Most contractors understand the value of budgeting as a management tool, but many believe that budgeting just doesn't work in the construction industry - it's too difficult and impractical, they say. But these contractors often change their minds once they recognize that a budget is not a precision tool.
Budgeting is about planning and understanding your business. The more you plan, the more familiar you become with your business and the better you are at running it. Think of a budget as a road map that guides you from point A to point B and helps you get back on track if you get lost.
Many large, well-established contractors understand this and are committed to the budgeting process. They have a good feel for their revenue sources and expenses and manage them by exception. Managing by exception means comparing actual to budgeted results and then investigating the reasons certain revenue or expense items are out of line. This process allows you to educate yourself about your business.
Budgets are no more difficult to develop for a construction company than for other types of companies. But a budget that isn't monitored properly is useless.
The following examples illustrate the value of budgeting. The first involves the revenue side, and the second involves the expense side.
A contractor asked for assistance in developing a budget for the upcoming year. After going through the initial inquiry process and developing a month-to-month budget, it became evident that, based on the assumptions made, the contractor was headed toward a significant loss for the year.
Projected expenses were reasonable and couldn't be reduced substantially without hurting the company's ability to perform. To develop additional revenue sources, the contractor created a much more intensive marketing plan and hired an additional project manager to free up more of his own time to effectively implement the plan. The result: the contractor achieved a respectable profit by generating more revenue and keeping expenses in line.
A contractor developed a budget before the start of her fiscal year and was monitoring it closely. The problem: although revenues were better than anticipated, the company was still losing money. Further analysis revealed the need for personnel changes to reduce unnecessary costs.
The contractor shifted some duties and terminated certain nonproductive personnel. Although this decision wasn't easy, the company had veered from its budget and needed to change course. By reducing unnecessary costs and controlling others, the contractor was able to rejoin the road to profitability.
You may have heard contractors say that they make money without a budget. Perhaps you've said it yourself. But think of the money you could have made if you had planned better. As the saying goes, "if you fail to plan, then you're planning to fail."