Leading Luxury Builders To Great ness
FREE GUIDE ESTABLISH A BUDGET THAT M AKES YOU M ONEY Learn how to establish a budget that gives you peace of mind and makes you money
ESTABLISH A BUDGET THAT M AKES YOU M ONEY Do you know how t o est ablish and st ay on budget ? Do you have much less money at t he end of t he year t han you expect ed? Do you find yourself wondering ?W here did t he money go and is t here somet hing I could have done different ly?? Your plan, focus, and execution will determine success or failure. Many Luxury Homes Builders nationwide struggle to generate a steady pipeline of qualified prospects and turn to marketing for help. Unfortunately, most don't get the results they seek. Cert ified Luxury Builders (CLB) has t he answer.
How To Est ablish a Budget That M akes You M oney SITUATION You arrive at year-end wondering where your money went?Don?t tell anyone about this. It?s so secretive that few builders do it. Are you ready?
PROBLEM SOLVER Use a budget. That?s it. That?s all it takes. Create a budget for your projects and your business, track the variances and take corrective action when necessary. Budgets allow you to stay on top of your financial progress as your projects progress and the year unfolds. They arm you with the ability to reel in expenses before they kill your bottom line. They force you to think through your business?strategy and its resource allocations.When you don?t have a budget to monitor or don?t monitor the one you have, you are destined to arrive at year end thinking, ?Rats. Where?d all my money go?? A luxury custom builder averse to budgeting is odd. On the one hand, they tend to be obsessive about planning field work. They know that letting their field crews sort out what to do from day-to-day is a recipe for disaster. But on the other hand, they don?t apply that same reasoning to their own business. Lack of business planning leads to poor financial performance; it?s as simple as that. You need a budget and it needs to reflect the reality of your market. You then need to keep a close eye on its progress and take corrective action when it?s called for.
M ARKET INSIGHTS Before diving into the how-to budget details, you must understand the connections between your budget, your business plan and your market. Your budget is a financial representation of your business plan. Your business plan?s purpose is to take advantage of profitable opportunities in the market. Budgeting should not be attempted until your business plan has been developed. Otherwise, your budget is just a dream that might turn into a nightmare.Your business plan should be aligned to the size of your market, the prices your market will pay and the cost of serving its needs. You can only make as much money as your market will support and your business plan will deliver. Budget accordingly. Builders often put the cart before the horse. They set sales, overhead and net income goals, put them into a budget and then try to craft a strategy to fulfill them. That sequence ignores the market.It?s foolhardy to create the financial model and then craft a business plan that fits it when the business plan hasn?tbeen tuned to the market. Work in this order: Develop strategy, establish the budget, meet the budget then build a bulging bank account. Your budget will be developed through five stages: preparation, rough draft, refinement, reality check and rollout.
STAGE 1 - PREPARATION Unless you implement a new sales and marketing plan, improve labor productivity, or reduce overhead, your financial performance will be controlled by the market and the economy. If they grow, you will make more money. If they shrink, you will make less or even lose money. In this industry, past performance is the best predictor of future performance,unless you force change. Build your budget on the foundation of your most recent three-year financial performance. To do that, gather together the balance sheets, income statements and cash flow statements for those years. Next, tap as many information sources as possible to gain an informed view of upcoming market changes. Visit with your banker. Visit with your insurance and bond agent. Buy construction forecast data. Search the census bureaus?website for reports on economic projections. Call the Federal Reserve to see what reports they have available. And call your local economic development councils. Eventually, you will discover the experts?consensus opinion. Even they can be blindsided by turns in the economy,but they are the most informed group to listen to. Go over the information with your executive team. Reach consensus on your upcoming market opportunities.
STAGE 2 - ROUGH DRAFT The purpose of the rough draft is to give you a reasonable starting point. Your rough draft will not consider changes to your business plan or changes in the economy. To create the rough draft, study the income statements from the last three years and determine: -
Target market sales trends Direct cost trends Administrative overhead trends Sales and marketing expense trends Operations support trends Labor burden trends Average gross margin
Take your most recent income statement and adjust each line item for the trend (up or down), or jot down the three-year average, whichever you feel is most appropriate.
