A key step in managing the expenses of any business means understanding what things actually cost. For instance, do you have any idea what it costs to seed a lawn, harvest sod or maintain the grounds around a shopping center? For that matter, what does it cost to “open the doors” to your business each day?
Often thought of as boring, time consuming and less than helpful to the owners and managers of small businesses, the costing and budgeting process can have a significant impact on the business’ bottom line.
At its most basic, costing poses a number of questions: “What does it cost to crank up the mower each day?”; “What does one sale cost?”; and so on.
Creating a budget means estimating the amounts that will be necessary to spend in order to prosper. Costing makes the guesses of the budget process, educated ones.
What does it cost?
What does it cost your business to perform its services, job or contract? Although the operation’s financial statements, if available, clearly show expenses, they are rarely broken down into specific jobs or even categories of services. That is where cost accounting enters the picture.
Cost accounting is the process of allocating all of an operation’s costs associated with generating a sale, performing a service, etc., both direct and indirect. Direct costs include things like the total wages paid workers, supervisors’ salaries, supplies expended, etc. Indirect costs are all of the other expenses associated with keeping the operation going.
It is the rare turfgrass professional or landscape contractor who does not know whether his/her business is profitable. Accounting statements or the operation’s tax returns often provide that information. How many contractors, however, know whether their bids, jobs or even the types of services that they perform are profitable? Few contractors are aware whether their “best” customer (or customers) is generating sufficient profits to warrant the degree of services provided.
Surprisingly, few understand what a particular job, service or customer actually costs. Far too many contractors believe that if they charge one sum of money and pay a worker a slightly lesser amount, the job or service is a profitable one. In reality, however, nothing could be further from the truth.
As is the case with many business expenses, the cost of money is often misunderstood. Any business that offers a “prompt payment” discount incurs a cost. The business must usually pay workers and its bills before it receives payment for the services rendered. Often, this means borrowing money.
It is up to the operators of the business to decide whether it is more economical to borrow the money necessary to keep the operation going or to offer their customers an incentive for paying early. Unfortunately, there is even a cost to money. Removing funds from savings incurs a “lost opportunity” cost. If those funds had remained invested or kept in a savings account, they would have earned interest or increased in value. Using them in the business means that the business should consider that “lost opportunity” cost as a legitimate cost of doing business.
Like a road map of a rapidly growing city, a budget establishes the exact path that needs to be followed in order to get to a selected destination, usually a set amount of profit. In other words, a budget is a map leading the way to the goals established by the business owner. The budget attempts to show what expenditures will be necessary to achieve those goals.
After the cash receipts and disbursements have been estimated, a minimum cash balance is usually established that will be adequate to meet cash requirements. How much does the operation’s bank require to be kept in an account? How much reserve must be maintained in order to comply with loan terms? How much is needed to meet the monthly bills and payroll?
Put another way, if $10,000 per month is necessary for payroll, rent, utilities, advertising and the like, the owner should plan to maintain a cash balance of $10,000. If sales slip, and the operation does not have sufficient income to promptly make payments, creditworthiness may be affected, or the contractor may be forced to borrow the funds to make up the shortfall resulting in an unforeseen expense.
A cash budget will aid in effective cash management. Through a cash budget, the landscape contractor can anticipate the need for short-term borrowing and, perhaps, obtain more favorable borrowing terms. Conversely, when the budget indicates periods of excess cash, those funds may be invested in readily marketable securities that will yield additional income to the business.
Accounting for costs, reducing costs
There is more to cost accounting than determining the cost of a job or service performed. Every business owner should also carefully analyze their costs of doing business to locate and reduce those expenses that are out of line.
Begin by comparing this month’s expense figures with last month’s or with the same month last year. Eventually, year-to-date expenses are compared with previous year-to-date figures. Usually, an attempt is then made to determine the reason (or reasons) for any discrepancies between the figures in different accounting periods and, perhaps, fix the reason for all costs that have increased.
If, for example, supplies’ expenses represented 2 percent of sales last year and shot up to 15 percent this year, you should know the reason. Equally important, that analysis also provides an insight into the fiscal health of the business. The operation’s financial health has its bearing on much more than the bottom line or profits. It can also affect the cost and the availability of financing.
How can you better manage the expenses of your business? Consider the following strategies:
- Accelerate cash inflows. The quicker cash is collected, the quicker it can be spent or added to the capital available to operate the business.
- Improve receivables. The contractor who operates on credit can usually benefit by:
- a. Billing early and billing often. Issue invoices promptly and follow up immediately if payments are slow in coming.
- b. Offering discounts to those who pay bills promptly.
- c. Requiring credit checks on all noncash customers.
- Consider raising prices. Check out the competition.
- Manage payables. Study the options available. Generally, bills should be paid as late as possible. If a payment is due in 30 days, do not pay it in 15 days.
- a. Consider vendors’ offers of discounts for earlier payment; these can either be expensive loans to your suppliers or a reduction in overall costs.
- b. Use electronic funds transfer to make payments on the last day they are due.
- Minimize expenses. This means not only minimizing the business’ operational expenses, but also making the most efficient use of every dollar spent.
- a. Comparison shop. Start using the Internet to get the best deals on everything your business needs, from office supplies to computers.
- b. Don’t always focus on the lowest price when choosing suppliers. Sometimes, flexible payment terms can improve cash flow more than a bargain-basement price.
- Don’t expand until cash is available to support the cost of that expansion.
- Prepare for cash flow imbalances. Many landscaping operations experience cash flow fluctuations throughout the year. By anticipating when income is likely to drop, a portion of the operation’s working capital, its reserve, can be earmarked to cover expenses during this period.
- Seek professional assistance. An accountant or other professional can help manage the operation’s cash flow, especially when it comes to projecting cash flow needs. Many accounting software packages also include modules that can help manage cash flow.
Managing expenses for profit
Managing the expenses of any business can be as involved and complex as the operation’s owner or manager desires. At its most basic, however, managing the expenses of a business requires understanding the “cost” of money.
Managing the expenses of an operation also means accounting for costs in order to understand what each service, contract or job is actually costing. That same cost accounting can also be useful in discovering why costs have been rising.
Columbus ventured out without a map looking for a shortcut to India and landed in the Caribbean. He died broke. The professional who sets out to find profits without a map or budget will end up somewhere, may even profit for a while, but it will be the result of luck not good money management. Imagine where you could end up by managing the expenses of your business.
Mark E. Battersby is a frequent contributor to Turf, writing on financial and business matters. He resides in Ardmore, Pa.