Budget More Than Your Projects

How many builders have their 2003 company budget in place?

By Stan Ehrlich, Contributing Editor | November 30, 2002


Stan Ehrlich


How many builders have their 2003 company budget in place? How many think they don't need one? While builders use budgets for individual projects, they often don't use them for their core company. A budget is a planning document that serves as a spending guide for a 12-month (or longer) period. It's incumbent upon builders to use a budget for their core company so they can make appropriate and timely spending decisions. A budget can be done in-house, without additional expense for accounting or bookkeeping consultants, but builders should have adequate software and accounting programs so they know how their business is faring without waiting for monthly or quarterly reports.

While the nature of home construction makes budgetary planning difficult (e.g., how many houses will we build and close during the next year?), the industry is not alone in that regard. How much certainty is there when a carmaker predicts sales for the next 12 or 24 months? Virtually all businesses are in the same boat when it comes to predicting sales and expenditures.

If you prepared a budget for 2002, compile your actual cash flows and compare them with budgeted expenses. Note considerable discrepancies so you can assess whether your expenses were extraordinary or your budgeted amounts too low. Then review each income and revenue line. Will revenue increase, decrease or remain the same in 2003? How many expenses were one-time only? Which purchases deferred this year will occur next year? How will inflation affect projected costs? Employee raises? Vehicle replacement? Equipment purchases?

Builders should be careful to note irregular capital expenses. Some equipment, for example, has a projected life span. It might be useful to create a sinking fund (i.e., setting aside money to be used in future years). In this manner, the cost of a new backhoe can be apportioned over five years, with one-fifth of the projected price being accrued each year. By the end of the fifth year, the company will have the entire cost set aside in a capital expenditure account.

After reviewing your 2002 figures, post and/or update the revised income and expenses. Share the numbers with your office manager and other key employees. Ask staff for wish lists for next year.

Once gross numbers have been determined, the next step is planning when expenses will occur. If, for example, your intention to purchase certain equipment is based on how well the year goes, you might want to show that anticipated expense as occurring in the third or fourth quarter.

Upon completion of this exercise, print the document. Each month, print out projected versus actual expenditures. Keep a running tally for projected versus actual year to date. When expenses exceed projections, dig deeper to understand why. If revenues drop, adjust the budget accordingly. And when profits allow, discretionary spending may be moved up. (There are certain limitations to using a budget on a very regular basis except to confirm the company's ability to make a significant purchase. While projected income and expenses must adjust for actual cash flow, a budget should not substitute for a general ledger.)

Business success isn't based on happenstance. Remember the old adage: Most businesses don't plan to fail; they fail to plan.


Related Categories

PB-Economics,PB-Industry Data + Research