Forecasting a Better Budget for a More Profitable Year

A quick and easy guide to uncovering the gaps between last year's budget vs. actuals, plus the six metrics you need to track to start strong in the new year.

Jeffrey Scott
November 9, 2022

With your books almost closed for the year, now is the time to forecast and finalize your budget for next year.

I bet you wish you had a crystal ball, so you could see what the next 12 months will look like.

Show Me Your History, And I’ll Show You The Future

At the beginning of the year you (hopefully) set an aggressive budget for making good profit, e.g. 20% after straight-line depreciation as a residential firm, up to 15% for commercial. (Note: some of your divisions should strive for even higher net margins.) If you didn't, you may have left money on the table.

Either way, now that you have closed the books on your revenue and expenses for most of the year, you can see small and large gaps between budget and actual.  

The gap comes from many places:

  • A slow start in the spring
  • Bad weather
  • Material costs not matching contracts
  • Unexpected inflation and other costs.
  • Rising fuel expenses
  • Hiccups in hiring, be it H2B or labor market troubles
  • Supply chain issues
  • A situation unique to you, like losing a big client
  • And so on

It's key you acknowledge your underlying mistakes (not just the surface symptoms, but the decisions you made and control) so you create a more accurate forecast for the coming year. Like everything in life, admitting and identifying one's mistakes is half the battle.

Rely On Data

Sherlock Holmes said it best, ‘“It is a capital mistake to theorize before one has data.”

You must rely on facts and numbers (not your gut) as you set your budget.

Use consistent calculations between the last year's budget and actuals, and your new budget, so it’s apples to apples.

To do that, you must use “accrual-based accounting.”  I have seen that many people confuse invoiced with accrual. Make sure you have it right.

The Two Gaps

Once you build your budget you may find a gap between where it lands and what you want it to achieve. The gaps you uncover will be in revenue or in expenses.

Revenue gaps are easier to see but not always easier to fix.

Expense and profit gaps are harder to ascertain because it requires accurate revenue, accurate billable hours, and accurate materials, subs and other expenses.

Can the gaps come from timing? No, because that would mean that you are following a cash budget, and not accrual.

The key is to understand your billable hours, and make sure they are accurate no matter what else you do.

Start & Finish Strong

"Finish Strong” is a mindless expression that generally means work harder.

As if you don't work hard enough!

So let’s work smarter instead. Start with an accurate forecasting of when you will start the year and end the year. Don't be over optimistic. Not only should you set budgetary expense and revenue goals, but also specific goals for the following:

  1. Sales by salesperson and product
  2. Sales Margins
  3. Revenue
  4. Capacity in terms of crews
  5. Billable and Non-Billable Hours capacity by month.
  6. Throughput (as sold, and as built)

By regularly tracking and hitting these six key metrics, you will know what starting strong looks like, and how to finish strong as well.

Forecast Your Budget With Your Team To Get Their Buy-In

You can’t do it alone!

A long-time peer group member in my community (Donn Vidosh, President of Vidosh North in Michigan), emailed me earlier this year and shared, “We are working on bonus payouts for next week which includes sitting down with division managers to re-forecast the second half of the year. This exercise is so valuable because it gives us all a target (with divisional sub goals) we can now push from top to bottom and assign specific goals down the org chart.”

I loved receiving this message because it shows the power of open book budgeting and management. Involving your people in the budgeting exercise is invaluable.

As you create your budget, show your team where your gaps are. Don’t hide them out of embarrassment and don't be angry about them. Engage your team to get better results. You got this!

Join me January 5 and 6, 2023 for my 3rd annual Financial Master Class where we will use your 2022 actual numbers (through October) to benchmark you against the industry—including elements such as the impact of inflation and material, equipment, labor scarcity, and insights into a better budgeting process. These benchmarks will give you the tools to set better markups, manage overhead with more nuance, and ensure you are achieving a proper ROI.

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