The importance of budgeting in business cannot be discussed enough. If you are not budgeting for your year, you are likely not running your business efficiently and ensuring that each project is being quoted properly to ensure you are recouping your costs and profit. This is a common way that people go out of business as they do not know how to effectively price projects to stay in business for the long term, cash flow runs out, and they close down.
This does not have to be the case with your business if you begin each year with an updated budget that outlines where you want to take your business. It is a great way to create a plan for your business and set goals as well so that you can begin saving for these goals with every completed project and to have confidence on the financial side of your business.
A budget is not a difficult thing to create and is most definitely the one thing that is going to set the stage for your season ahead. In this article, we get into why you need to create a budget and what exactly goes into it. You can also check out our Budget and Estimate Spreadsheet at the bottom of the article.
Importance of Budgeting in Business
Knowing why budgeting is important for business is the first step in realizing why you NEED to be creating a budget in your business. Besides being in more control of your business with a budget, you will find that there are numerous advantages to creating one. It will help inform decisions and decide how you want to grow your business. There is no longer a guessing game when you do not have a budget, but everything is now on paper and decisions will become much more clear and based on financials rather than guesses or intuition.
Benefits of Budgeting in Business
- Goals Setting
- Pricing
- Investing Decisions
- Net Profit
The yearly budget sets goals for your business and helps you achieve those goals in your business. It provides an action plan as to how you are going to achieve those goals. As you sit down and decide what pieces of equipment you want to purchase, what your financials look like the previous year, what changes you want to make this year, what employees you want to hire, and what employees will get raises or benefits, you can include these in a budget to ensure that when you create a quote for a project based on your budget that you are making back these costs so you can be rest assured that your business is operating for the long term.
The budget will give you confidence in your pricing, knowing that you are charging exactly what you are worth and not overcharging or undercharging your client. This means that if a client comes back and asks you to drop the pricing for whatever reason, you can confidently tell them that your price is your price. There is no negotiating. Otherwise the money they negotiate from you is coming out of your profit or your own salary.
The budget sets the stage for your estimating or quoting, as well as your job costing. This is an important step in evaluating your financials and deciding whether or not your actual numbers from the project match up to the estimated or quoted numbers to that project. This is a crucial step to do during long projects and especially at the end of each project. It will help you decide where things went wrong and where things went right in your estimating and the efficiency of your crew on the job site. It helps you make decisions on employees, equipment, and the direction of your business. And it all stems from creating your budget.
Budgeting allows you to invest in your business wisely and in the areas that require the investment in order to grow. Choosing where you want to hire a new employee to improve sales growth or on site efficiency is decided in the budgeting process. As is deciding what pieces of equipment you are going to purchase in the coming year. All of these costs need to be inputted into the budget. There is no such thing as saying that is the cost of doing business. Every cost that your business accrues should be in the budget so that you know you are making that money back.
The budget also helps you know that you are making a net profit at the end of every single year. This profit margin is included at the end of each quote and is included in the budget. This percentage is what you are aiming for at the end of each job, typically around 10%-15% as a target to aim for in construction. This is a net profit on top of the owner’s salary. Do not get confused with net profit and your own salary. Those are two very different things. However, many businesses operate with no net profit at the end of the year or very little if they are lucky and it is because they have not created a budget, among many other factors.
Creating a Business Budget
Budgeting for a small business in the construction industry for contractors that are estimating and quoting projects begins with separating and identifying the costs that come with operating the business. These are direct costs to a project and indirect costs associated with your business. Often times the direct costs are easy to include in projects and include things like labor and material costs, but the indirect costs are overlooked and are what kill small businesses.
When it comes to budgeting for your season, it begins by identifying how many hours you have available to you in one season so that you can create an hourly / daily / weekly / monthly / season target in terms of time you have available to make the money you need as a business. This is an easy calculation of deciding how many weeks you have in your season, how many working days in a week, and how many working hours in a day. Multiply these together to get the amount of working hours you have in a season. If you have more than one crew, then you can divide the Overhead Expenses by the number of crews you have and just include all of the tools and equipment your business owns into one category. That way your are making back all of the Overhead Expenses between those two crews.
This only works if those crews are fairly similar in the work that they do. If these two crews do different work for example one does installs and the other does maintenance, then there should be two separate budgets created for this business with the equipment and tools they use separated to ensure these two divisions of your business are making back their costs that they have.
When it comes to the remainder of your budgeting, this is what you need to identify:
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Overhead Cost in Construction
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Labor Costs in Construction
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Material Costs in Construction
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Profit Margin in Construction
Overhead budgeting begins with identifying the indirect costs in your business that are not associated to any one specific project. There are numerous examples of this from equipment costs, tools, and any expenses associated with those that will be used on job sites to less obvious examples such as rent you pay for your office space or yard, interest paid on assets, professional fees like lawyers and accountants, and marketing costs. These all get added up and budgeted accordingly. Simply put, Total Overhead Expenses / Hours per Season is how much you need to make per hour just to cover the indirect job costs.
When it comes to calculating Overhead Expenses, some are easier than others. For example, rent is an easy calculation because it is a set price every month for that year. Though other costs like marketing need to be budgeted for. Typically you can take a certain percentage of your forecasted revenue or profit to allocate towards marketing or you can look at what you spent last year and decide how much more you will need to market in order to hit your sales goal for the current year. For example, if you plan to increase sales by 15% you are likely going to have to increase marketing by that amount as well.
