How to Create a Yearlong Budget
Adam Grant, owner of Xtreme Collision Center in Morrisville, Vt., opened his doors for business in 2004. The shop was doing $300,000 in annual revenue, but with no financial planning in place, Grant says those early years were an absolute nightmare.
Grant’s nightmare peaked in 2009. Costs were out of control, he says. He had no way of tracking where all his money was going. Cash seemed to just disappear, and by the end of the year, Grant’s net profit wasn’t anywhere near what he was expecting it to be.
“I wanted to be more profitable, but I needed help,” Grant says. “I knew there had to be an easier way to operate, and there had to be some kind of tool to help me.”
— Jay Fisher, owner, Northeast Collision Inc.
That golden tool, Grant realized, was a budget. He recognized that a little financial planning makes a huge difference in understanding where all his money gets spent and what he needs to do to take home the paycheck he deserves. Budgeting even helped Grant uncover areas of waste, which is one factor that helped revenue increase to $1.2 million in 2010.
You can’t control what you don’t measure, says John Niechwiadowicz, owner of Performance Consulting Services, an automotive consulting company in Orefield, Pa.
Profitability is the core goal for any organization. A budget will define your game plan for sales and expense targets throughout the year—and provide you with a benchmark for success, he says.
It’s up to you to decide how to allocate your money. But first, you’ve got to know how much money you need, and how much you’ll have at any given time to cover your costs. It’s important to start by setting financial goals—for the company and yourself—predict your sales, and know your break-even point.
The budget for your business is obviously based on the expenses you incur and the amount of sales you’re able to bring in. But before you get ahead of yourself, the process starts with goal setting, and a determination of any growth you might be able to attain.
“Goal setting really sets the stage for preparing your budget,” Niechwiadowicz says, noting that the goals you put in place are almost as important as the budget itself.
If you’re hoping to grow your business, Niechwiadowicz suggests analyzing your current market share, the number of homes in your market, and how many dollars of collision repair exist there.
Based on those factors, you can set realistic goals for growth, he says. “You can identify whether your goals are realistic by looking at your historical monthly sales trends, and how those trends compare to your goals.” Then identify what you’re going to do to turn those goals into reality.
Shop owners should also set income goals for themselves, Grant says. If you set sales goals that are just enough to cover your costs, that clearly doesn’t leave any money for you to take home a paycheck. Identify your target salary for the year, figure out what percentage of gross profit that represents, and then project what sales need to look like to make that happen.
The best way to forecast sales is to analyze your performance in past years, says Tony Nethery, business development manager for Jackson, Tenn.-based COLORMATCH, a DuPont paint distributor that offers value-added services like financial consulting. Create averages of your historical sales for each month and apply that to your new budget.
Randy Miller, owner of Randy & Bob’s CARSTAR Autobody in Chicora, Pa., goes back five years to create monthly and yearly sales targets. He analyzes his historical performance, his current market condition and his goals for growth to project the sales he believes his shop is capable of bringing in.
But Miller knows his predictions aren’t always accurate. So to proactively play it safe, he makes two other sales projections: a projection if sales are 5 percent lower, and a projection if sales are 20 percent higher than his initial prediction.
“We don’t have to worry about adapting to unexpected changes in sales because we have a plan in place for each situation,” Miller says. He analyzes his budget every 10 days—three times a month—so he knows which budget to operate by.
Finding Your Break-Even Point
Every shop has fixed costs that need to be paid for—rent, mortgage, utilities, payroll, insurance and taxes. You’ve got to pay these things regardless of whether you fix any cars or not, so it’s critical to make sure you have enough cash to cover the cost.
You can easily predict your fixed costs if you’ve been in business for at least one year, Nethery says. Look at your profit and loss statement from the previous year and identify the monthly and total-year fixed costs you paid.
— Jay Fisher, owner, Northeast Collision Inc.
“This highlights all the things your business can’t go without, and the amount of money you’re going to have to pay out no matter what,” Nethery says.
