in this post and move down the cascade in future discussions.

The budget is a working management tool that operates at the biggest picture level. Once you create it, you need to use the budget by “rolling” it monthly. This reporting process allows you to identify variances (problems) and identify/reforecast your plan (solutions) to ensure you make the budget or m ake the necessary adjustments to secure your net profit.

Building the budget Build your budget from the bottom up: Start with net profit, add overhead expenses, determine cost of goods (labor, materials, and subcontracts) and labor costs. Then, calculate the revenue required to get you the gross profit dollars you need. You always keep this original as your standard of comparison. It is your goal. See an example of a simple condensed budget below:

Rolling the budget Rolling the budget simply means “dropping in” actual results monthly where the original budget numbers were. Then, conduct a detailed review of the variances from the original budget. You do this to identify problems and define solutions—to make sure you make the budget. See an example of the rolling budget below:

Variability vs. control There are typically three key areas that vary in any budget year. These are overhead expenses, labor and revenue. There are usually two numbers that really matter — those you can control in the short t erm: labor and revenue. I am not suggesting that overhead is not important, only that it is harder to control in the short term. You don’t budget “fat” into the overhead, and most of those expenses (rent, equipment, insurance, etc.) are fixed. This leaves only staffing cuts to reduce overhead. Ouch!

Identifying problems in the budget When you look at this rolling budget above, is there a problem? There certainly seems to be...

Revenues are running behind—that seems pretty important. So, here are the questions: Is it possible to catch up and close the revenue gap? If so, how?

Labor may not be over budget dollar-wise, but it is over budget as a percentage of revenue. The average wage rate is higher than planned. Is it possible to bring this cost back into line? If so, how?

The answer to these questions requires a system of cascading reports that allows readers to “drill down” into the variances—because from the rolling budget view alone, it is hard to pinpoint the causes. Cascading, expandable reports provide an understanding of the source of the problem, allowing for the development of a solution. What are these reports? The first level is called Business Key Productivity Indicators (KPIs), which we'll discuss in the next blog post.

Learn how certain KPIs can help you understand variances in your budget in the next post: "Do the Math, Part 3: Landscape Business Management KPIs."

In case you missed the first part of our Do the Math series, learn more about how reporting can drive accountability in your landscape business in our first post, "Do the Math, Part 1: Reporting for Accountability."

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