Featured image

Easy Budgeting

Originally published
Originally published: 9/1/2017

A different, simpler way to look at your budgeting process and ensure profitability all year


One of the more dreaded processes HVACR companies go through is budgeting. Most of us dread it and, in the past, I was no exception. Now, however, I’m part of the minority that enjoys the budgeting process. I like to analyze the data to see where and how we can improve. But I didn’t like the fact that it was a time-consuming process. The good news is that budgeting can be simplified.

A few years ago, I had an awakening as it pertains to budgeting and forecasting. I remember being frustrated with the misses in my budget. Then I had an epiphany.

I had made the perfect budget. Everything had to be perfect for my budget to be perfect. But I had not taken into account that imperfect people, me included, would be executing the budget. And then there were those other imperfections, such as the weather.

Temperatures are a big factor and didn’t coincide with my budget. And neither did some of the real day-to-day issues we face, such as trucks breaking down, parts and equipment not being available when we need them and people out sick when we need them the most, to name a few. Needless to say, I was frustrated.

I knew there had to be a better way, so I decided to go with my own version of budgeting. I thought it would be fun, and appropriate, to call it Knucklehead Budgeting — because it’s so simple, even a knucklehead like me could follow it.

Learn from History

First, I knew I had to look at my company differently than I had in previous years. I had to get away from trying to build perfection into my budget. Instead, I needed a budget and forecast based in reality. The answer to my dilemma was pretty easy: History.

History showed me that my company was actually an annuity and should be treated as such. Year after year, I had the history of it all — by month, by department, by cost category … you name it, I had it.

I decided to reverse engineer my budget by looking historically at my least performing month. No surprise, it was February. I now knew the most important aspect of my budget, my low point from a sales and gross margin standpoint.


The next step was to look at my overhead and decide what I could afford. It’s important to decide what you can afford, not what you have or want. Too often, businesses fall into an overhead trap and become slaves to their overhead. Don’t let this happen. It’s no fun.

Another issue is fixed cost overhead verses variable cost overhead. Here is what my experience tells me: Variable cost overhead is a small part of the overall overhead as it pertains to our businesses. Yes, we do have commissions, but outside of that, our cost structure as contractors is largely fixed.

I’ve also fallen victim to, and watched others, play the overhead game by increasing sales to cover the budgeted amount of overhead. You can make any budget work as long as you increase sales and margins enough to pay for your overhead. The problem here is that real life gets in the way and we don’t always have the sales and margins needed to offset, with profit, our overhead.

The one and only constant we know, every single day in business, is our overhead. But most business owners ignore it. Every business owner should know exactly what his or her overhead run rate is — weekly, monthly and annually. This is the most consistent number since it is largely fixed and not variable like sales, which is seasonally driven.

Bottom line: know your overhead number. Period.

Limit Downside, Maximize Upside

Now, let’s go back and look at the lowest performing month with the known gross margin and compare it to the monthly overhead run rate. For an easy example, let’s say your lowest sales month is $100,000 and your historical margins are 40 percent.

If your lowest sales month produces a gross margin of $40,000, that means your overhead has to be no more than $40,000 or you lose money.

I know, this seems too easy. That’s because it is that easy. You limit your downside and maximize your upside using this type of budgeting. Yes, you still need to do a thorough line item budget, but you now know what you can afford rather than hoping for sales to offset your overhead.

Getting to this number is the easy part. Acting on it is more difficult, but it’s worth it since you’ll be a strong and profitable company. It will keep you from being a slave to growth and hoping for perfection in your business. Instead, you’ll have a predictable business that creates equity to grow on rather than being leveraged and desperate for sales.

Knowing your costs will allow you to make good business decisions, not poor decisions. It really is that easy. Now you just have to do it.



More Articles

article image

3 Components of a Foundation of Purposeful Leadership

Here are three key factors that will set the foundation for Purposeful Leadership.

article image

Easy Budgeting

History shows that your company is actually an annuity and should be treated as such.

article image

Polarity Management: A Unique Leadership and Problem Solving Solution

As a leader, it's important to improve your decision making process when faced with tough problems and tough decisions.

Who’s in Charge of the HVACR industry?

Calling manufacturers, distributors, utilities, and contractors to enforce quality and safety standards

article image

Employee Education and Training: In the End, We All Win

Employee Education and Training: In the End, We All Win. Why should I invest in education and training?