If you want to have accurate pricing and adequate cash flow throughout the upcoming year, building an effective budget is critical.
Rather than considering it an optional practice or not putting much consideration into the budgeting process, landscape companies need to approach this process with intentionality.
“I would advise landscapers to really understand the purposes of the budgeting process before they start,” says Andrew Trower, CPA and founder of Andrew Trower & Associates, P.S.C. “The ultimate goal of budgeting is to determine your pricing markups for each revenue class and cost of goods sold type (i.e., labor, materials, subs). Secondary goals include cash flow planning and benchmark/KPI planning.”
Trower stresses that without a budget, you cannot effectively price your services.
Building Your Budget
Trower says effective budgets start from the bottom up. If you haven’t been budgeting in the past, you first need to determine what your net profit requirements are. These are determined based on your balance sheet.
“Perhaps the biggest mistake is not first asking the question ‘How much net profit do we need to make?’” Trower says. “Sometimes landscapers will show me a sophisticated budget that demonstrates healthy profitability, but the landscaper hasn’t considered whether this level of profit is enough to cover their balance sheet obligations. Another big mistake is not budgeting overheads on a zero-based basis.”
Trower strongly recommends budgeting all overheads on a zero-based basis, instead of using the previous year’s numbers. He says this is because overhead is considered ‘waste’ and the customer is not paying for your overhead.
“We should be on a constant quest to reduce overheads to the greatest extent practicable,” Trower says. “Using the last few years’ numbers for revenue or COGS/gross margin is appropriate.”
After considering net profit requirements and overhead structure on a zero-based basis, then you should analyze your margin by backlog of work and calculate your sales goals by department.
Trower says because your budget is a forecast of your P&L, you are essentially establishing benchmarks for metrics such as gross margin percentage by department, contribution margin percentage, EBITDA and operating income.
He adds that landscape company owners shouldn’t overlook macroeconomic factors that might impact their sales efforts, the cost of inputs and the labor market when budgeting.
“The ITR Economics quarterly report that is available for free for NALP members is a wonderful resource that can be utilized to better forecast these trends,” Trower says.
If your company is looking to grow, your budget needs to show that you will earn enough net profits to cover your debt service and other balance sheet obligations.
“If you realistically expect to earn profits that exceed your balance sheet requirements, you will maintain healthy cash flow,” he says.
Sticking to Your Budget
Don’t feel like budgeting is a process you have to do alone as the owner. Trower says ideally, you should involve all parties that have significant ownership over the budget process.
“For instance, general managers will generally be involved with the entire budgeting process and will have visibility into the entire P&L, whereas account managers might only be involved with items on the P&L above the gross margin line,” Trower says.
This not only helps with the overall accuracy of your budget but improve accountability as the year goes on.
“Solicit help within your organization by divvying out certain overhead accounts to be watched during the year,” Trower says. “By decentralizing some of this responsibility, you can obtain help in monitoring certain expense accounts while empowering managers to take ownership.”
