Start the Year with a Plan
by Josh Weiss, Lutz & Co.
Most companies go into a year filled with optimism and are eager to achieve their goals. Often times, those goals are loosely defined and while they give general direction to the company, they are hard to measure if they are not specific. This is also frequently the case with the budget for the year. Many companies spend hours plugging numbers into a budget, but base those numbers on last year plus a little bit to the revenue side and hold the expense side constant. It is that simple. Do those two things and there will be more money left at the end.
However, how hard have you really looked at the economic climate, evaluated your equipment and personnel or considered the amount and location of available work? Also, with the broad or loosely defined goals, have you really examined what it will take internally to achieve your goals? Budgets and goals need to be measured with specific performance metrics to ensure that you are on track and your business can efficiently perform. A budget that gets completed in January and is shoved into a drawer until December does not do much good. This happens as things get busy and it seems that all you can focus on is getting the next job done.
Taking the budgeting and goal setting to the next level requires persistent management and review. This should be on at least a monthly basis. Contractors are great at managing projects and completing projects according to schedules. However, it is critical to review that progress not only so you know how you are doing, but also when you need to make adjustments.
Scenario based budgeting is one way to improve the budgeting process. It considers the best, expected, and worst case scenarios. The best case scenario is when all of the work you could hope for comes in and for the most part have the right people at the right times to complete it efficiently. The expected case scenario is the best budget that increases profit because management has taken a hard look at the work available, ensured the equipment and personnel are correct, and the company performs the way management knows it can. The worst case scenario is a budget that is prepared for hiccups and road bumps along the way. It considers bad weather, personnel shortages and things of that nature. It does not mean that the worst case scenario projects lost profits because you should not be in business to lose money. However, it should force management to consider those things and have backup plans and adjustments ready to keep the year as close to expected as possible.
Regular review and specific measurement metrics along the way with help keep things progressing as expected or hopefully better than expected. Every business is different. Nobody knows your business better than you do so you have to decide what impacts the business most for success. It may be monitoring the current cash position regularly and forecasting cash needs for the coming 60-90 days. There may be certain performance ratios such as return on equity, return on assets, steady working capital ratio or debt to equity ratio management that you focus on and if you achieve those goals, the business will inherently run smoothly while generating profit. The people responsible for financial reporting or your external advisor should be able to help identify and set up a measurement tool for any of these metrics.
Attainment of goals and proper management of the budget are the jobs of everyone in the company. If you do not revisit the budget and meet with your superintendents, project managers, fieldworkers, finance team and top management, then you will have a hard time achieving the goals of the company. You will not know what went wrong until the end of the job, but you might also miss out on what went right. A lot of times, the successes on projects can be carried to the next one and efficiencies gained can be applied to the entire job from estimating to financial reporting. This is just as important as is learning from your mistakes.
Investing time to thoroughly plan and dig into the budget can get the company pointed in the right direction for the coming year. Regular measurement and review will keep it on course and prepared to adjust course as needed to push it to the best case scenario at the end of the year.