Welcome to Financial Series #7Establish Budget

Your Hosts for Today’s Conference are:Gary Elekes in Nashville, Tennessee

Gary Oetker in Plano, Texas

Conference Objectives: Review the significance of Budgeting and why it

should be done.

Review fundamentals in setting financial goals

Review how to construct an annual budget

Review how to construct monthly budgets

Review how to involve employees in budget process

Review why to budget and the basics in settingfinancial goalsReview how to set business mix goalsReview how to budget above the lineReview how to analyze & change monthly sales curves Review how to budget overheadReview how to create an annual and monthly budgetsReview how to involve employees in budgeting process

Agenda for Conference

A prediction of what might happenYou will always be wrong

An effort to plan for the futureA proactive approach versus reactiveA “financial picture” of the future

What is a Budget?

Creates guide and financial roadmapCreates accountability for your entire company

This fits nicely into pay for performance compensation plans for department

headsA budget helps you focus and select among

alternative strategies to achieve financial goals

A monthly budget provides milestones during the year

Why do a Budget?

Step 1 – Internal AnalysisStep 2 –External Analysis of Opportunities and

ThreatsStep 3 – Set Financial GoalsStep 4 – Create a Budget in Support of Financial

GoalsStep 5 – Assemble Action Plans to Support

Budget and Financial Goals

Budgeting is One Step in Creating a Financial Plan

Setting Financial Goals

Internal AnalysisReview historical financial performance by

departmentCompare to industry Key Performance Indicators

(revenue per employee, gross margin, margin dollars/crew day, overhead,

etc.)Consider desired Return-on-InvestmentConsider company strengths and weaknessesConsider business mix

Setting Financial Goals (cont)External AnalysisConsider market opportunitiesConsider market threats

Other ConsiderationsConsider other aspects in setting financial goals

including marketing, operations and organizationGoals must be realistic and attainable, but should

have some stretchInvolve your management team in goal setting

Determining Business MixPreliminary (For Year)Determine yearly revenue goals per departmentDetermine gross profit percentages per

departmentDetermine gross profit dollars per departmentDetermine cost of salesEstimate total company overheadEstimate total company operating profit (EBIT) Adjust department revenue and gross margins to

get desired return on investment

Business Mix WorksheetRes. Repl. Res. Service RNC Total Company (%)

Sales

Desired Gross Margin % 40.0%

$1,000,000

Gross Margin $

Cost of Sales $

$300,000 $500,000 $1,800,000

50.0% 30.0% 38.9%

$400,000

$600,000

$150,000

$350,000

Overhead Expense

Operating Profit

$150,000

$150,000

$700,000

$1,100,000

$500,000

$200,000

27.8%

11.1%

100.0%

38.9%

38.9%

61.1%

Budgeting TechniquesAbove the Line

Use history as a guideFinalize your business mixFinalize revenue goals by departmentEstimate cost of sales using percentages

Except for labor – Use dollarsUse KPI’s as a guide to setting cost of sales

percentages If there’s a variance from history versus the plan,

be sure to create action plans to implement those changes

Budgeting Techniques – Above the LineTotal % Residential % Residential % RNC %

Replacement ServiceSales 1,800,000 1,000,000 300,000 500,000

Parts 230,000 12.8% 100,000 10.0% 45,000 15.0% 85,000 17.0%Direct Labor 278,000 15.4% 100,000 10.0% 78,000 26.0% 100,000 20.0%Equipment 390,000 21.7% 250,000 25.0% 0 0.0% 140,000 28.0%Subcont. 10,000 0.6% 10,000 1.0% 0 0.0% 0 0.0%Permit 5,000 0.3% 5,000 0.5% 0 0.0% 0 0.0%Callbacks 9,000 0.0% 0 0.0% 9,000 3.0% 0 0.0%Extended Warranty 15,000 0.8% 15,000 1.5% 0 0.0% 0 0.0%Buydown 10,000 0.6% 10,000 1.0% 0 0.0% 0 0.0%Warranty 14,000 0.8% 20,000 2.0% -6,000 -2.0% 0 0.0%Allocated Fringes 63,000 3.5% 30,000 3.0% 18,000 6.0% 15,000 3.0%Sales Salaries 0 0.0% 0 0.0% 0 0.0% 0 0.0%Sales Commission 76,000 4.2% 60,000 6.0% 6,000 2.0% 10,000 2.0%

