Not only are budgets a plan of action for a snow and ice business, they are also a tool for performance evaluation. At its most basic, a budget is a systematic method of allocating financial, physical, and human resources to achieve goals.
DEVELOPING A BUDGET
Many contractors begin with basic equipment, a line of credit and the best of intentions. Too often the operation’s finances don’t get the attention it deserves – especially as things start to slide downhill. Many business owners honestly believe things will “work out,” laboring under the assumption 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 business fundamentals. 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 professional should prepare for unexpected interruptions that may affect the operation’s finances, and 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, since “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, perhaps a month, quarter or 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 estimation. 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 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.
An important reasons for a budget is to make the snow removal operation’s financial situation more predictable. What’s more, it’s 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 “control.” With a master budget to follow, a snow removal contractor can carefully control expenditures during the time 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 professionals know when a budget is developed that there will be changes in just about every line item by the end of the period. Budgets, however, provide guidelines and prescribes some sort of limits.
A budget depicts what a snow removal contractor expects to spend (expenses) and earn (income) over a specific time. 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 useful for projecting the money 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 budget’s overall format is a record of planned income and planned expenses for a fixed period. A financial budget is based on how much income is coming in minus the costs, which equals net income and, hopefully, how much money goes in the bank. A sales or income budget 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 must 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 costs don’t materially change, at least as a percentage of income or sales. Wage dollars are very similar, overhead is the same and the compensation of owners is usually the same.
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 necessary to the survival of the business.
The cash budget is one of the primary tools used to plan for cash flow. It is often developed on a month-by-month or seasonal basis. A good cash budget allows a 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 must withdraw money from savings or even apply for a short-term loan to cover its needs.
Every snow contractor should review their operation’s budgets to determine if money is being spent wisely. Certain costs may have been overestimated, which frees up money to grow. Larger operations can afford to establish yearly budgets because they have more flexibility, but a small snow operation is more vulnerable to volatile markets or unexpected costs. Thus, contractors should review their budgets more frequently and make changes as necessary.