target="_blank" rel="nofollow" href="#fb3_img_img_82fe6e05-506e-54cc-887b-68443c60c669.jpg" alt=""/> Set a realistic and thorough budget for office supplies and equipment.
Financial Techniques for Profitability
Benjamin Franklin once said:
Beware of small expenses; a small leak will sink a great ship.
While there are numerous reasons why businesses fail, money woes and financing issues rank near the top, especially for companies engaged in contracting. Many contractors fail to correctly recognize their true cost of doing business and thus fail to properly price their services accordingly. It is very interesting to know that in the same geographical area of the country, competitive bids for the same work from several contractors can differ by as much as 30 percent. Does this mean that some contractors deliberately overcharge their clients or that others are giving the work away? Absolutely not. There are typically legitimate reasons for a wide variance among bids for the same work. Contractor A, for example, may have a larger, more stable, and more experienced workforce who demand higher wages, while contractor B may work out of his home, have few employees, and thus have very low expenses. However, contractor C may not truly understand and account for all of his expenses and therefore actually undercharge clients.
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Most software companies offer product upgrades nearly every year. Often, these upgrades offer minor changes to the basic programming. While it is important to keep up to date with the latest software enhancements, money can be saved by upgrading your software every other time it is offered. Study the new features offered by an upgrade, and decide if you can postpone them by a year or so. Caution: If your software becomes obsolete because you skipped too many upgrades, it’s probable that the software company will cease providing technical support for your older software.
Contractors who have a reputation for excellent work that is completed on time and within budget are usually able to charge more than the contractor who is late, installs the incorrect product, and adds “extra charges” when the project is completed. This chapter covers the strategies for establishing a budget and how to use it to calculate a fair and profitable price for services. It establishes the framework for Chapter 7, which explains how to use the budget to determine what level of annual revenues is needed to make a profit.
Creating a budget for a new contracting business, or any business, can be a difficult because of the lack of a spending history. Established businesses have years of spending records to help them estimate future spending. Without a track record, a new business must make educated projections based on the best available information and then actively monitor and update its budget as actual spending information is known.
Assistance may be available from a number of sources, including former employers, industry associations, suppliers, and even some competitors. Asking a large competitor for help might seem like a daunting task, but surprisingly, many large, established companies are eager to help a startup contracting business. They take it as a compliment that someone respects them enough to ask for advice. They have a vested interest in seeing that new businesses in their industry present themselves in a positive light. And, they are so well established that they have few worries about competition from a startup.
The first thing you need to do when considering your budget is make sure you know what you absolutely need in order to make the business work. Often, we have items available that we do not need to buy if we are starting a small one- or two-person operation. For example, in the early stages, your current computer may do the trick, as long as it supports financial and accounting software. In all fairness, budgets can even be made on Microsoft Excel spreadsheets. In fact, some business owners prefer making a simple budget without the complexities found in some software programs. Remember, software is a tool to help you with a budget and with financial matters. You, however, are in charge of the basics, which means knowing how much you are spending and where you are making a profit, or not.
New business owners can save money and keep budget items to a minimum by being creative. Many business owners have used furniture and crates saved in their basements or in the garage as a starting point for their office furnishings and storage.
By using accounting software, a contractor can track expenses, both by category and by supplier; organize client information and accounts receivable; manage employee wages, deductions, and benefits; and accurately file government reports and payments. Four of the highest rated accounting programs for small business are FreshBooks (www.freshbooks.com), Sage One (at www.sageone.com), AccountEdge Pro (at http://accountedge.com) and QuickBooks Pro by Intuit, Inc. (at http://quickbooks.intuit.com/). There are versions available for both the PC and Macintosh.
There is another invaluable tool that becomes the heart of the budget-making process—the spreadsheet.
As you will learn later in this chapter, the spreadsheet is helpful with financial management because it can be used to understand the effects of increased or decreased spending. For example, the spreadsheet can be used to answer a question like, “If I hire a salesperson and increase total wages by $25,000, how much will the cost of employee benefits increase and how much more revenue will I need to generate this year to pay for these increased costs? OK, now what happens if the person I hire wants to be paid $35,000?” All the budget maker has to do is enter either amount of the new wage, and the questions will be automatically answered. It’s a great tool for all sorts of “what-if” questions.