Covering Your Assets: Time is now to take hard look at your 2021 budget (Voices)
Covering Your Assets
As 2020 comes to a close, many organizations may have outstanding questions regarding how to approach 2021 budgeting. It’s important to have a plan in place, especially for construction and manufacturing organizations, to outline expectations for what you want to achieve in a particular period.
Budgeting has been imperative for construction and manufacturing companies in any business climate, but it’s even more important as we look to navigate COVID-19’s impact.
The inherent issue with a budget — and where many business owners get stuck — is that it is difficult to effectively predict which projects will be available to bid and whether your bid will be the one that is accepted. As a result, many budgets never get off the ground because business owners don’t know where to start.
Budgeting is even more uncertain during a pandemic, so let’s take a look at how construction organizations can approach budgeting for 2021.
Budget, forecast and plan for 2021
Focus on contracts where you have experience and where you are reasonably certain you can make a gross profit that will cover the general and administrative expenses and allow you to generate a net profit. Then determine whether the budget will allow the company to pass debt covenants.
Next, tap into all your business contacts to gain a strong understanding of the current market and the contracts that may be available to bid. Discussions with your bank, bonding company, and chamber of commerce members should provide some clarity. Look for contracts available to bid on various construction bidding websites, as well as through your contacts with previous clients.
Once you determine the contracts you hope to win, along with your current backlog, convert your prospects into actual dollars spread over the months you will work on those contracts.
Your team is your most valuable asset during this process. In-house sales managers, project managers, and accounting staff should all assist and have input into the process. For instance:
- Sales managers can help estimate what bids are likely to be successful.
- Project managers can forecast the revenue and expenses by month.
- Accounting staff can update overhead factors and estimate costs.
Direct and indirect overhead are important components of contract costs. These factors are applied to every direct labor dollar or hour and include: payroll taxes, benefits, union dues and other indirect costs like depreciation and rent.
Update these elements at least once a year (and preferably, every six months). Margins on successful bids are thin and the difference in overhead items could have a material impact on the success of your bid, especially on contracts that include a significant amount of direct labor.
Include the selling, general and administrative expenses in your budget and analyze ways you can reduce fixed costs due to the impacts of COVID-19. For example:
- Excess yard space can be rented out.
- Do contract manufacturing with excess manufacturing capacity.
- Certain employees may want to work fewer hours.
- Telephone, internet, and insurance contracts can be renegotiated.
Start the process early to allow enough time to negotiate these changes. After the budget is assembled, it may need to be modified, especially if there are losses. Ask the team that prepared the initial calculations to assist in this process.
Budget management is the last — and often most crucial — step. Make sure your standard monthly accounting package includes a Statement of Income that compares actual to budget with a line-by-line narrative on significant variances.
Keep a close eye on how your actual performance aligns to your budget — it can help you spot trends and respond proactively to keep your business strong in an uncertain economy.
Don’t defer asking for help
Talking to business owners about their finances oftentimes reveals their vulnerable underbelly. In my experience, asking an unbiased consultant to stress test your assumptions is a good idea.
For example, I routinely benchmark my clients to determine how their operations compare to their peers. One such analysis had payroll and occupancy expenses way out of the “norm.”
The owner lamented that while their top line growth had been hit with the impact of COVID, their G&A salaries had not decreased accordingly. We discussed creative ways to offer furloughs, and strategic non-rehires to get the G&A salary back in line with normal ratios. We also discovered that approximately half of their office was not being utilized. We weighed the cost with right-sizing the office, and renting out the remaining space.
The owner assumed that since they owned the entire building, they might as well spread out! I encouraged them to take a hard look at renting or buying another space. Large scale remodels are hard on a business to try to stay open through the remodel.
I believe in the end, taking a hard look at the numbers almost always has better outcomes.
Mike Bosma, CPA, is Principal-in-Charge of the Reno office of CliftonLarsonAllen LLP. His weekly NNBW column, “Covering Your Assets,” focuses on effective planning strategies for every business owner. Reach at email@example.com. CLA’s Beth Silver assisted with writing this article.
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