Don’t forget the money you paid for other incidental costs, such as employee training, marketing and equipment maintenance or upgrades.
All of these costs added together make up your break-even point. A good goal for your break-even number is about 32 to 35 percent of your total sales. The other 65 percent of total sales goes toward your direct costs such as labor, parts and materials, and the net profit, which is what you as the owner take home in your paycheck, says Elainna Sachire, president of Square One Systems Inc., a facilitator of collision industry 20 Groups.
A good target for net profit is 10 percent of total sales, says Sachire.
Maintaining Your Cash Flow
Budgeting isn’t just about making sure you bring in enough total revenue to cover your costs. It’s also about tracking your cash flow, and making sure you’ve always got enough money in the bank to cover those costs on time.
“Cash management is crucial,” says Jay Fisher, owner of Northeast Collision Inc. in Buffalo, N.Y. “Shop operators not only have to understand how much money they have to pay each month in expenses, but when that money is due as well.”
Fisher analyzes his cash flow every Tuesday. “I know how much cash we have on hand, what that money will be used for, and when it will be spent on any given day,” he says.
Fisher offers a few tips on how you can ensure your bank account is always properly loaded with the necessary amount of money for what your shop needs:
• Have a weekly deposit goal. Since Fisher has budgeted out all of his fixed expenses, he knows exactly how much money he needs to generate by certain dates each month. He set up weekly deposit goals into a bank account to accumulate money, and ensure he’ll have enough cash by the end of the month to pay his bills.
“You might come up short if you wait until the end of the month to start setting that money aside,” Fisher says.
• Budget payroll for slow and busy times. Fisher knows that business increases during the winter months. Increased sales can increase payroll expense because of overtime, so he budgets for that to ensure that cost doesn’t damage his cash flow.
You have to budget for slow times, too. December, for example, has holidays when the shop is closed and not producing anything, Fisher says. But you still have those fixed costs to pay, so you have to predict sales for the rest of the month appropriately to ensure you’ll have enough cash to cover those costs even when you’re not making any money.
• Have a financial reserve. Grant suggests stashing away 3 percent of your total sales into a financial reserve so that unexpected costs won’t drive you under the water.
Fisher says he’s had times when a technician needed some additional training or a piece of equipment needed maintenance. But because he didn’t think about those unexpected costs in advance, Fisher didn’t have any money left over to make that happen.
Maintenance on your booth could cost a couple thousand dollars, Fisher says. That’s often among the first things operators put on hold when finances are tight. But that’s a problem because doing so only increases maintenance costs down the road, and you might be producing poor quality paint jobs until the maintenance happens, he says.
A financial reserve can help you in covering costs for big jobs, too. Unlike small jobs that only take a few days and pay you right away, heavy hits can take weeks to complete. You don’t get paid for that work until the end, but you have to pay for costs to produce that job along the way, which Fisher says can sometimes be hard on your cash flow.
Every Dollar Counts
Industry profit margins have dramatically shrunk over the last 20 years, Nethery says. With profit margins as small as they are today, there’s no room for error.
Before having a budget in place, Grant says he was burdened with worry everyday. He had constant concerns about all the bills he had to pay, and the fact that his business was constantly under the gun to bring in more money to cover his operating expenses.
“I had a lot of sleepless nights without a financial plan,” Grant says. “I had a checkbook that was empty, and constant financial concerns.”
Miller felt the same pressures prior to making a budget for his shop. “Our company had grown so fast that money was going all over the place,” Miller says. “I didn’t know where it was all going, and I was running the company with no idea of what direction I was moving in.”
When your business gets bigger and you have multiple people responsible for different areas of your business, it’s really easy to lose sight of what your business is doing, Miller says. “With shrinking profits in the industry, it’s more important than ever to know exactly where every penny is going.”
When you realize that there’s a better way to operate your business, open your mind to change and make adjustments that help the business, you’ll find yourself moving in the right direction, Grant says.