Using Your Annual Budget as a Valuable Management Tool

Posted on December 1, 2005 by LCT Staff - Also by this author

In a perfect world, every limousine operator would construct a detailed revenue analysis and budget-planning report. Adding this healthy habit to their business tools could result in a better bottom line.

Revenue targets and budgets aren’t perfect; they have to be modified and corrected during the year to reflect reality. However, they’re invaluable as part of the New Year planning process for initiating new sales and marketing programs, adding fleet and employees and integrating new technology into your business.

We asked operators with various fleet sizes and geographic locations to share their budgeting methods and how they use the process as a valuable management tool.

Wayne Cipullo Director of Corporate Development Regal Limousine Service, North Hampton, N.H. Fleet Size: 40+

What factors go into setting your 2006 revenue target?

First, we have to look at previous activity performance. We breakdown each service segment (airport, weddings, group, specialty) of our business over the past five years and analyze the year-over-year activity patterns to see where we’ve been.

Next, we examine current and forecasted trends within the travel industry. We can then start to develop some activity assumptions based on this information.

Are you increasing your service prices next year?

We base our rate strategies on current pricing, competition and our projected expenses. We’ve instituted a surcharge system to compensate for unstable fuel costs. We generally don’t offer price differentials for new or existing clients, although we may offer a discount from time to time. We offer corporate rates based on volume.

What method will you use to create your 2006 budget?

As far as expenses, we use a combination of historical data and zero-base budgeting methods to develop our line-by-line operating expenses. Take tires for example; we’ll sit with our maintenance manager and look at the mileage on the vehicles and determine when we will need to purchase tires for each one. We can then create a monthly budget for tire purchases. For smaller items such as office supplies, we look at what we have typically spent in years past and make our assumptions based on those figures.
When we budget payroll, we categorize our staff into two segments: base or variable. Base staff consists of people who will be paid the same amount every week regardless of the amount of business activity. Managers, dispatchers and reservationists usually fall into this category. Budgeting for base staff is fairly straightforward - a simple matter of calculating their monthly payroll and factoring in annual raises as they are scheduled.

Variable staffing applies to those people who work strictly based on the amount of volume. Chauffeurs, for example, are in the variable staffing category because chauffeur staffing varies with the number of runs. In order to figure variable staffing, we need to go back to our activity assumptions and calculate our chauffeur payroll based on the number of runs. Once we have an understanding of our expenses, we can go back and tweak our revenue projections to make sure we have manageable margins.

How do you implement and enforce your budget?
We actually have a simple process for this. We’ve created a spreadsheet that acts something like an automatic checkbook. The manager is given a monthly figure for an expense, such as vehicle maintenance. Every time he spends money out of that account, he enters it into the spreadsheet and it calculates the remaining balance for the month. This is a very simple solution for controlling expenses, but we have to watch our revenues and adjust the balances to keep within our percentages.
Will you be making any changes to your operation next year, and if so, how does this affect your budget-planning process?

Our CFO will decide if a purchase is to be a capital expense or an operating budget expense. For example, if we were to upgrade our chauffeur pagers, that would come out of the operating budget as a monthly expense. If we were going to purchase six new computers, we would probably budget this as a capital expenditure. It all has to do with the cost and the useful life of the equipment.

How do you use your budget as a management tool?

We post our daily and monthly run counts every day so that our staff knows how we’re doing. Financial reports are reviewed and analyzed on a monthly basis. Problem areas are highlighted and discussed with the appropriate manager. From there, strategies are put in place to resolve the problem. We also have annual general staff meetings and review the key numbers.

Jay Menaldino Director of Sales and Marketing Excel Limousine, Rochester, N.Y. Fleet Size: 11

When creating your 2006 budget, what factors are involved?

We use statistical data to analyze our profit and loss during the past five years, and drill down on those controllable areas in reducing the overall cost of doing business. We will concentrate on and monitor those areas where we have developed process improvements in the present model, and create other strategic areas for improvement in technology, training, marketing initiatives and fleet purchases.

Our controllable expenses are summarized as operating expenses. These would include insurance, vehicle finance and maintenance, labor costs, advertisement, facility costs and gasoline costs. We also determine where our business was generated during the past five years. These business segments are classified as type of service such as airport, corporate, wedding, night out, proms, funerals, medical transportation, affiliates and other. Also, we look at how these have increased or decreased in recent years.
The tools we use are the data obtained through our balance sheets as well as other reporting tools that we’ve designed. We will create individual budgets as we have in the past for marketing, maintenance, training, purchasing and core operations.

Another step in the process is that we ask our department heads to analyze the way they currently spend their budgets and ask for forecasts along with their business plans for the upcoming year. Then, we work together in defining the budget requirements and make reductions in expenditures or reallocate dollars out of other budget areas.

Are you increasing any of your service prices next year?
We have had to increase our service rates by 10% to offset the increases in insurance and gasoline prices.

Will you have different pricing structures for new and existing clients?

Yes, we did create several promotions for both new and existing clients to increase hourly rentals. These come in the form of savings revolving around client utilization of our services, and also come in the form of rebates and VIP Membership amenities.

How do you use your revenue goals and budget as a management tool?

Quarterly reviews of revenues and goals are just one way we focus on our business. Weekly meetings also are conducted by both managers and employee groups. These meetings address where we are today with our budgets. Improvement measures are reviewed by senior staff and implemented if warranted. Excel promotes an open-door policy to management staff and employees with incentive awards to help continually recognize areas where improvements that increase productivity, reduce costs or increase revenue may be achieved. We try to create an environment to foster better productivity from our employees who will go the extra mile.
Alan Kushmakov President Four Seasons Limo Co., Phoenix Fleet Size: 14

What factors go into setting your 2006 revenue target?