Total Cost 1,100,000 61.1% 600,000 60.0% 150,000 50.0% 350,000 70.0%

Gross Mar. 700,000 38.9% 400,000 40.0% 150,000 50.0% 150,000 30.0%

Budgeting Techniques -Determining Sales Curves by Department

$ % $ % $ % $ % $ % $ %Residential Replacement 63,240 7.0% 66,340 7.3% 70,680 7.8% 75,000 8.3% 80,000 8.8% 97,000 10.7%Residential Service 26,500 8.8% 18,000 6.0% 19,500 6.5% 23,500 7.8% 25,500 8.5% 26,000 8.7%RNC 51,000 10.3% 38,000 7.7% 40,600 8.2% 50,600 10.3% 36,600 7.4% 40,000 8.1%

$ % $ % $ % $ % $ % $ %Residential Replacement 126,480 13.9% 93,620 10.3% 45,880 5.1% 58,000 6.4% 64,000 7.0% 68,200 7.5%Residential Service 33,000 11.0% 35,000 11.7% 19,000 6.3% 23,500 7.8% 24,500 8.2% 26,000 8.7%RNC 62,800 12.7% 53,400 10.8% 29,600 6.0% 42,400 8.6% 24,000 4.9% 24,000 4.9%

March April May June

July August September October November December

January February

Look at historical sales curves by department

Previous Years Sales History

Analyze & Adjust Sales Curves

Use previous years performance as a historical guide

Take any anomalies into considerationMake plans to flatten peaks and valleysSet new sales curve for budget

Analyze and Adjust Sales Curves

Jan. Feb March April May June July Aug. Sept. Oct. Nov. Dec.Res. Service 29,530 28089 50,657 53748 49,104 130628 90,364 100911 60,977 33724 19,939 31903

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1 2 3 4 5 6 7 8 9 10 11 12

Sample Historical Sales Curve for Service

Can you sustain growthat peak months?

Can you increase revenueat the valleys?

Budgeting Techniques -Project Monthly Revenue by Department

$Residential Replacement 1,000,000Residential Service 300,000RNC 500,000

$ % $ % $ % $ % $ % $ %Residential Replacement 7.0% 7.3% 7.8% 8.3% 8.8% 10.7%Residential Service 8.8% 6.0% 6.5% 7.8% 8.5% 8.7%RNC 10.3% 7.7% 8.2% 10.3% 7.4% 8.1%

$ % $ % $ % $ % $ % $ %Residential Replacement 13.9% 10.3% 5.1% 6.4% 7.0% 7.5%Residential Service 11.0% 11.7% 6.3% 7.8% 8.2% 8.7%RNC 12.7% 10.8% 6.0% 8.6% 4.9% 4.9%

July August September October November December

Next Years Sales Goals

January February March April May June

Spread the sales goals to each month using percentage as a guide. Tweak the final numbers.

Budgeting Techniques -Project Monthly Gross Margin by Department

Total % Residential % Residential % RNC %Replacement Service

Sales 147,900 70,000 26,400 51,500

Parts 19,715 13.3% 7,000 10.0% 3,960 15.0% 8,755 17.0%Direct Labor 24,164 16.3% 7,000 10.0% 6,864 26.0% 10,300 20.0%Equipment 31,920 21.6% 17,500 25.0% 0 0.0% 14,420 28.0%Subcont. 700 0.5% 700 1.0% 0 0.0% 0 0.0%Permit 350 0.2% 350 0.5% 0 0.0% 0 0.0%Callbacks 792 0.0% 0 0.0% 792 3.0% 0 0.0%Extended Warranty 1,050 0.7% 1,050 1.5% 0 0.0% 0 0.0%Buydown 700 0.5% 700 1.0% 0 0.0% 0 0.0%Warranty 872 0.6% 1,400 2.0% -528 -2.0% 0 0.0%Allocated Fringes 5,229 3.5% 2,100 3.0% 1,584 6.0% 1,545 3.0%Sales Salaries 0 0.0% 0 0.0% 0 0.0% 0 0.0%Sales Commission 5,758 3.9% 4,200 6.0% 528 2.0% 1,030 2.0%

Total Cost 91,250 61.7% 42,000 60.0% 13,200 50.0% 36,050 70.0%

Gross Mar. 56,650 38.3% 28,000 40.0% 13,200 50.0% 15,450 30.0%

January _____ Operating Profit Projection

Budgeting Overhead

Budgeting Techniques -Overhead Considerations

Overhead Categories

Marketing

Employee Relations

Plant & Equipment

Vehicle Related

Administrative

Total

Use dollars for overhead expense accounts

Tie marketing budget to Marketing Plan

Refer to industry KPI recommendations. Remember to accommodate business mix.

