Money

How To Make Your Budget Generate More Profits

Tom Halligan
Posted on January 18, 2017

Boston operator Mark Kini estimates about a million dollars “went out the window” over many years because of inconsistentcy in managing his budget. Although a successful owner for the past 15 years running Beverly, Mass.-based Boston Chauffeur, after hiring a consultant Kini discovered if you don’t regularly review and adjust every line item in your budget, you will lose money.

Although the company had good cash flow, a strong balance sheet, and solid net profit margins, Kini said it was a “game changer” after he learned how he really needed to embrace and manage the details in his budget all year. With a 20-vehicle fleet and a background in business, Kini said he learned to hone in on five key areas: Financials, marketing, sales, operations, and human resources.

“You have to have a clear strategy about your budget plan and recognize that cash is king,” Kini said. “Numbers don’t lie. So you have to pinpoint any reckless spending by looking at every budget line item and ask yourself why this is happening — then adjust.”

Mark Kini, owner,Boston Chauffeur
Mark Kini, owner,Boston Chauffeur
Little Things Add Up

For example, Kini mentions office supplies as a line item. “We looked at that line item expense and you look at the trends and we found we were not as disciplined as we should have been. We looked at the vendors we were using and asked ourselves, are we getting the best prices and any ancillary benefits from using one vendor over another, such as free shipping or cash back? That’s managing your budget to keep expenses low,” he explains.

One of the key components in preparing and staying on budget is factoring in “unknowns,” advises Ron Sorci, founder and CEO of Miami-based Professional Consulting Resources, Inc., and a LCT financial columnist. “You have to factor in unforeseen events that disrupt business, such as a lawsuit that requires hiring an attorney, loss of a major account, increasing insurance, and other events that can disrupt cash flow.”

Micromanage The Money

Ron Sorci, CEO, Professional Consulting Resources, Inc.
Ron Sorci, CEO, Professional Consulting Resources, Inc.
As a former CFO of Aventura Worldwide, Sorci knows from experience staying on top of your budget is the best tool for an operator to run a profitable operation.

“January is the perfect time of year to prepare a budget by reviewing your historical data and preparing for the New Year. For example, do you plan on increasing your rates in 2017? Then you need to factor the increase into your budget.”

Sorci, who writes the “Profit Driven” column for LCT Magazine, is a firm proponent of paying attention to the details of running your company. He says operators need to be as objective as possible in preparing a budget, and revisit it often to ensure your are on track. 

“The first thing operators need to do is list every single line expense and figure out what it costs them to run their business, all their expenses, and then break down every single source of where revenue comes from (corporate, retail, etc.) and plug in what you want your profit margin to be. In this industry, it ranges from 8% to 13%, so if you want to make a 10% after tax profit, plug that into your budget.”

As a consultant — and echoing Kini’s advice to stay on top of your budget — Sorci advises operators to review their budgets often to stay on course. “You should review your budget on a month-to-month basis and every three months consider revising your budget to be more realistic if you have had a major loss, such as losing an account.”

Expect The Unexpected

Another example of a budget buster is if you have accidents through the year and high deductibles that must come out of your pocket, which can throw a wrench into a tight budget and cash flow.

Sorci notes six examples of unexpected expenses that can seriously impinge on a budget:

  1. Overtime (see sidebar)
  2. Lawsuits
  3. Loss of a major account
  4. Not enough capitalization
  5. Insurance increases
  6. Disasters

“Unexpected costs not factored into your budget can seriously disrupt your cash flow if you are not prepared for such costs,” Sorci says. Lawsuits and natural disasters happen that can trigger cash flow problems plus insurance hikes, and competition from TNCs can stretch the budget rubber band if you are not prepared.”

A Living Document

Richard Fertig, owner,Brilliant Transportation
Richard Fertig, owner,Brilliant Transportation
Adds Richard Fertig, who launched Brilliant Transportation in New York City in 2010, “Most people look at their budgets backwards when they should be looking at it on a weekly basis, or even daily, so there are no surprises at the end of the month.”

A former hedge fund manager with a finance MBA from the University of Pennsylvania Wharton School, Fertig understands how a budget is a working document that needs to be relied on and adjusted constantly to ensure profitability.

“If you see you are having a bad month, you need to react and do something about it to stay on budget,” Fertig says. “That may mean running specials or handing out flyers, or whatever it takes to bring in business to make up for any shortfall. Suppose your heating bill comes in at $1,700 and you only budgeted $1,000? What are you going to do, just sit there? A budget isn’t just numbers; it has a real purpose to help you run a profitable business every month.”

He points out a budget has to consider such variables as fluctuating fuel costs, slow periods, and other factors that can affect profit and loss. “For example, the long Thanksgiving is slow, so we let staff take time off, which didn’t reduce costs, but ate up some vacation time during a slow period.”

One piece of advice Fertig offers owners is to build your salary into the budget. “l learned early on from other operators to pay yourself a respectable compensation because that’s important. You work hard, and at the end of the year, you have managed a budget that makes the company profitable.” 

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Watch For The Silent Budget Killer

Former CFO and industry consultant Ron Sorci points to one line item that quickly can become the silent killer of a company’s operational budget: Overtime pay. “More companies struggle with managing overtime because it creeps up on you during any given week and operators don’t budget for more than an employee’s 40-hour work week.”

Sorci notes overtime costs create the most headaches for operators of all sizes because it’s not factored into their budgets. “Nobody seems to budget it, and then they are surprised when they have a larger payroll that affects cash flow.”

For example, he says a dispatcher may not have enough chauffeurs during a busy time period and decides to keep them working longer hours to handle the volume, or on standby in case of client ASAP calls, or other unexpected business such as affiliate runs.

“I love to pay overtime — as long as it’s directly tied to revenue,” operator Richard Fertig adds. But he cautions overtime can be a killer if operators have to pay time and a half, or in California, where he also does a lot of business, double time after 12 hours.

“Operators need to factor in all the workmen comp costs with overtime because that $15 an hour hourly rate is now $30 an hour, and that eats into profit margins and causes negative cash flow.

“You’ll see operators look at their P&L statements and they wonder why they didn’t make a profit that month. Well, hey, you didn’t plan for overtime costs that didn’t drive revenue.”

Related Topics: finance, How To, insurance rates, lawsuits, profits, saving money

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