By Jim Peduto

Jim Peduto is the president of Matrix Integrated Facility Management and the co-founder of the American Institute for Cleaning Sciences, an independent third-party accreditation organization that establishes standards to improve the professional performance of the cleaning industry.
Yogi Berra once remarked, “If you don’t know where you are going, you might wind up someplace else.” Each year many potentially successful businesses have unpleasant surprises or experience hardship because of poor financial management. For business owners, knowing how to prepare budgets and accurate business forecasts is essential. Setting financial goals for sales, expenses and profits gives entrepreneurs the ability to succeed in business.

The complex task of developing an operating budget can be simplified by breaking it down into six key steps. These steps can be adapted to other budgets for planning those as well.

1. Review prior years’ data.
Collect historical data on sales and costs as a starting point. If possible, review results for the past two or three years. It is essential to consider sales plans, how sales resources will be used and any changes in the competitive market.

2. Develop reasonable assumptions.
After reviewing historical data, develop assumptions about the future. Trust personal experience and that of employees. Estimate sales growth, the market for services, effectiveness of the current marketing program and competitors’ next steps.

3. Determine expected revenues.
The first and most important number is the top line: the estimated sales. This number should be the result of a complete analysis of marketing and sales activities. Expected revenues include not only services you expect to sell, but also at what price you will sell. If prices will increase (or decrease) in the next year, consider whether or not sales will be affected by the change.

4. Calculate expected production and delivery costs.
When calculating all expected costs involved in producing and delivering service to customers, be sure to include all direct and indirect costs including materials, labor, taxes and insurance. This also includes sales and marketing costs and business administration costs.

5. Calculate expected operating expenses.
This includes fixed costs such as rent, salaries, utilities, office supplies, financing costs, payroll expenses, insurance and legal and accounting costs.

6. Calculate expected operating income.
Operating income is the revenues minus costs and operating expenses (before interest and taxes).

An operating budget is an essential tool for every contractor. Each month you should compare your actual results to your plan (the budget). If your actual results vary significantly from the plan, you need to step back and ask, “Why?” Does your budget need to be updated or are there operating issues that you need to address? The key is to consistently analyze your progress and use the budget as a compass. Businesses that follow that course wind up exactly where they would like to be.