Commentary

How budgeting helped us survive challenging times

Veteran convenience services operator Ray Friedrich describes key budget processes that allow a business to sustain a profit.

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February 21, 2022 by Ray Friedrich

When we first started our business from scratch, we had a business plan but not a budget. When we paid all our bills and money was left over, we "made" money.

Small, closely held companies may not see the need to develop and execute on a budget. We have discussed how the importance of having a well thought out, written business plan aligned with your long-term strategic goal is critical to success. Likewise, a well thought out operating budget will tell you with certainty that you are executing your business plan profitably. Don't forget, profit is your most important product. Without profit there is no business.

A realistic budget will give you the proper data to make key investment decisions and keep you on track with your spending and available capital. It will tell you if you are hitting your targeted revenue and profit goals.

As our company grew and became much more complicated, our budgeting process made it easier for the owners and managers to keep up to date on how each division was operating and how much that division was contributing to the bottom line. We tracked all of our dinning accounts on their own budget along with our major vending and micro market accounts.

Most importantly, if there was a problem with any aspect of the business, it was easy to identify the culprit. The faster you identify a problem, whether it be on the expense side or revenue side, the faster it can be fixed.

Surviving in uncertain times

The convenience services industry, especially today, is highly volatile. Revenue is uncertain and expenses for product and labor are very dynamic. If you do not analyze your real results versus budgeted projections on a monthly basis, you could find yourself in big trouble, real fast, especially in this environment.

Prior to the COVID-19 situation, business was very consistent. Variance in budget versus actual performance was well within acceptable margins. Today, this is not what I am seeing. With the organizations I have recently worked with, we are experiencing revenues all over the board from week to week. Expenses on product and labor are increasing rapidly and as a result, profits are hard to come by.

The 'master' budget

Budgets are made up of parts. The final product of your organization's combined "all in" performance is your master budget. The master budget is a financial plan based on your business's strategic plan. It has two "subbudgets," your financial budget and your operating budget. In turn, each of these is comprised of a number of specific budgets.

In preparing your annual budget, it is best to involve your professional advisors such as your in-house accounting, your CPA and tax consultant. You will also want to involve anyone who is directly held accountable for the part of your budget you are developing and anyone who can provide insight into that specific part of your operation.

As these key people are going to be held responsible for achieving the stated budget objectives, they need to "own it" as one the authors. You don't want to hear, "I never thought that budget was realistic anyway."

Operating and financial budgets

The operating budget uses forecasted numbers in your "subbudgets," or schedules that comprise it. These forecasts are based on historical activity from the prior year's operations taking into account known factors that will change or have a certain effect on the business. These could be the loss or gain of a significant piece of business or a challenging economic outlook.

The result of the development of the operating budget is the pro forma, or forecasted income statement for the firm for the specified time period.

Your financial budget is an estimate of the organization's cash budget, capital expenditures and balance sheet line items like assets, liabilities and owner's investment. The financial budget is the last budget to be annually developed since it is made up of all the subbudgets in your operating budget. Your financial budget will predict your net operating profit or loss.

Two budget approaches

There are typically two budget approaches used in the convenience services industry.

A static budget approach is where you use historical performance to budget revenues and expenses line by line and adding or subtracting a certain percentage depending on current factors such as the anticipated increase in cost of goods or labor.

The other type of budgeting approach is a zero-based budget process where every line item is zero and you base your numbers on current conditions using internal and industry specific data.

I have found it best to combine these two approaches.

In order to be successful during challenging times, you need to create realistic budgets in support of your long-term strategic goal. You and your team then need to spend a good amount of time analyzing your real performance versus projected performance for all budgeted aspects of your business. I recommend doing this monthly as soon as the data is available. This will allow time for corrective actions.

In our dining business, our POS system gave us food and labor costs every night. Thus, we could head off a financially challenged operation before it developed into a larger problem. We were able to make swift adjustments to bring the account back into line.

Remember, you can't improve what you do not measure.

Vending