Establishing a budget for your business is a key ingredient to success. A contracting company may have the most skilled employees, the newest equipment, a top-notch sales team, and a creative advertising and marketing program; but failure is destined if the company does not have a comprehensive financial plan. The budget is the first step in creating this plan because it:
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When establishing a budget, weigh the costs and benefits of your spending decisions. For example, let’s say you plan to buy a piece of equipment for $10,000. However, the dealer has another model that is larger, faster, and more efficient at a cost of $14,000. Ask yourself if the additional cost of $4,000 will generate a net benefit to the company of at least that much. If it does, buy the more expensive model. This concept of marginalism shows that additional (marginal) costs and additional (marginal) benefits are pertinent to financial decision making.
Although the budget can be considered a road map to financial success, the road is littered with potholes and detours. Never consider your budget to be a fixed document that you prepare once and never change. It is a dynamic document that will undergo revisions and modifications during the year. Most often, these changes will be minor, with little effect on your overall financial plan.
Many new business owners begin their budget process by trying to determine what their total revenues will be for the year. They think that by considering revenues first, they’ll be in a position to know how much money they can spend during the course of the year. What they often overlook is consideration of how they will achieve the projected revenues. Merely knowing or guessing annual revenues does not provide a strategy for pricing your services nor does it instill any kind of spending discipline. Projected revenue is something you cannot necessarily control, since you do not know how many jobs you will get and how much of that revenue may not occur based on factors that are out of your control, ranging from a recession to weather conditions to a major competitor opening in your area of business.
Conversely, spending is something that you can control. You can decide how much you’d like to spend while knowing your minimum needs. Sure you might like a large office space, but you might be better off taking a more realistic approach and budgeting for a moderate-size office.
The budget process begins and ends with a detailed and organized system that projects annual spending in various categories and then uses these spending amounts to determine the amount of revenue needed to pay for the spending, leaving enough at the end of the year for a profit.
The sample budget used in this chapter will be divided into three distinct categories of expenses, each with its own unique characteristics. The first category contains direct job costs, or just direct costs, expenses specifically related to projects completed by the company. It includes materials, labor, and subcontractors, if any; it also includes the rental of any equipment that might be required to complete the projects.
One of the most difficult concepts for new contractor-owners to grasp is the true cost of labor. An employee earning $10 per hour actually costs his or her employer much more than that. In addition to the hourly wage, the employer incurs costs in the following categories:
When you combine these costs, which we call the “labor burden,” you’ll get a truer picture of your actual cost of doing business. Most businesses have different classes of employees, such as the field laborers who install the projects, the sales force, and the office staff. Each category will have a slightly different calculation for labor burden. For illustration purposes, imagine a contracting company that works 52 weeks per year, has six field laborers, one office worker, and an owner who handles sales, design, and general administration of the business. The charts that follow reflect this imaginary company, K&K Contractors LLC. However, the concepts work well with companies of all sizes and configurations.
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Hiring subcontractors is a very popular manner of bringing in staff for projects because it saves money in many ways. Not having to pay benefits allows you to pay at a higher hourly rate and still save money. You are also not carrying a higher payroll during slower times of year. Plus you can bring in experts in areas you may not need on an ongoing basis. Look for trustworthy and competent contract employees.
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