1. BUDGETING FOR BUILT-IN PROFITABLILTY Lee J. Rosenberg, P.E. Quality Service Contractors Power Meeting XXX Daytona Beach Florida March 21, 2009 Lee J. Rosenberg, P.E. Quality Service Contractors Power Meeting XXX Daytona Beach Florida March 21, 2009

2. The Budgeting Process It Is Your Roadmap To The Future It Is Your Roadmap To The Future Begin The Process No Later Than November 1 st Each Year If On A Begin The Process No Later Than November 1 st Each Year If On A Calendar Year Calendar Year Remember Remember BUDGET FOR A PROFIT! BUDGET FOR A PROFIT! It Is Your Roadmap To The Future It Is Your Roadmap To The Future Begin The Process No Later Than November 1 st Each Year If On A Begin The Process No Later Than November 1 st Each Year If On A Calendar Year Calendar Year Remember Remember BUDGET FOR A PROFIT! BUDGET FOR A PROFIT!

3. Reasons For Lack Of Profitability They have no Business Plan They have no Business Plan They lack the ability to execute a plan if they had one They lack the ability to execute a plan if they had one They take no action They take no action They have low expectations They have low expectations They have no direction They have no direction They lack the necessary business skills They lack the necessary business skills Remember…. Remember…. “AN IDEA WITHOUT ACTION IS ONLY A DREAM” They have no Business Plan They have no Business Plan They lack the ability to execute a plan if they had one They lack the ability to execute a plan if they had one They take no action They take no action They have low expectations They have low expectations They have no direction They have no direction They lack the necessary business skills They lack the necessary business skills Remember…. Remember…. “AN IDEA WITHOUT ACTION IS ONLY A DREAM”

4. The Budgeting Process Project End-Of-Year Numbers Project End-Of-Year Numbers Set Revenue Objectives By Department Set Revenue Objectives By Department Set Gross Profit Objectives By Department Set Gross Profit Objectives By Department Set Net Profit Objective Set Net Profit Objective Project Direct Labor Needs Project Direct Labor Needs Project All Other Personnel Needs Project All Other Personnel Needs Project Direct Labor Burden Project Direct Labor Burden Project All Cost Of Sales Lines As A % Of Sales Project All Cost Of Sales Lines As A % Of Sales Project Overhead Costs Project Overhead Costs Get The Team Involved Get The Team Involved “IT’S NOT HOW MUCH YOU SELL, IT’S HOW MUCH YOU MAKE” Project End-Of-Year Numbers Project End-Of-Year Numbers Set Revenue Objectives By Department Set Revenue Objectives By Department Set Gross Profit Objectives By Department Set Gross Profit Objectives By Department Set Net Profit Objective Set Net Profit Objective Project Direct Labor Needs Project Direct Labor Needs Project All Other Personnel Needs Project All Other Personnel Needs Project Direct Labor Burden Project Direct Labor Burden Project All Cost Of Sales Lines As A % Of Sales Project All Cost Of Sales Lines As A % Of Sales Project Overhead Costs Project Overhead Costs Get The Team Involved Get The Team Involved “IT’S NOT HOW MUCH YOU SELL, IT’S HOW MUCH YOU MAKE”

5. Set Revenue Objectives By Department What Are Departments? What Are Departments? Project Current Year Final Revenue By Department Project Current Year Final Revenue By Department Calculate Estimated Percentage of Growth from Prior Year by Department Calculate Estimated Percentage of Growth from Prior Year by Department Set Growth Targets for Each Department Set Growth Targets for Each Department

6. Set Gross Profit Objectives By Department A Reminder: Gross Profit = Revenue Minus Cost Of Sales A Reminder: Gross Profit = Revenue Minus Cost Of Sales Project Current Year Final Gross Profit Percentages by Department Project Current Year Final Gross Profit Percentages by DepartmentOR Just Set Reasonable Expectations Just Set Reasonable Expectations Establish Gross Profit (GP) % targets for the coming year Establish Gross Profit (GP) % targets for the coming year Now, take projected Revenue and Multiply by Targeted GP% by Department Now, take projected Revenue and Multiply by Targeted GP% by Department Finally, determine the sum of the individual department Gross Profit $ and set that number aside for now. Finally, determine the sum of the individual department Gross Profit $ and set that number aside for now.