Review each line item and estimate expense

Plan important process/operational changes while budgeting

Budgeting Techniques -Set Overhead for Year (cont)

Sales Goal 1,800,000Gross Margin Goal 700,000 38.9%

Yellow Pages 20,000 1.1% Mgt. Bonus 4,000 0.2% Depr. - Leasehold 2,000 0.1% Permit and Licenses 2500Direct Mail 35,000 1.9% Admin. Wages 90,000 5.0% Depr. - Equip. 8,000 0.4% Accounting Fees 5000Newspaper 17,000 0.9% Warehouse Wages 45,000 2.5% Depr. - Furn. 4,000 0.2% Goodwill Amort. 0Television 0 0.0% Officer Salary 95,000 5.3% Building Maint. 2,000 0.1% Bad Debts 5000Other 4,500 0.3% Vacation/Holiday 7,000 0.4% Shop Supplies 1,700 0.1% Dues and Subscriptions1200Co-op -4,500 -0.3% Tng./Meet. Wage 6,000 0.3% Equip. Maint 2,000 0.1% Industry Group Fees 0Sub Total Marketing 72,000 4.0% Payroll Taxes- FICA 11,500 0.6% General Liab. Insur. 5,000 0.3% Data Processing 5000

Payroll Taxes- Other 3,000 0.2% Rent 18,000 1.0% Postage 4000Worker's Comp 3,000 0.2% Utilities 8,650 0.5% Office Supplies 8000Group Med. 12,000 0.7% Telephone 7,000 0.4% Radio, Pager Exp. 12000

Depreciation Exp. 5,000 0.3% 401-K 5,000 0.3% Janitorial Exp. 2,000 0.1% Cellular Exp. 2500Vehicle Repair 6,000 0.3% Self Work. Comp 0 0.0% Prop. Tax 4,000 0.2% Bank and Credit Card 500Vehicle Fuel 28,000 1.6% Uniforms 10,500 0.6% Sub. P&E 64,350 3.6% T&E 4000Vehicle Licenses 500 0.0% Employee Relations 0 0.0% T&E Meals 750Auto. Insurance 9,100 0.5% Drug Testing 2,000 0.1% Contributions 1000Vehicle Lease 15,000 0.8% Hiring Exp. 3,000 0.2% Mileage Reimburse 1000Sub. Vehicle 63,600 3.5% Small Tools 6,600 0.4% Other 1000

Education Exp. 6,000 0.3% Sub. Admin. 53450Allocated Fringes -63,000 0Sub. Emp. Rel. 246,600 13.7%

Total Overhead 500,000 27.8%Operating Income 200,000 11.1%

Vehicle Related

AdministrativeMarketing Employee Related Plant and Equipment

Budgeting Techniques -Project Monthly Overhead Expenses

Consider costs that hit specific months (I.E. – marketing campaign)

Consider spreading out over costs over 12 months (I.E. - Cost / 12)

Budgeting Overhead- Gut Check -

Setting Budget for 3 Slowest Months

Budgeting Techniques -Target Monthly Overhead

$ % $ % $ % $ % $ % $ %Residential Replacement 70,000 7.0% 73,000 7.3% 78,000 7.8% 83,000 8.3% 88,000 8.8% 107,000 10.7%Residential Service 26,400 8.8% 18,000 6.0% 19,500 6.5% 23,400 7.8% 25,500 8.5% 26,100 8.7%RNC 51,500 10.3% 38,500 7.7% 41,000 8.2% 51,500 10.3% 37,000 7.4% 40,500 8.1%TOTAL 147,900 129,500 138,500 157,900 150,500 173,600

