One of the most powerful tools you can use to grow your business is a budget. But the truth is a budget alone gets you nowhere. If you create a budget it, print it out and put it in a desk drawer it doesn’t do you any good!
However, smart contractor’s that create and compare to actual results on the path to make the profit their after can be huge for their business. A good budget is built with your profit target in mind. It becomes the roadmap to hit your profit target. As the year progresses you can see where you’re off track and adjust to get back on track.
It’s just like a map. If you make a wrong turn you look at your map and figure out what you have to do to get back on track.
One of the first things that happens by default when you start managing your business with a budget is that you put more focus on the numbers. I’m a big believer in where you put your focus is where you improve. The simple fact that you have a budget and are comparing it to your actual results will put a lot of focus on the numbers and most importantly profitability.
Its just like anything else in life. If you want to get in shape you start weighing in, recording your weight, tracking what you eat, etc. Your business budget is no different. What you focus on is what you improve.
Comparing Actuals To Budgeted Numbers
Now once you have a budget in place the key to maximizing results from it is comparing it to your actual results. This is where a lot of big breakthroughs will happen. So often when contractors first do this exercise they’re blown away by some of the things they’re spending money on.
They start saying things like “ wow, how the heck that we spent so much money on fuel this month?” Or “Why are software expenses so high?”
All of a sudden these things start to pop out and you find unnecessary expenses and things you can cut to make more profit. Doing this you slowly start trimming away overhead expenses that are unnecessary and eating into your bottom line.
Percentages
Ahh, percentages. When I started adding percentages to my P&L it changed everything. It’s one thing to look at the numbers on a P&L and it’s another thing to look at percentages. For some reason percentages seem to point out problems very quickly.
When looking at percentages it’s great to compare your actual’s to your budget and even your last year percentages. To illustrate let’s look at an example:
Last Years P&L showed the following:
Revenue: $4,500,000
Materials: 1,085,000 (24%)
This Years Budget was
Revenue: $6,000,000
Materials: 1,440,000 (24%)
This Years YTD P&L Reads
Revenue: $2,700,000
Material: $756,000 (28%)
At a quick glance the numbers don’t give me much to work with but the percentage sticks out. In Last Years P&L report materials were 24% of sales which was in line with my budget. However, this year’s YTD number is 28%. In this example if the revenue target of $6,000,000 was achieved Material would be: $1,680,000. That is a difference of $240,000 to the bottom line!
By looking at these percentages I can now adjust. In this example it looks like the cost of materials has seriously increased or my team isn’t being as efficient with material as they were previously. With this information now I have the ability to figure out what is causing it and correct it before the year ends and I lose the $240,000 to the bottom line.
That is the power of having and using a budget in your business. With this information you can quickly scan down your P&L and find outliers that are much higher or lower than you expected them to be. Then you can start drilling into those numbers and figuring you out what is taking your away from your profit target.
All of the students in our contractor program use their dashboard spreadsheet to track their P&L vs actual results. It such a powerful tool for earning more profit in your business. If you’re not using a budget I highly recommend you start. It can be the tool that takes your business to the next level.
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