7. Set Net Profit Objectives What Is A Reasonable Net Profit? What’s Wrong With Getting A Great Return On Your Investment? What’s Wrong With Getting A Great Return On Your Investment? What About Risk versus Reward? What About Risk versus Reward? Remember: Net Profit Is Pre-Tax And Does Include The Owner’s Salary & Benefits Remember: Net Profit Is Pre-Tax And Does Include The Owner’s Salary & Benefits Departmentalized Net Profit versus Overall Company Net Profit Departmentalized Net Profit versus Overall Company Net Profit

8. Project Project Direct Labor Needs Make Note Of Each Current Position Make Note Of Each Current Position Note Additional Positions To Be Filled And When Note Additional Positions To Be Filled And When Set All Base Wages And Allow For Increases Set All Base Wages And Allow For Increases If Not Hourly, Calculate Performance Pay If Utilized If Not Hourly, Calculate Performance Pay If Utilized

9. Direct Project Direct Labor Burden Payroll Taxes (FICA, FUTA, SUTA) Payroll Taxes (FICA, FUTA, SUTA) Company Portion of Group Health, Life, Dental, Vision, etc Premiums Company Portion of Group Health, Life, Dental, Vision, etc Premiums Profit Sharing, 401-K Matching, etc Profit Sharing, 401-K Matching, etc Workman’s Compensation Insurance Premiums Workman’s Compensation Insurance Premiums Unapplied Time ???????? Unapplied Time ????????

10. Project All Other Personnel Needs List All Current Personnel Including The Owner List All Current Personnel Including The Owner List Any Additional Indirect Personnel And When To Be Added List Any Additional Indirect Personnel And When To Be Added Note Each Person’s Current Pay, Allow For Increases And For Overtime If Applicable Note Each Person’s Current Pay, Allow For Increases And For Overtime If Applicable

11. Project All Cost Of Sales Lines As A % Of Sales Project All Cost Of Sales Lines As A % Of Sales There Are Differing Opinions Materials Materials Equipment Equipment Direct Labor Direct Labor Direct Labor Burden Direct Labor Burden Subcontract – Labor Subcontract – Labor Subcontract - Other Subcontract - Other Permits Warranty Reserve Other Direct Job Costs Sales Commissions “Spiffs”

12. Project Overhead Costs Advertising – Direct Mail Advertising – Direct Mail Advertising – Employment Advertising – Employment Advertising – Miscellaneous Advertising – Miscellaneous Advertising – Radio Advertising – Radio Advertising – Yellow Pages Advertising – Yellow Pages Advertising – Co-Op Advertising – Co-Op Advertising – Newspaper Advertising – Newspaper Advertising – TV Advertising – TV Amortization Amortization Auto Allowance Auto Allowance Bad Debt Bad Debt Bonuses Bonuses Business Promotion Credit & Collection Contributions Conventions & Meetings Depreciation Dues & Subscriptions Education & Training Employee Entertaining Insurance – General Insurance – Group Insurance – Vehicles Insurance – Workman’s Comp

13. Project Overhead Costs Continued Interest Interest Janitorial Janitorial Lease – Equipment Lease – Equipment Lease – Vehicles Lease – Vehicles License/Bonds License/Bonds Management Fees Management Fees Miscellaneous Miscellaneous Office Supplies Office Supplies Postage Postage Printing Printing Professional Fees Professional Fees Radio & Pager Service Radio & Pager Service Profit Sharing Rent Repair & Maintenance – Customer Repair & Maintenance – General Repair & Maintenance – Office Equipment Salaries – Administrative Salaries – Officers Salaries – Sales Safety Security

14. Project Overhead Costs Continued Service Charges Service Charges Small Tools Small Tools Taxes – Payroll Taxes – Payroll Taxes – Real Estate Taxes – Real Estate Taxes – Property Taxes – Property Taxes – Other Taxes – Other Telephone & Answering Service Telephone & Answering Service Uniforms Utilities Vehicles – Fuel Vehicles – Repair & Maintenance Waste Removal Direct Labor Burden Applied

15. What Is Direct Labor Burden Applied? The Sum Of The Direct Labor Portions Of… Payroll Taxes Payroll Taxes Company Portion Of Group Insurance Premiums Company Portion Of Group Insurance Premiums Company Portion Of Profit Sharing Plan Contributions Company Portion Of Profit Sharing Plan Contributions Workman’s Compensation Premiums Workman’s Compensation Premiums