Equipment costs are calculated a little bit differently as well. Equipment needs to be replaced eventually, but you do not want to wait until it needs to be replaced to have to make up the money to purchase a new piece of equipment. This is why even though you own a truck, you should be charging for that truck on every project to have enough money saved to purchase a new one by the time that truck dies. To do this, estimate the cost of the truck you want to purchase, estimate the number of years you will get out of the truck, subtract the resale value after those years from the price you pay, and divide by the number of years usage you will get out of it. This is the cost per year for that truck which will be your overhead expense. This can be repeated for all equipment in your business.
Labor costs are a little bit more straight forward as your employees have a set rate at which they get paid. If they are hourly and you know how many hours a season that are worked, you can calculate how much you are going to be paying in labor for that season for each employee. You should factor in raises for that season, benefits, or bonuses into this as well. For salary employees, they are treated much like an Overhead Expense would be treated as they have a fixed cost for that season.
One hidden expense of having employees is the insurance, taxes, and even turnover and loss of efficiency during this time that costs a business money. This can be calculated as a percentage markup on that labor as a percentage. You can likely look back on past employees and how much more they actually cost against their actually hourly rate to convert that into a percentage. A minimum of 25% is a good starting point if you are unsure.
Additionally, you as an owner need to be factoring in your own salary into this picture. Otherwise you are discounting the work you do for the business. The business profits are not your salary. These are two different things and are too often lumped together. Pay yourself at the end of the year however you like, but factoring in a reasonable salary for the work that you do during a season is important in knowing your worth and charging what you are worth. Just think what it would cost you to hire somebody to step into your role in the business. Or, think about all of the roles that you take on and consider what each of those roles would cost you on a part time basis. You are likely a part time bookkeeper and at times an accountant, HR, CEO, equipment operator, foreman, and so on.
Though these are factored into every project, it is a good to get an idea of how much in material costs you will be charged for throughout a season by budgeting for it. This can be calculated by looking at last year’s material costs and adding a certain percentage on top of that to account for the growth that you are estimating for. This is a starting point to understanding how much money you are going to be spending in materials for that upcoming season. In addition to your material costs for an estimate, add on a margin to the material to account for waste and any possible warranty issues.
One great way of reducing this cost is to speak with your suppliers coming into a new season and asking them if they would consider providing you with a discount on supplies because of your previous year’s sales with them. This is a good negotiation tactic if you are spending a significant amount of money at one place and are loyal to them over a number of seasons. Alternatively if you have the storage space, you can purchase in bulk to save on costs.
This is the added amount on top of all of these costs that is the margin you are making in your business. This is not a markup. There is a major difference and can cost you money if you do not know the difference between the two. A markup is multiplying by the percentage. For example, $100 x 10% markup = $110 but that is not a 10% margin. That is a 9.09% margin ($10 / $110). That might not seem like a major difference, but when you are doing $1,000,000 in sales that gets to be a big number.
To get margin, you need to divide by the inverse percentage. So if you want a 10% margin, you would subtract 100% – 10% = 90% as the inverse. $100 / 90% = $111.11. With the profit margin being 10% because the profit $11.11 / $111.11 = 10%.
Profit margin that you should be aiming for in a construction business is 10% to 15% as a starting point. Especially if you have been struggling to make any in the past. If you want to learn more about this and knowing your numbers in general, you can read more articles that have been linked throughout this post and especially give this book a read.
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All of this will provide you with a company wide budget. Depending on how many divisions you have or how two crews may differ in your business, you may have a company wide budget and a budget for each of your divisions. The company wide one shows how much money your business needs to make in the season while each divisional budget separates that budget into the various crews.
This can be applied to your sales, as sales budgets can be then allocated to various sales people based on their experience and how much they should be bringing in to the business for that year. This is a great way to begin to set goals for your employees and have a bonus structure in place so that they have an incentive to reach those goals. The same thing can be applied to the crews doing the work where they have a timeline and a profit margin that they need to make on that project in order for them to receive a bonus for the project. It allows them to take responsibility for lost time or wasted materials, as the more they are able to be efficient with materials and time on a job site, the more money they will make. This is where job costing during and at the end of a project plays a major role. We will get more into bonus structures in a future article.
Landscape Construction Budgeting Software
If you are looking for a landscape business budget template, we have a couple of options for you to choose from. You can learn more about monthly paid software such as LMN for your business. Along with many other features that it offers, it provides you with a company budget that you fill in for your business and allows you to create estimates from that information. It also allows you to be able to job cost your projects.
We also have a few resources available to you so that you can learn more about how to budget and properly price projects. We have created the Budget and Estimate Spreadsheet that allows you to input your overhead expenses, labor costs, profit margin, and calculate a project using production rates. This spreadsheet comes with a one time fee and allows you to create your budget and base all of your estimates and quotes from that spreadsheet.
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Basic estimating template
Labor, material costs, overhead expenses, and profit
Requires you know how to calculate your numbers
BUDGET AND ESTIMATE SPREADSHEET
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Excel spreadsheet - 9 tabs
Advanced estimating template
Input your business numbers and automatically create a budget
Budget automatically calculates amount included in each estimate
Ensures you are calculating and knowing your numbers properly
Estimate, Cost of Sale, Material Catalogue, Labor Time, Production Rates, Labor Costs, Employees, Overhead Expenses, Business Operations, Job Costing
Grows and customizes to your business
BUDGET AND ESTIMATE SPREADSHEET
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BOOKKEEPING FOR CONTRACTORS SPREADSHEET
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Budget and Estimate Spreadsheet
Bookkeeping for Contractors Spreadsheet
Fully Customizable to Your Business' Needs
Job Overview Screen Shows Profitability on Each Job
Profit and Loss Statement is Completely Automated
Expense Tracking to Know Where Your Money is Going
Income Tracking to Understand What Services are Making the Most Money
Organize Your Bank Accounts