Welcome to Financial Series #7 Establish Budget

Your Hosts for Today’s Conference are: Gary Elekes in Nashville, Tennessee Gary Oetker in Plano, Texas

Conference Objectives:  Review the significance of Budgeting and why it should be done.  Review fundamentals in setting financial goals  Review how to construct an annual budget  Review how to construct monthly budgets  Review how to involve employees in budget process

 Review why to budget and the basics in setting financial goals  Review how to set business mix goals  Review how to budget above the line  Review how to analyze & change monthly sales curves  Review how to budget overhead  Review how to create an annual and monthly budgets  Review how to involve employees in budgeting process Agenda for Conference

 A prediction of what might happen  You will always be wrong  An effort to plan for the future  A proactive approach versus reactive  A “financial picture” of the future What is a Budget?

 Creates guide and financial roadmap  Creates accountability for your entire company  This fits nicely into pay for performance compensation plans for department heads  A budget helps you focus and select among alternative strategies to achieve financial goals  A monthly budget provides milestones during the year Why do a Budget?

Step 1 – Internal Analysis Step 2 –External Analysis of Opportunities and Threats Step 3 – Set Financial Goals Step 4 – Create a Budget in Support of Financial Goals Step 5 – Assemble Action Plans to Support Budget and Financial Goals Budgeting is One Step in Creating a Financial Plan

Setting Financial Goals Internal Analysis  Review historical financial performance by department  Compare to industry Key Performance Indicators (revenue per employee, gross margin, margin dollars/crew day, overhead, etc.)  Consider desired Return-on-Investment  Consider company strengths and weaknesses  Consider business mix

Setting Financial Goals (cont) External Analysis  Consider market opportunities  Consider market threats Other Considerations  Consider other aspects in setting financial goals including marketing, operations and organization  Goals must be realistic and attainable, but should have some stretch  Involve your management team in goal setting

Determining Business Mix Preliminary (For Year)  Determine yearly revenue goals per department  Determine gross profit percentages per department  Determine gross profit dollars per department  Determine cost of sales  Estimate total company overhead  Estimate total company operating profit (EBIT)  Adjust department revenue and gross margins to get desired return on investment

Business Mix Worksheet

Budgeting Techniques Above the Line  Use history as a guide  Finalize your business mix  Finalize revenue goals by department  Estimate cost of sales using percentages  Except for labor – Use dollars  Use KPI’s as a guide to setting cost of sales percentages  If there’s a variance from history versus the plan, be sure to create action plans to implement those changes

Budgeting Techniques – Above the Line

Budgeting Techniques - Determining Sales Curves by Department Look at historical sales curves by department Previous Years Sales History

Analyze & Adjust Sales Curves  Use previous years performance as a historical guide  Take any anomalies into consideration  Make plans to flatten peaks and valleys  Set new sales curve for budget

Analyze and Adjust Sales Curves Sample Historical Sales Curve for Service Can you sustain growth at peak months? Can you increase revenue at the valleys?

Budgeting Techniques - Project Monthly Revenue by Department Spread the sales goals to each month using percentage as a guide. Tweak the final numbers.

Budgeting Techniques - Project Monthly Gross Margin by Department

Budgeting Overhead

Budgeting Techniques - Overhead Considerations Overhead Categories Use dollars for overhead expense accounts Tie marketing budget to Marketing Plan Refer to industry KPI recommendations. Remember to accommodate business mix. Review each line item and estimate expense Plan important process/operational changes while budgeting

Budgeting Techniques - Set Overhead for Year (cont)

Budgeting Techniques - Project Monthly Overhead Expenses  Consider costs that hit specific months (I.E. – marketing campaign)  Consider spreading out over costs over 12 months (I.E. - Cost / 12)

Budgeting Overhead - Gut Check - Setting Budget for 3 Slowest Months

Budgeting Techniques - Target Monthly Overhead Target monthly overhead so company makes money in 3 slowest months

Budgeting Techniques - Set Monthly Overhead (cont) Target monthly overhead so company makes money during the slowest times of the year For residential replacement & service focused companies, target monthly overhead at 30% of average 3 slow month $114,867 x 30% = $34,460

Budgeting Tool on Website

Interject Budget Into Income Statement

 Discuss  Conclude  Commit  Create  Execute  Measure  Feedback Getting Employee Buy-In Model Note – I will update this slide

DiscussInvolve Personnel ConcludeGet Buy-In on Decisions CommitAll Hands in Team Goal CreateIdea to reality – stuff! ExecuteAccountability to do Work FeedbackMeasurements & Report Adapt PlanAdapt as Needed – Start from the top again Getting Employee Buy-In Model

 Create thirst for facts and realism  Share company performance with all employees  Make effective communication a core value of your company  Create clear concise performance expectations  Ask employee input into business plan for company  Have employees establish goals along with you Involve Employees in Decision Making

Q uestions & A nswers