16. So, What Is The Budgeted Net Profit? Subtract Cost of Sales From Revenue To Obtain Gross Profit $ Subtract Cost of Sales From Revenue To Obtain Gross Profit $ Subtract Overhead Costs From Gross Profit $ Subtract Overhead Costs From Gross Profit $ Add Other Income Including Interest Income, Other Income, Gain On Sale Of Fixed Assets Add Other Income Including Interest Income, Other Income, Gain On Sale Of Fixed Assets This Determines The Net Profit This Determines The Net Profit

17. Net Profit….Is It Acceptable? IF NOT….. GO BACK TO THE DRAWING BOARD

18. An Important Consideration You’ve Projected The Direct Labor % For Each Department You’ve Projected The Direct Labor % For Each Department You’ve Projected The Direct Labor Burden % For Each Department You’ve Projected The Direct Labor Burden % For Each Department Based On The Budgeted Revenue Per Department You Can Now Calculate The Total Direct Labor $ For The Company Based On The Budgeted Revenue Per Department You Can Now Calculate The Total Direct Labor $ For The Company Based On The Budgeted Revenue Per Department You Can Now Calculate The Total Direct Labor Burden $ For The Company Based On The Budgeted Revenue Per Department You Can Now Calculate The Total Direct Labor Burden $ For The Company

19. The Big Test Perform The Alternate Direct Labor Cost Calculation Perform The Alternate Direct Labor Cost Calculation For Each Direct Labor Employee, Take The Total Hours Worked And Multiply By The Hourly Rate Allowing For Projected Wage Increases And Overtime For Each Direct Labor Employee, Take The Total Hours Worked And Multiply By The Hourly Rate Allowing For Projected Wage Increases And Overtime Obtain The Sum For All Direct Labor Employees For The Year Obtain The Sum For All Direct Labor Employees For The Year Compare The Grand Total Direct Labor $ To The Calculated Direct Labor $ Determined In The Previous Slide Compare The Grand Total Direct Labor $ To The Calculated Direct Labor $ Determined In The Previous Slide The Results Should Be Extremely Close…If Not…. The Results Should Be Extremely Close…If Not…. GO BACK TO THE DRAWING BOARD

20. The Monthly Spread Let’s Now Take The Annual Revenue Budget Per Department Let’s Now Take The Annual Revenue Budget Per Department Using Sales History Data We Can Predict, With Some Accuracy, The Monthly Distribution Of Revenue For Each Department Using Sales History Data We Can Predict, With Some Accuracy, The Monthly Distribution Of Revenue For Each Department Let’s Assume That You Have Monthly, Departmentalized Revenue Data For Years 2008 - 2007 – 2006 – 2005 Let’s Assume That You Have Monthly, Departmentalized Revenue Data For Years 2008 - 2007 – 2006 – 2005 Add Up The Revenue For Each Month And For Each Department For The Above Four Years But Add In The 2008 Revenue Twice Add Up The Revenue For Each Month And For Each Department For The Above Four Years But Add In The 2008 Revenue Twice Take The Sum And Divide By Five (5) To Give You The Weighted Revenue Per Month Per Department Take The Sum And Divide By Five (5) To Give You The Weighted Revenue Per Month Per Department Now, Calculate The Percentage Of Historical Revenue By Month By Department Now, Calculate The Percentage Of Historical Revenue By Month By Department Project The Budgeted Monthly Revenue By Multiplying the Annual Revenue By The Monthly Percentages For each Department Project The Budgeted Monthly Revenue By Multiplying the Annual Revenue By The Monthly Percentages For each Department

21. Are You Confused? Are You With Me? There’s More

22. The Capital Expense Budget Furniture & Fixtures Furniture & Fixtures Company Tools Company Tools Vehicles Vehicles Office Equipment Office Equipment Other Non-Expense Items Other Non-Expense Items

23. The Cash Flow Projection Beginning Cash Balance Beginning Cash Balance Cash In Cash In Cash Out Cash Out Cash Injection Cash Injection Cash Distributions Cash Distributions

24. Wrap - Up Questions & Comments? For Additional Resources www.ServiceRoundtable.com Lee.Rosenberg@ServiceRoundtable.com 210/798-8006 Direct Line

25. THANK YOU

26. Thank You Lee Rosenberg, P.E. Chairman Service Roundtable Lee Rosenberg, P.E. Chairman Service Roundtable