STAGE 3 - REFINEM ENT Now, adjust the numbers for changes in the market and changes in your business plan.If you expect the market to shrink, assume both your sales volume and your margins will shrink. If you expect your market to grow, assume either your sales volume or your margin will grow. Do not assume both will grow (we?renot going to go into this, but it usually holds true). Now, estimate the cost impact of new business strategies. For example, you may decide to expand sales by pursuing the office building market. To land the work, you will authorize a $30,000 marketing campaign consisting of magazine, direct partner and influencer, best-fit client, event and entertainment. This spending would be on top of the marketing you do to generate your current workload. Your marketing budget needs to reflect the additional investment.
When thinking through your business plan, closely look at the cost impacts of: -
Increasing marketing to pursue existing and new market Expanding sales staff Purchasing new equipment Adding office hourly staff or partners (Real estate partners) Implementing or altering management information system (CRM) Training and developing employees Changing the bonus plan (Commission only) Entering a new geographic territory complete with local office Raising pay
Another budget impact to consider is improved selling performance. Assume your sales team persuaded another 20 percent of your clients to hand you negotiated contracts. Your budget would need to reflect the higher markups associated with negotiated contracts. You are ready to finalize your first draft. Adjust the trended or average numbers for each line item by the impacts of your business plan. Re-type the document so that it is easy to ready.
STAGE 4 - REALITY CHECK One of the primary reasons builders fail to hit their profit goals is because they are overly optimistic about their gross margins. The time has arrived for everyone to join a no-holds-barred discussion on operations and sales. You need to challenge all assumptions made that the crews will perform better than they have in the past. No baseless, pie-in-the-sky claims are allowed.Unless there is reason to believe turnover has been greatly reduced,more efficient equipment has been purchased or the operations management team will be able reduce downtime and rework, do not assume your labor will be more productive than in the past. Also, question strongly the ability to generate better quality leads and better paying jobs of the sales and marketing team. Sales and marketing personnel are highly optimistic individuals by nature. Take their promises of greater glory with a grain of salt. Believe it when you see it, not before.In other words, don?t take their word on gross margins at face value. You need to analyze it segment by segment.Discuss the real mark ups each segment produces. Pull out your job costing reports to see what the real mark ups ended up being. Ask them why they believe the leads will be better and why the margins will improve. Then segment by segment,forecast total sales and margins. Pull them together and compare to your budgeted direct cost and gross profit.Adjust your budget accordingly. Now, you?ve finalized your budget. Time to roll it out.
STAGE 5 - ROLL OUT Now that you?ve finalized the twelve-month budget, you need to break it into manageable monthly chunks: Create a spreadsheet with fourteen columns. Each row should list an income statement expense.The first column is the name of the expense, the second column is the total for the year and the third column is for January, (the fourth for February, and so on through December). Look at each income statement line item and determine whether it is an expense that stays consistent or varies each month (e.g., office rent vs. project materials). Many overhead expenses are billed twice a year or quarterly. Put the appropriate value under each month. The total for the months must equal the total for the year. Pull up monthly sales for the last three years. Calculate the weighting of the sales per month. For example, if you typically sell $400,000 in July out of $3.2 million annually, July accounts for 12.5 percent of your sales. Calculate 12.5 percent of your budgeted sales and direct expenses and put them in July?s column.
Continue filling out your spreadsheet until you have the entire budget accounted.Make copies of the detailed monthly budget and distribute to all individuals who have spending authority. Pull them into a meeting, shut off the cell phones and explain the detailed budget to them. They need to understand the expenditures planned by the budget, the logic behind the expenditures, the assumed gross margins and the planned timing of the expenditures. Regarding cash accounting versus accrual accounting: If you are running your business on the cash accounting basis, you should consider setting up your budget and tracking your progress on the accrual method. Cash accounting is great for taxes but terribly misleading when managing a business for success. By completing the twenty-two-step budgeting procedure, you now have in hand the tool that empowers you to manage your year-end performance. Of course, the key word in there is ?manage.?
