Ready, Set, Budget!

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Start planning now for a profitable 2013

As an engineer working for a petroleum company, Bronson Shavitz disliked the monthly reviews of budgets and spreadsheets required by his employer. His perspective changed, however, once he took the helm of Shavitz Heating & Air Conditioning in Skokie, IL, the business his great-grandfather started in 1904.

“I used to think it was a waste of time to keep track of our unit’s performance and figure out whether we were on plan,” says Shavitz. ”But now I see the importance of budgeting, forecasting, and planning—they’re essential to knowing what you’re doing and seeing where you’re at.”

In fact, in the last few years, Shavitz Heating & Air Conditioning has upped its level of financial analysis to better handle growth hurdles. For example, by forecasting and tracking the number of calls and installations annually versus the number of technicians, Shavitz determined it was operating at its infrastructure’s capacity. The company is nearing the point of needing to add a new position or two—such as a dedicated service manager—rather than relying on employees to handle multiple roles.

Shavitz explains, “We’re taking a more scientific approach to our finances and really looking at our history: What have our expenses been for the last three years in different categories? What will go up? What will stay the same? Then we have to scale those numbers with growth, which will help determine our pricing.”

Divide and Conquer

At Shavitz Heating & Air Conditioning, employees budget and track all expenditures by department (residential service, commercial service, residential maintenance, commercial maintenance, and so forth). To Tom Grandy, president of Grandy & Associates, that discipline represents the first step to enhanced and continued profitability.

“Only if you break out your sales and costs by department, all the way through the Profit & Loss (P&L) statement will you find out if one department is subsidizing another,” notes Grandy. “If much of your growth happens in a department that’s actually losing money, but you don’t know it, you’ll work yourself right out of business.

“Often, contractors see a lot of dollars flowing through their business and think they are making a lot of money. In reality, that’s not necessarily the case,” continues Grandy, whose Owensboro, KY-based firm provides business training to the trades industry. For example, a contractor may make only $15,000 on $1 million of commercial work, which is fiercely price competitive; only by tracking all expenses associated with that work — including overhead, such as rent, utilities, advertising, and insurance — can the contractor know the true cost of that business and set prices accordingly.

Grandy recommends developing a month-by-month, department-by-department budget and then revisiting it at least twice a year to make necessary tweaks. “Your budget creates your hourly rate, and you may find the costs of doing business increasing,” during the year, he says. “For example, if you give a technician a $1 per hour increase, you’ll have to raise your hourly rate between $5 and $6 to cover it.”

Details, Details

At Hyde-Stone Mechanical Contractors, Inc., based on Watertown, NY, the three co-owners join the comptroller in a monthly review of the financial statement plus a quarterly review of budgeted-versus-actual income and expenses for the company overall and for each of its three offices. They compare each project manager’s sales numbers, gross margins, and labor costs to the individual’s goals as budgeted for the year.

“We know exactly what it costs us to run every single day. If a project manager chooses to go to that margin or even below, it’s up to him to make up the margins throughout the job,” explains Christopher Stone, vice president. “If a project manager looks unlikely to meet his goals, we team together to go after a job that will help him make his numbers.”

Hyde-Stone typically begins its budget process in October, using the previous year’s actual performance to determine allocations of overhead percentages. The salary, benefits, and other costs associated with an employee who travels extensively among the three offices, for example, would be equally divided among all three. For an employee in one office who spends 75 percent of his time on construction and 25 percent on service, costs would be divided between those departments accordingly.

“We fill in as much of the budget as we can, looking at the last three years of rent, electric, and phone. The big unknown is usually insurance— health, liability, bonding—so we make guesstimates and adjust the budget in January after the final numbers come in,” Stone explains. The budget also reflects forecasting of expenses three or four years out, such as tools, training, or a new vehicle, so those future costs can be built into current pricing to build cash.

Both the budgeting and forecasting flow from the planning are undertaken by Stone, his brother, and his father. Several times a year, the three go off site to spend a day discussing what they are doing right and, based on  the financials, what they could be doing better. “We look at all areas of the company and talk about where we are, where we want to go, and how we will get to that next level,” says Stone. “After the three of us reach agreement, we start bringing in our employees to discuss the feasibility of our ideas and to ask for suggestions.”

Worth Trying

Speaking of suggestions, here are several to consider implementing in your own business:

Track both billable and non-billable time. “Many contractors don’t realize that, on average, a service technician can bill only four of every eight hours to customers because of shop time, travel time, and call-backs,” says Tom Grandy. Your pricing—whether hourly or flat rate—must reflect that reality, he emphasizes.

Invest in a comprehensive soft ware package. Choose one that enables you to track calls by type and department (residential maintenance versus residential service, for example).

“You have to know where you are, so you can use that data as a foundation when budgeting for the next year,” says Shavitz, whose company uses a program that also includes dispatching, job costing, invoicing, and payroll capabilities.

“We can sort by month and look, for example, at the last three years of overtime and the expenses associated with it,” Shavitz continues. In addition, he always tracks the number of callbacks. Shavitz observes, “If you budget for 50 calls a day but have a 10 percent callback ratio, that’s another five service calls you need to handle— which is either another technician or five disappointed customers who have to wait another day for service.” To reduce callbacks, his firm conducts weekly trainings and provides incentives to technicians with the lowest callback ratios.

Beef up your business knowledge. Take a class on Budgeting 101, attend a “boot camp” on best practices, or participate in a webinar on pricing strategies—whatever will help you get a better handle on the financial aspects of your business. Chris Stone, for example, watches several YouTube videos each week on topics such as budgeting and strategic planning.

“Without understanding your numbers, at the end of the year you could conceivably say, ‘What just happened? I thought I was doing so well, so why don’t I have any money?’” says Stone.

Call in the experts. “Don’t be shy about asking a consultant, a distributor, whoever, for help,” Grandy advises. “The questions you have are not unique. In fact, everyone else in the industry has probably had the same problem you’re having—or will have it someday.”

Develop a significant maintenance program. Shavitz aims to keep his maintenance staff busy during slower times with the work provided by residential and commercial maintenance agreements. “It’s guaranteed work that you can accurately predict and schedule,” he says. In addition to improving cash flow, maintenance appointments often turn into leads for the sales staff and installations.

Don’t delay. “You can have a lot of work and employees and trucks, but if you don’t have a budget you won’t understand your true costs,” Stone emphasizes. If you already have a basic budget in place, take it to the next level for 2013 by analyzing historical financial performance and incorporating the results of strategic planning and forecasting sessions.

“We have rainy day accounts to use if we get into trouble, but we’ve never had to go to a bank and borrow money,” adds Stone. “If you watch your numbers, you can be in the same position.”

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Posted In: Money