$ % $ % $ % $ % $ % $ %Residential Replacement 139,000 13.9% 103,000 10.3% 51,000 5.1% 64,000 6.4% 70,000 7.0% 75,000 7.5%Residential Service 33,000 11.0% 35,100 11.7% 18,900 6.3% 23,400 7.8% 24,600 8.2% 26,100 8.7%RNC 63,500 12.7% 54,000 10.8% 30,000 6.0% 43,000 8.6% 24,500 4.9% 24,500 4.9%TOTAL 235,500 192,100 99,900 130,400 119,100 125,600

July August September October November December

January February March April May June

Target monthly overhead so company makes money in 3 slowest months

Budgeting Techniques -Set Monthly Overhead (cont)

Sept. Nov. Dec. Average GM % GM $Residential Replacement 51,000 70,000 75,000 65,333 40.0% 26,133Residential Service 18,900 24,600 26,100 23,200 50.0% 11,600RNC 30,000 24,500 24,500 26,333 30.0% 7,900TOTAL 99,900 119,100 125,600 114,867 45,633

Target monthly overhead so company makes money during the slowest times of the year

For residential replacement & service focused companies, target monthly overhead at 30% of average 3 slow month

$114,867 x 30% = $34,460

Budgeting Tool on WebsitePrior Years Data Year Jan Feb Mar Apr May Jun Jul AugSales-Residential Replacement 2001 5 5 6 7 7 13 15 9

2002 5 5 6 7 7 13 15 9 2003 4 6 6 7 7 13 15 9

Totals 14 16 18 21 21 39 45 27 Historical Sales Curve 4.67% 5.33% 6.00% 7.00% 7.00% 13.00% 15.00% 9.00%Actual Sales Curve to use in Budget - 5.00% 7.00% 6.00% 7.00% 8.00% 11.00% 12.00% 12.00%

Historical Cost factors - % vs. Sales Historical Cost factors - % vs. SalesHistorical Cost of Sales % - Parts 0.0% Historical Cost of Sales % - Buydowns 0.0%Actual % to Sales to use in Budget - 9.0% Actual % to Sales to use in Budget - 3.0%

Historical Cost of Sales % - Equipment 0.0% Historical Cost of Sales % - Rebates 0.0% (enter as negative #)Actual % to Sales to use in Budget - 26.0% Actual % to Sales to use in Budget - 0.0%

Historical Cost of Sales % - Labor 0.0% Historical % - Direct Labor Allocated Benefits % 0.0%Actual % to Sales to use in Budget - 9.0% Actual % Fringe to Direct Labor for Budget - 24.0%

Historical Cost of Sales % - Subcontract 0.0% Historical Cost of Sales % - Warranty Labor 0.0%Actual % to Sales to use in Budget - 0.0% Actual % to Sales to use in Budget - 2.0%

Historical Cost of Sales % - Permits 0.0% Historical Cost of Sales % - Commissions 0.0%Actual % to Sales to use in Budget - 1.0% Actual % to Sales to use in Budget - 6.0%

Historical Cost of Sales % - Warranties 0.0%Actual % to Sales to use in Budget - 0.0%

Interject Budget Into Income StatementAs of January 30: Actual Last Year Budget Variance

Sales $80,000 73,600 76,800 3,200

Parts $9,600 8,832 9,216 384Direct Labor $8,000 7,360 7,680 320Equipment $16,000 14,720 15,360 640Sub-contractor $240 221 230 10Permit $240 221 230 10Callbacks $400 368 384 16Extended Warranty-3rd Party $800 736 768 32Buydown / Financing $800 736 768 32Warranty $1,200 1,104 1,152 48Allocated Fringes $4,000 3,680 3,840 160Sales Salaries $0 0 0 0Sales Commission $4,800 4,416 4,608 192

TOTAL COST $46,080 42,394 44,237 1,843

GROSS MARGIN $33,920 32,224 32,563 1,357

DiscussConcludeCommitCreateExecuteMeasureFeedback

Getting Employee Buy-In Model

Note – I will update this slide

Discuss Involve PersonnelConclude Get Buy-In on DecisionsCommit All Hands in Team GoalCreate Idea to reality – stuff!Execute Accountability to do WorkFeedback Measurements & ReportAdapt Plan Adapt as Needed – Start

from the top again

Getting Employee Buy-In Model

Create thirst for facts and realism Share company performance with all employeesMake effective communication a core value of your

companyCreate clear concise performance expectationsAsk employee input into business plan for companyHave employees establish goals along with you

Involve Employees in Decision Making

Questions

&

Answers