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Budgeting for profits

By and |  June 8, 2014

Budgets are almost essential for every business and can help aggregate producers plan for a prosperous future.

Successful aggregate producers usually develop budgets to monitor progress toward their goals, help control spending and predict cash flow and profit. In other words, budgets are an operator’s plan of action for his or her business.

Not only are budgets a plan of action for the aggregates business, they are a tool for evaluating performance at the end of specific time periods. At its most basic, a budget is a systematic method of allocating financial, physical and human resources in order to achieve strategic goals.

Developing a budget
Many operators begin in business with a mine or a property lease, basic equipment, machinery, a line of credit and the best intentions. Initially, most do contemplate the financial needs of their operation. Too often, however, the financial needs are not given all the attention they deserve – especially as things start to slide downhill. Far too many operators honestly believe things will work out, laboring under the assumption that the road to success is paved by simply working harder.

Unfortunately for these operators, working harder may not be the solution if they haven’t focused on the fundamentals of business success. As in many things, timing is everything. Rent, salaries, suppliers and other bills all must be paid on time, or businesspeople risk losing both access to credit facilities and even the operation. When overdue bills are combined with customers who refuse to pay or delay in making payments, it is all too easy to be caught in a financial squeeze.

Planning and building a successful business should start with the preparation of a business plan, budget and the implementation of appropriate internal controls. Every aggregates producer should be prepared for unexpected interruptions that may affect the operation’s finances, and in particular, have appropriate insurance in place.

A budget should be an important part of any financial plan and should include all expenses that the operator knows of and can anticipate – and when expenses must be paid. An amount for unexpected expenses should always be included, because it is Murphy’s Law that costs will always be greater than expected, particularly as the volume of work increases.

Build in marketing time and expenses. Most of all, build in a draw. After all, if the crushed stone, sand or gravel operation’s owner, shareholder or employees aren’t looking after the operation, no one else will.

Comparing total expenses to anticipated revenue, using a historical basis to forecast income or even an educated estimate is usually sufficient for a small aggregates business.

Establishing a budget
An operator first develops a master or static budget with the numbers based on the planned inputs (income or revenue) and outputs (expenses) for the operation. Think of this in very simple terms. The operator is looking at what the operation will take in from revenue and what it will pay out in expenses. The budget is done for a specific period of time, perhaps a month, a quarter or a year.

For any successful aggregates operation, formulating a monthly that coordinates and estimates expenditures for the entire year is essential to the bottom line. Unfortunately, this is often ignored or done improperly with a common oversight of not being realistic when planning a budget.

Some tend to overestimate income and underestimate expenses. Many operators don’t have a good handle on their books. For this reason, it is a good idea to have a third party review estimations.

Every aggregates operation can benefit from experts who have the knowledge, resources and tools to create a realistic budget – one that draws from industry standards for income and expenses.

While having a budget in place is part of having a path to financial success, it is important to remember that any budget is only a projected guess. A quarry or sand-and-gravel plant operator should accept missed projections as a learning tool. Living within a budget is informative, and knowing how much cash should be kept on reserve and timing expenses for paying vendors will take some time.

The bottom line is a budget doesn’t have to be difficult, but it is vital to business success and, often, survival. Eventually, there will be a time to take on a new employee or expand the operation, and because of the budgeting process, the owner or manager will be prepared.

One of the most important reasons for a budget is to make the aggregates operation’s financial situation more predictable. It is good practice to review the budget once a week. This should take no more than 15 minutes to compare actual activities to what has been budgeted.

Many businesses use budgets for the purpose of control. If an operator has a master budget to follow, then they can carefully control expenditures during the time period of the budget by comparing them to the master budget. Thus, while budgets help prevent overspending, they also give operators a benchmark to use for evaluating the business.

Budgets cannot always stay static or the same. There are times when expenditures must change from the budgeted amount, and revenues will change from that which has been forecast. Business owners and managers know when a budget is developed that there will be changes in just about every line item by the end of the time period. Budgets, however, provide guidelines for the operation of the quarry or plant and prescribe some sort of limits.

Budget types
A budget depicts what an operator expects to spend (expenses) and earn (income) over a specific time period. Amounts are categorized according to the type of business activities, or accounts (i.e., labor, telephone costs, sales of products, etc.). Budgets are useful for planning an operation’s finances and then tracking it to see if it is operating according to plan.

Budgets are also useful for projecting how much money will be needed for a major initiative such as buying new equipment, a new facility, hiring a new employee, etc. There are yearly (operating) budgets, project budgets, cash budgets and others. The overall format of a budget is a record of planned income and planned expenses for a fixed period of time.

A financial budget is based on how much income is going to be generated minus the costs, which equals net income and, hopefully, how much money goes in the bank. A sales or income budget, on the other hand, is a goal – something to shoot for. In other words, a sales or income budget is what the operator hopes the operation will do while the financial budget is what has to be done.

A sales or income budget is created by looking at individual customers and realistically estimating the income from each during the next period. With the financial budget, costs don’t materially change – at least as a percentage of income or sales. Wage dollars are very similar, overhead is more or less the same and principal’s compensation is the same, with additional withdrawals made from time to time.

Within the broad category of budgeting, the owner of the small aggregates operation or business may also want to do some specialized budgeting for cash flow. The cash budget is one of the primary tools used in order to plan for cash flow.

A cash budget is often developed on a month-by-month basis. A good cash budget allows an operator to see short-term financial needs and opportunities for the operation. One month, the operation may have extra cash and may be able to save some money in a money market fund or take advantage of a bargain in the marketplace. Another month, the aggregates operation may have a shortfall and have to withdraw some money from savings or even apply for a short-term bank loan to cover its needs.

Budget reviews
As mentioned, budgets should be reviewed regularly. Aggregates producers and plant operators should review their budgets to determine if money is being spent as wisely as possible. Certain costs may have been overestimated, which can free up money to grow the business. Larger operations can afford to establish yearly budgets because they have more financial flexibility.

But small quarry or plant operators are more vulnerable to volatile markets or unexpected costs. So aggregate producers and other small business owners should review their budgets more frequently and make changes they feel are necessary.

Often, the day-to-day pressures of keeping up with work make it difficult to find the time to properly deal with business-related financial issues. Still, regardless of whether a producer or sand-and-gravel plant operator is just starting out – or has been in business for several years – taking the time to create a business plan and budget for the aggregate operation is essential. It will really help in better understanding the operation’s finances and building for a more profitable future.

Take note
Small quarry or plant operators are more vulnerable to volatile markets or unexpected costs. These businesses should review their budgets more frequently.

Mark E. Battersby is a freelance writer who has specialized in taxes and finance for the last 25 years.

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