TRACKING The second reason builders fail to hit their year-end financial targets is because they fail to track their progress against budget and take corrective action as necessary. Instruct your accounting staff generate an income statement and cash flow statement at the end of each month. A word is also in order regarding your accounting staff: Whether inside or outsourced, your accounting staff must deliver these reports no later than the seventh of the month. Hold them accountable to that date. They will probably whine like mad but ignore it. Timely reporting must be a non-negotiable duty of their position or service. The monthly income statement should show: -
Budget value for the month Actual value for the month Budget value year-to-date Actual value year-to-date Actual vs. budget variance for month Actual vs. budget variance year-to-date Projected year-end based on current trend.
Each month gather your management team to review and discuss the income and cash statements.
TAKING ACTION Budgets do not produce the results; managing them produces the results.As variances become apparent, investigate their cause and take all necessary action. That may mean visiting with someone or some group who is under performing and discussing how things can be done to meet the performance goals. Taking action may mean revising the budget in accordance with changes in the economy and market.When spending exceeds plan or sales fall short, discuss the situation with your management team and decide how to get back on plan and whether the spending needs to be scaled back to offset poor sales or increased to take advantage of unexpected opportunities. You should not ignore unforeseen opportunities just because money wasn?t set aside for them. Adjust the budget as better-than-expected opportunities arise. Reallocate your resources or increase your budget to accommodate the needed investment.
CASH BUDGET Translating your monthly income budget into a monthly cash budget is surprisingly easy and highly beneficial. Copy your income statement spreadsheet and translate the monthly sales figures into monthly cash receipts.The way to do this is to look at your aged receivables. If you typically receive your money forty-five days after the job, then your inbound cash trails your sales by one and a half months.
Your outbound cash is also easy to figure. Your field labor gets paid weekly? your office staff twice monthly or so.Your materials are due in thirty days. The overhead expenses are already scheduled. Lease payments are due every thirty days. Monitor your cash flow budget just like you do your income budget. Go over them at the same time. Usually, when cash flow is becoming a problem it is due to slow paying clients. You need to know that as quickly as possible so that you can chase the money owed to you.
FINAL THOUGHT To run a construction company successfully, you must pay attention to the rate at which your business generates gross profit and the rate at which it spends money on overhead. The only way you can know whether those rates are acceptable as your year unfolds is to create a budget and keep an eye on its progress.Otherwise, you might as well keep expecting those ugly year-end surprises.
?41 West hasbeen building custom homessince 1995 and ishonored to be ranked #1 on Houzz.com of over 3,000 general contractorsin Naples. We define successas creatinglong-lasting relationships. Our clientsare happy to share with you their 5-Star service experience before, during, and longafter the completion of their custom home, luxury condo or home re-model project. Our promise isto earn a 5-star review from our clientsand everyone who comesin contact with 41 West.? Looking t o build meaningful relat ionships wit h st rat egic part ners in your market ? View our case study about how one builder generated an additional $30 million through CLB's strategic partner program
ABOUT CLB NETW ORK CLB measures our partnership success in Revenue, New Projects, and Net Profit. We want you to achieve your goal of putting a minimum of $1M in profits in the bank and achieving 10% net profit for the business and building a valued asset. CLB takes a bright and innovative approach to offering easy-to-understand, customizable, and fractional solution options at a significant value compared to hiring employees or firms that do not understand your business, your best-fit clients or the luxury home building and remodeling industry. CLB Network is backed by a team of seasoned professionals who explicitly understand what it takes to be a high performance luxury custom homes and remodeling business and how to deliver a 5-star experience to best-fit strategic partners. prospects, and clients. Our combined experience and solutions allows CLB to offer you and your business genuine peace of mind knowing that we are on your team and will help you achieve your goals years sooner than if you had to do it on your own.