Money

Maximizing Profits Starts With Sound Budgeting Practices

Linda Jagiela
Posted on September 20, 2014
Aventura Worldwide CEO Ron Sorci explained how defined, consistent budgets can help limo operators set goals, provide direction, instill accountability, and improve workplace performance.
Aventura Worldwide CEO Ron Sorci explained how defined, consistent budgets can help limo operators set goals, provide direction, instill accountability, and improve workplace performance.

Aventura Worldwide CEO Ron Sorci explained how defined, consistent budgets can help limo operators set goals, provide direction, instill accountability, and improve workplace performance.

Aventura Worldwide CEO Ron Sorci explained how defined, consistent budgets can help limo operators set goals, provide direction, instill accountability, and improve workplace performance.
Aventura Worldwide CEO Ron Sorci explained how defined, consistent budgets can help limo operators set goals, provide direction, instill accountability, and improve workplace performance.

LAS VEGAS, Nev. — If you are like most people, the thought of preparing a budget makes you want to take cover. Ron Sorci, Chief Financial Officer of Aventura Worldwide Transportation Services in Miami, says you need to change that view.

Sorci, who spoke at the International LCT Show in February, explained that good budgets can help you in many areas of your business. He believes that budgets will enable companies to control their resources while signaling responsible management. Budgets set goals that managers can strive to achieve and allow owners to monitor their performance. Budgets will lead to better performance and will hold people accountable, Sorci said.

“Many people ignore the budgeting process and wing it as they go along,” Sorci said. “By doing this, you will only pay for the ramifications of not knowing where you stand in the budget process.”

Creating a Budget
Sorci explained there are three ways to create budgets: Top down, bottom up and zero based.  
“With the top-down budget, the preparer sits in a room and lists every expense and revenue,” Sorci said. “He prepares the budget and then meets with everyone in the organization and tells them what the budget is. This is the worst approach you can use,” he said.

Sorci recommends a bottom-up budget. “With this type of budget, the preparer reaches out to each of the department heads and asks them what they expect to spend in their departments and how they can do better during this period. They then submit the numbers which the preparer uses to put the overall budget together. This type of budget is best received by the employees as they have buy-in since they were consulted when you prepared it.”

The last type, which Sorci also does not recommend, is the zero approach.  In this, the preparer starts with zero and looks at what he ideally will need to run the company.  

Business Plans
“Hand in hand with your budget, you will need a business plan,” Sorci said. “A budget looks at one year while a business plan can look at five or more years.”  

The business plan assesses the business and maps out the future to help companies grow, he said. Business plans are essential for companies that need to secure financing, whether that is a bank loan or overdraft protection.  
Sorci believes that budgets and business plans are living documents that should be constantly reviewed and communicated to the organization. When preparing a business plan, an operator should review constant resources, such as customer satisfaction. You don’t want to cut your customer satisfaction when you cut expenses. If you decide to use smaller cars because they cost less, will your clients be less satisfied with the ride? You need to understand external resources and their needs.  

Return On Investment (ROI)
ROI is the magical number that all companies look at. Sorci believes that companies should have an eight to 13% profit margin with 10% the average. Sorci cautions that you shouldn’t let the figures alone guide you. He says that you should approach ideas from multiple areas and get buy-in from others in your organization. He suggests that you constantly analyze where you stand and what affects your business.
Sorci recommends the following exercises:

Analyze your current year’s results: Do you have complete buy-in and can you make changes?

  • SWOT: This acronym stands for Strengths, Weaknesses, Opportunities and Threats. Ask yourself what are the strengths of your company? What gives you a competitive edge? What are your weaknesses? What do you think needs fixing? Are there any opportunities that you can capitalize on? Can you get a potential big contract? Finally, what are your threats? Are your competitors pricing to buy the market? Are companies such as Uber taking away some of your share of the business? Sorci says you should make these lists with an eye for change.
  • PESTLE: Another acronym that you can use to help your business. It looks at the following: Political, Economic, Social, Technological,  Legislative, and Environmental factors. Under Political, Sorci sites things such as Obamacare and minimum wages. How will these things affect your business? Under Economical, look at things such as the recession and what toll it takes on your business. Under Technology, do you need your own app? What things are happening Legislatively in your area?  

As a sidebar to this analysis, Sorci explained that in a recent Harvard Business Review article, Cooper Software looked at 500 American office workers with regard to maverick spending. The article said that six out of 10 employees admitted to waste, fraud or abuse up to $25,000. They also admitted to stealing all types of things including money. Owners always should be aware of the potential of this happening in their businesses.

Six Steps to Better Budgets

Sorci suggests the following six steps to better budgets:

  • Check industry standards: Speak to your industry peers and see what they are doing in their business. Attend industry trade shows and association meetings to understand what others are doing. Ask questions.
  • Prepare spreadsheets: Use spreadsheets such as Excel that will automate the process for you and allow you to recalculate numbers when you make a change.
  • Build in slack to your budget to give you some wiggle room for the unexpected.
  • Look to cut costs.
  • Review your business and your budget regularly whether it be monthly or quarterly.
  • Shop around for services and suppliers. Consider sending requests for bids. Ask for discounts and ask your suppliers to use your service.  

Opposing Views To Budgeting
Sorci explained that some members of corporate America believe that budgeting is a waste of time. For those who compensate based on performance, some believe that budgets are only used to manipulate numbers. He cited examples of companies that shipped partially completed goods just to make the numbers look better in a particular period. Sorci does not believe these views are correct if you hold people in your organization accountable.
 
Things Executives Always Should Say

  • “Spend what we have before we gripe that we need more.” Put money in your budget that allows you to produce results.
  • “Show me a rock star and I will hire them.” If the world’s greatest employee was available, would you pass them up because you couldn’t afford him? Sorci says that you should never refuse to hire someone who will make your business grow. Good talent is hard to find. Don’t let them get a way when you have the chance.
  • “I always have $____ for a good idea.” This is stuff that is not in your budget. Don’t let a good potentially money making idea get away because you don’t have money in your budget.
  • “I always have $____ dollars for wiggle room.” Give yourself some slack. Don’t get hung up on everything.
  • “Five great things start with small investments.” Be prepared to make those investments should the opportunities arise.

TYPES OF COMPANY BUDGETS

  • Cash budget: Looks at cash flow
  • Sales budget: Tracks the expected sales and seasonality
  • Operating budget: Analyzes revenue and expenses
  • Expense budget: Evaluates every expense you have in your business
  • Labor budget: Tracks every employee and all of the costs related such as wages, insurance and perks
  • Capital budget: Includes all capital expenditures for your company and the payments made on them including items such as computer equipment and software

Related Topics: Aventura, better business management, business tools, finance, ILCT 2014, industry education, profits, revenues, Ron Sorci

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