5 Benefits of Creating an Operating Budget for Your Remodeling Business
authors Shawn McCadden | December 2, 2020
It’s that time of year again. It’s time to decide your business plan and profit goals for next year. That’s what qualified remodelers do—they plan for profit.
To make profit happen next year, now is the time to work on and commit to an operating budget for the coming year. Along with gathering all your anticipated costs and expenses, add in your profit goal and then determine the markup your business will need to use to make your profit goal happen.
Creating and utilizing an operating budget can be a business- and life-changing experience. If you have never done a budget, trust me, you just don’t know what you’re missing. There are five clear benefits of conducting a thorough budgeting process and, perhaps, many others.
Budgeting for Profit
Most contractors who are new to budgeting create a budget based on volume, or the amount of work they plan to sell and install during the budget period, typically one year. Over the years, I’ve observed that contractors who assemble their budgets this way tend to do so only based on how many dollars of work they plan to complete. Their goal oftentimes is to simply sell and produce more work than the previous year. They assume that because they will do more work, there will be more profit. It is one way of budgeting.
I suggest you budget based on your profit goal. Budgeting for profit prioritizes profits first and, typically, assumes selling and completing the least amount of work needed to achieve the profit goal. I find most contractors who budget for volume simply prioritize how much more work they plan to complete, hoping the profit will be there when all is said and done. If you don’t know how to budget for profit and figure out the markup you need to use to achieve your goals, go back and read a few of my previous articles on how margin and markup work at QualifiedRemodeler.com.
Benefit No. 1: Enables Better Investments
When you neglect to do a budget and or do your budget based on volume alone, you are probably not proactively considering how much money you can or are willing to spend on business investments during the year. This can be one of the reasons there is no money, or profit, left at the end of the year. Basically, if an investment was not part of your budget, the money you spent (for example, on a new truck or a new table saw) ends up coming out of your planned profits. If, however, you anticipate investments and add them into your budget, you can decide how much you can afford to spend on investments. You should know this amount before you consider a volume requirement and/or whether your pricing exceeds what the marketplace will pay for what you offer. You probably can’t buy everything, so budgeting helps you prioritize how to best use the dollar amount you can afford without compromising the planned profits.
Benefit No. 2: Knowing Where the Money Goes
A real budget can be eye-opening. A good way to plan for your specific expenses this year is to review what you expensed last year. As you review historical data and determine your anticipated job costs and overhead expenses for the coming year, you will quickly become more aware of your most common expenses. This will not only help you decide what to buy in the new year, but it will also help you determine where to cut back or negotiate to reduce costs and expenses. Then, if you have discipline and stick to your budget, you can just say no to the things you didn’t budget for, and you will protect your profits.
Benefit No. 3: As a Planned Expense, Profit Becomes a Reality
With an operating budget, you are much more likely to create profit. By budgeting for profit instead of volume, you essentially make profit a planned expense that needs to be paid out to the business owner(s), just like any other cost or expense that needs to be paid to your vendors. In fact, to protect profit and make sure it’s not spent on things that you did not budget for, planned profit should be paid out regularly (perhaps monthly). It’s amazing how much easier it is to earn profit when you plan for it and make paying it out a required expense and activity. After all, if you were a business manager at my business, rather than an owner, and there was no profit, you would quickly be replaced.
Benefit No. 4: Knowing What You Won’t Buy
By creating an operating budget, you are really deciding what your business will not buy. This knowledge gives you discipline during the year, helping you set limits, so you only buy what you planned to buy. Then, when offered or tempted to buy something not already included in your budget, your budget is the reason not to do it. However, if something comes up that would definitely benefit your business, you do have a choice. You can either not spend the money, or you can change your priorities and eliminate something else already in your budget.
Benefit No. 5: Confidence in Pricing
The last—and most valuable—benefit of an operating budget for your business is the confidence you have in your pricing when you are in front of prospects. Knowing the markup you need to use on what volume of installed work becomes the plan for success and locks in the amount of profit you seek and deserve. The confidence makes it so easy to say no when a prospect wants to negotiate. The confidence you project can make your pricing much more believable and acceptable to your prospects. QR
Shawn McCadden is a speaker, business trainer, columnist and award-winning remodeler with more than 35 years of experience. He can be reached at shawnmccadden.com.