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Every successful business needs a budget. Janice Meyer, Housing First Minnesota’s vice president of finance, breaks down budgeting approaches as you head into 2021.
If you’re wondering how to prepare a 2021 budget amid unprecedented uncertainty, join the club, it’s crowded! Some industries have fared better than others during the pandemic, construction being one of them. But there are still pressures facing the industry such as supply chain disruptions and related price fluctuations. These pressures are not likely to see relief anytime soon and should be considered when budgeting for 2021. Other budgeting factors to consider are increased wages. This could be either for lost time wages, as staff may not be working while waiting for COVID-19 test results, or simply the need to stay competitive in the marketplace to retain talented workers. On a positive note, with interest rates at historic lows, financing expenses should be lower which can offset some of the other increased expenses, and this is also good news for consumers wanting to purchase a new home or remodel an existing home.
So, why do you need a budget? A budget is a basic ‘roadmap’ to get you where you want to go. Along with defining your vision, mission statement, and goals, it is an integral part of business planning. Creating a budget does not have to be a difficult task, and it is enormously beneficial to enable you to measure whether you are on track for your annual revenue, salary, and profit goals. Half the work of budgeting for the following year is done by preparing accrual and detailed financial reports, such as the income statement, in the current year. While past performance does not always predict the future, looking at trends in your revenue and expense line items from the past few years and then considering factors of the current environment can give you a good starting point.
There are two budgeting approaches: Approach 1 – Anticipate revenue for the year; Approach 2 – Anticipate operating expenses and profit for the year.
The approach that starts by anticipating revenue works better for those industries whose prices are market driven because it is easier for them to anticipate revenue. There are three steps to this approach:
This approach works well for those who have more latitude to negotiate prices and scope of work, such as custom builders, remodelers, and service providers. This approach is preferable because it creates a concrete goal and also tells you how much you must sell, not just what it might be nice to sell. There are six steps in this approach:
At some point, you will also want to prepare quarterly and, ideally, monthly budgets that reflect seasonal trends in the business or certain events that occur only periodically throughout the year (think Parade of Homes!). Remember that initially you do not need to go into that level of detail to gain tremendous benefits from planning a simple budget for your business.