It’s nearly impossible to predict annual revenues precisely, particularly for the chauffeured transportation industry, but it’s critically important for companies to create high-quality revenue budgets. My team and I will spend weeks assessing market conditions, evaluating competition, conducting analyses based on previous years and establishing targets to set revenue expectations for next year.
When we’re developing revenue targets, we adhere to the following basics: Understand thoroughly how sales work and how prospects become customers Analyze prior customer behavior Assess the total number of potential accounts with which our company can realistically do business Look at the marketing investment required to drive more business Study seasonality associated with customer behavior, and national and local dynamics of the economy

Are you increasing your service prices next year?
We’ve already implemented the price increase for this year and are considering another price increase early next year. I think many of my peers would agree that we are way overdue when it comes to increasing rates. The plan is to keep the same pricing structure for our existing customers and adjust pricing for new ones.

Will you be making any changes to your operations next year?

Yes, we are planning to increase our fleet, hire more chauffeurs and purchase technology products such as GPS tracking and DriveCam. We include new purchases and activities within our new budget plan. In most cases, the total of all proposals will be two-to-three times the real amount the company can spend. My team and I discuss proposed activities and actual spending limits. Then we go through the budget, item-by-item, and pare it down to a realistic amount.

How do you use your budget as a management tool?

I schedule quarterly meetings with my team to review revenues for the past three months and compare those numbers to projected revenue targets. We also discuss and analyze new sales opportunities, marketing achievements and failures, operations and account management.

Chris Hundley President The Limousine Connection, North Hollywood, Calif. Fleet Size: 31

When setting revenue goals for 2006, what factors are involved?

We really try and look at the big picture. We look at the trends in the past three years as a basis to see evolving patterns. This is a very difficult business to accurately forecast but we need to have a game plan to start with and then be able to modify it as needed. The revenue and budget forecasts need to be flexible based on unforeseen changes.

Are you increasing any of your service prices next year?

Yes, approximately 6% based on profit percentages and overhead cost. We generally review or change rates on an annual basis. We added a fuel surcharge in 2003 and now we are going to keep the surcharge and raise the rates minimally to help with fuel and other operating costs. Clients seem to accept and understand a fuel surcharge better than a large rate increase, so that is what we are doing at this point.

How do you implement and enforce your budget?
We review it monthly and make changes if there’s good reason. My people are empowered to feel free to voice their opinion on any aspect of the business. They know I might not agree with them, but I appreciate their input.

Will you be making any changes to your operations next year?

Nothing drastic. We are a rather conservative company and have a pretty consistent flow of business. We always are fine-tuning and adjusting to stay on top of our game. We don’t chase after business that doesn’t make economic sense.

How do you use your budget as a management tool?

We meet monthly or sooner if need be. We are always looking for input whether it is good, bad or a differing opinion. I have made up formulas over the years that have proven reliable, but it’s always good to get gut feelings from other employees involved in day-to-day operations. Gut feelings win out approximately 20% of the time, and have proven to be a reliable tool over the years. The key is staying open-minded and flexible.

Gary Day President American Limousines Inc., Baltimore Fleet Size: 43

When setting revenue goals for 2006, what factors are involved?

When we set our revenue goals for 2006 we consider multiple factors. Primarily, we expect our company to perform a minimum of 10% better than the previous year. While 10% growth is aggressive, we expect that when we concentrate on new sales and excellent customer service 100% of the time, our revenue goals are more than achievable.

Additionally, we look at what is going on in our city to anticipate areas of opportunity where we can grow our business even further. These opportunities include conventions and other major events, such as sporting events or new show openings, that allow us to capitalize on one-time business that gives us an additional boost. We look at these events at least a year in advance.
Are you increasing any of your service prices next year?

We’re doing everything we can to keep service prices fair and reasonable, and most importantly, affordable to our customer base. With prices increasing for so many and the potential threat of inflation looming in the economy, we’re doing our best to pass on modest price increases to our customers.

The only service pricing increase we are forecasting currently, aside from an increase directly related to fuel, is a slight increase in our wedding business. We anticipate all of our wedding service costs to increase by $5.
How do you implement and enforce your budget?
This is a constantly changing process that is responsive to the needs of the business at the time. We’ve found that we need to focus more on recruitment during winter and summer, when chauffeurs typically hibernate, so in early spring and late summer, our focus shifts toward marketing and advertising. Fuel costs are a constant concern and are watched on a daily basis.

Will you be making any changes to your operations next year?

Our fleet size has grown tremendously this past year in response to customer demand. We employ a process where we monitor our requests and model our fleet in response to these requests. The appearance of our fleet is constantly changing.
We also expect to hire additional staff because there is a strong need for 24/7 service. Baltimore is a growing city and we need to be responsive to that growth. In doing so, we have determined that around-the-clock service can be supported. We are looking for additional staff to make this a reality. Also, we are planning to increase our advertising budget and decrease our expenditures related to recruitment.
Finally, we believe strongly in the need for technology and technology upgrades on a constant basis. We have retained a technology consultant and make regular upgrades to our network. The smarter our network is, the smarter we are, and we can translate that into better customer service for our clients. We believe that in conjunction with excellent chauffeurs, a capable and friendly office staff and new late-model clean vehicles, our service is enhanced by a strong computer network with regular upgrades.
How do you use your budget as a management tool?

We have bi-weekly team meetings with senior management, marketing, sales and front-office managers. At these meetings, we cover our goals and current achievements from the previous, current and next month.

We set challenges to accomplish and plan ahead for any obstacles that we can forecast. These frequent meetings give everyone in management an opportunity to stay connected and focused on our company’s mission.

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