Budgeting for Better Success
Many company owners conduct business without a financial plan, oftentimes with negative impact to their bottom line. Learn how a budget can help secure your operation.
Say the word “budget” and you’ll likely hear a groan or two. It’s no secret that people often dislike the budgeting process. Many believe it’s a waste of time. However, it’s hard to overlook the many benefits of a thoughtfully developed financial plan.
As a financial consultant to the security and systems integration industry for more than 20 years, I’ve learned firsthand that many companies struggle with budgeting, planning and overall financial management. Indeed, while most understand that the probability of success increases in proportion to the amount of planning that goes into a business, many companies continue to shoot from the hip and operate in the dark.
Granted, there are some obstacles. For one, setting up an accounting system and developing a budget is not for the faint of heart. It requires an earnest commitment of time and resources. Additionally, it is my view that financial management is more challenging because of recurring revenue, job costing, service contracts, leasing and other characteristics of our industry.
Every owner/manager of a security or systems integration company has developed a plan with various strategies and numerous assumptions. Preparing an annual budget encapsulates those plans, whether written or unwritten, into a documented financial forecast.
GETTING KEY STAFF INVOLVED
The act of preparing a budget requires you to think more deeply about your strategies and assumptions and usually forces you to be more realistic. For example, you may think your growing company will be able to sell and install systems worth $500,000 in the coming year. You would rethink that number if your budget indicated your technical staff would be far too thin to reach that level. Over-estimating your technical capacity could negatively impact margins and cash flow, reduce compensation to sales representatives, and put undue stress on your technical staff, to name a few potential consequences. The ramifications of inaccurate or ill-advised assumptions are usually not good. Budgeting gives you the opportunity to get your key people involved and vested in the execution of the company plan. The concept is similar to any team sport. Your chances of success improve when you communicate a clear strategy, have defined objectives and get feedback from each member. Some team members may reach their goals and others may not, but the team as a whole can still celebrate the accomplishments and move on to higher goals.
Budgeting opens the door for bonus plans based on overall company performance. If the company does well, employees do well. We’re talking Main Street, not Wall Street here. Projecting your company’s cash flow is a benefit of the budgeting process. If your budget were to show that cash will be tight, you would have advance warning to revise operations to reduce cash requirements and bolster working capital. Or, you may take steps to raise additional cash.
The value and benefits of budgeting increase significantly if you are able to compare actual results to a budget, as illustrated in the spreadsheet example for ABC Security Systems on page 128.
By tracking and investigating variances, you can take timely action to avoid or mitigate problems, reduce costs or capitalize on opportunities. Case in point: In a situation where installation labor costs are consistently higher than estimates and sales are strong, you might decide to increase the labor rate used in quoting new system installations. The change could potentially result in higher margins without compromising sales volume.
ORGANIZING THE FINANCIAL PLAN
Structuring your budget starts with an analysis of your company’s financial reporting requirements, including how profit and cost centers have been defined. For example, security and systems integration companies typically engage in multiple activities like installations, service, inspections, monitoring, guard and patrol. Each of the various activities or a combination of them should be established in your accounting system as a profit center where revenue and direct costs are tracked. Profit centers match revenues and costs and are a cornerstone of truly understanding your financial picture.
Within a profit center, your company may find it beneficial to track activity in greater detail. For example, within the service profit center, repair and inspection activities may be tracked separately with an even further breakdown between billable and contract work.
Cost centers are established to track indirect costs and expenses. They often mirror the departments to which each employee is assigned (e.g. sales, installation, service, guard or administrative). Wages, payroll taxes, benefits, rent, phone and advertising are just a few examples of expenses that are tracked by cost centers.
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