Hard work alone does not guarantee financial success. A business plan and budget are essential for every snow removal and ice management business and can help a contractor better understand the finances of their operation, ensuring a more profitable future. Successful snow removal contractors develop budgets in order to monitor progress toward their goals, help control spending, and predict cash flow and profit. In other words, budgets are a contractor’s plan of action for his or her business.
Not only are budgets a plan of action for the snow and ice removal business, they are also a tool for performance evaluation at the end of a specific time period. At its most basic, a budget is a systematic method of allocating financial, physical and human resources in order to achieve strategic goals.
DEVELOPING A BUDGET
Many contractors begin in business with basic equipment, a line of credit and the best of intentions. Too often, however, the operation’s finances don’t get the attention it deserves — especially as things start to slide downhill. Far too many business owners honestly believe things will “work out,” laboring under the assumption that the road to success is paved by simply working harder.
Unfortunately, working harder is not always the solution if a snow removal contractor hasn’t kept his or her eye on the fundamentals of business success. As in many things, timing is everything. Rent, salaries, supplies and other bills all must be paid on time or risk losing both access to credit and, maybe even the operation. When overdue bills are combined with customers who refuse to pay or delay in making payments, it is all-too-easy to be caught in a financial squeeze.
Planning and building a successful business should start with the preparation of a business plan, budget and the implementation of appropriate internal controls. Every snow removal professional should also be prepared for unexpected interruptions that may affect the operation’s finances, and, in particular, have appropriate insurance in place.
A budget should be an important part of any financial plan and should include all expenses that the contractor knows of and/or can anticipate, and when they must be paid. An amount for unexpected expenses should always be included, because “Murphy’s Law” dictates that costs will always be greater than expected — particularly as the volume of work increases. Build in marketing time and expenses. Most of all, build in a “draw.” After all, if the snow removal operation’s owner doesn’t look after him- or herself, no one else will. Comparing total expenses to anticipated revenue, using a historical basis to forecast income or even an educated estimate, is usually sufficient for a small, seasonal snow removal operation.
ESTABLISHING A BUDGET
A contractor first develops a master or static budget with the numbers based on the planned inputs (income or revenue) and outputs (expenses) for the operation. Think of this in very simple terms. The contractor is looking at what the operation will take in from revenue and what it will pay out in expenses. The budget is done for a specific period of time, perhaps a month, a quarter or a year.
For any successful snow removal operation, formulating a monthly budget that coordinates and estimates expenditures for the entire season is essential to the bottom line. Unfortunately, this is often ignored or done improperly. A common oversight among small business owners is not being realistic when planning a budget.
Some tend to overestimate income and underestimate expenses. Many contractors don’t have a good handle on their books. For this reason, it is a good idea to have a third-party review estimations. Every snow removal and ice management operation can benefit from experts who have the knowledge, resources and tools to create a realistic budget; a budget that draws from industry standards for income and expenses.
While having a budget in place is part of having a path to financial success, it is important to remember that any budget is only a projected guess. Snow removal professionals should accept missed projections as a learning tool. Living within a budget can be informative and knowing how much cash should be kept in reserve and timing expenses for paying vendors will take some time.
The bottom line is a budget doesn’t have to be difficult, but it is vital to business success and, often, survival. Eventually, there will be a time to take on a new employee or expand the operation, and because of the budgeting process, the contractor will be prepared.
One of the most important reason for a budget is to make the snow removal operation’s financial situation more predictable. What’s more, it is a good practice to review the budget once a week, a practice that should take no more than 15 minutes to compare actual activities to what has been budgeted.
Many businesses use budgets for the purpose of “control.” With a master budget to follow, a snow removal contractor can carefully control expenditures during the time period of the budget by comparing them to the master budget. Thus, while budgets help prevent overspending, they also create a benchmark for evaluating the business.
Obviously, budgets cannot always remain static or stay the same. There are times when expenditures must deviate from the budgeted amount and revenues will change from the forecasted amount. Snow removal professionals know when a budget is developed that there will be changes in just about every line item by the end of the time period. Budgets, however, provide guidelines for the operation of the snow removal business and prescribe some sort of limits.
A budget depicts what a snow removal contractor expects to spend (expenses) and earn (income) over a specific time period. Amounts are categorized according to the type of business activities, or accounts (for example, telephone costs, service performed, etc.). Budgets are useful for planning an operation’s finances and then tracking it to see if it is operating according to plan.
Budgets are also useful for projecting how much money will be needed for a major initiative such as buying new equipment, a facility or hiring a new employee. There are yearly (operating) budgets, project budgets, cash budgets, etc.
The overall format of a budget is a record of planned income and planned expenses for a fixed period of time. A financial budget is based on how much income is going to be generated minus the costs, which equals net income and, hopefully, how much money goes in the bank. A sales or income budget, on the other hand, is a goal — something to shoot for. In other words, a sales or income budget is what the contractor hopes the operation will do while the financial budget is what has to be done.
A sales or income budget is created by looking at individual customers and realistically estimating the income from each during the next period. With the financial budget, keep in mind that costs don’t materially change, at least as a percentage of income or sales. Wage dollars are very similar, overhead is more or less the same and the compensation of owners is usually the same, with additional withdrawals made from time to time.
Within the broad category of budgeting, the owner of the small snow removal operation or business may also want to do some specialized budgeting for “cash flow.” In fact, cash budgeting is one type of budget that is practically necessary to the survival of the business.
The cash budget is one of the primary tools used in order to plan for cash flow. It is often developed on a month-by-month or seasonal basis. A good cash budget allows a snow removal contractor to see short-term financial needs and opportunities for the operation. One month, the operation may have extra cash and may be able to save some money or take advantage of a bargain in the marketplace. Another month, the operation may have a shortfall and have to withdraw some money from savings or even apply for a short-term loan to cover its needs.
As mentioned, every snow removal contractor should review their operation’s budgets to determine if money is being spent as wisely as possible. Certain costs may have been overestimated, which can free up money to grow the business. Larger operations can afford to establish yearly budgets because they have more financial flexibility. But a small snow removal operation or businesses is more vulnerable to volatile markets or unexpected costs. Thus, contractors and other small business owners should review their budgets more frequently and make changes they feel are necessary.
Often the day-to-day pressures of keeping up with work make it difficult to find the time necessary to properly deal with business-related financial issues. However, regardless of whether the snow removal or ice management business is just starting out, or has been in business for several years, taking the time to create a business plan and budget for the operation is essential. It will help in better understanding the operation’s finances and build for a more profitable future.