Preparing an annual budget

Read time: 3 minutes

Introduction to Budgeting for Builders

Someone once told me, “A budget becomes obsolete the moment you publish it,” and technically, they are correct. A whole year is a long time, and many of the assumptions you use to prepare a budget will not eventuate. That being said, preparing a budget is still worthwhile as it allows you to look at the previous period and think about the future state of your business. A budget is a touchstone to come back to when you have some negative business outcomes, and it is a way to document your business aspirations and goals.

If you, as a building and construction business owner, are applying a continuous improvement mindset, you need to constantly set targets, assess your actual results against these targets, and refine your business processes.

Preparing a budget doesn’t need to be a complicated and daunting task with the following simple steps.

How to create a budget for your building company

1. Estimate your revenue

Look at your revenue for the past 12 months. Can you do better this year? If you have a CRM, you can quickly determine your sales pipeline over the next 12 months. Most builders will be able to predict the amounts they expect to invoice on jobs in progress and jobs where the contract is signed, and construction will commence in the next 12 months. Additionally, you can make a judgment call on which leads you believe to be close to signing a contract and add this to your monthly revenue forecast.

2. Set a gross profit margin target

You need to estimate your direct construction costs to work out your projected gross profit. Direct construction costs are the cost of materials, subcontractors & suppliers required to complete all your building projects. Gross profit margin might differ from job to job, so consider the mix of projects you expect to complete over the next 12 months. This is where accurate financial record-keeping becomes essential. Do you track profit margin by project type? Look at the overall gross profit margin you achieved over the last 12 months and use this percentage to estimate your direct construction costs over the next 12 months.

3. Estimate your operating expenses

Next, you need to estimate your overheads or operating expenses. The easiest way to review this is to open up your accounting software and run a Profit and Loss report for the past 12 months. Typically, a builder's largest expenses will be employee costs like wages, commissions, and superannuation. Estimate your costs month to month and add them to your budget. You may also want to add a small percentage increase to each type of expense to account for inflation and other increases. Builders should also remember to include a contingency for warranty costs.

4. Check your Net Profit

Once you are confident you have included all expected revenue, direct construction costs and overheads in your budget, look at the estimated Net Profit figure. Are you projecting a profit? Is there some profit left over to buy any new tools or office equipment? Will this allow you to take some money out of the business as owner drawings? If not, you need to reassess your margin targets or your operating expenses.

One additional step you could take is some scenario analysis, for example:

  • What would happen to net profit if you achieved 10% less revenue but your overheads remained the same?
  • What would happen to net profit if you employed an additional sales rep? Would this increase your revenue?

Conclusion

JACK App can help you prepare your budget and better understand your building business's financial position. JACK App's CRM will help you understand your sales pipeline. Job budget features and reporting allow for a real-time understanding of each job's profit margin.

We would love to give you a quick 10-15-minute demo of how JACK can improve your business processes.

Please sign up here for weekly updates on improving your building or trade business.