CO2 2019

1. Budgeting for Growth
Dan Gordon
PCO Bookkeepers
W O R K S H O P

2. Tips and Tricks to Building a Profitable
Company Using Budgets
Daniel S. Gordon, CPA

3. What is a Budget?
Why businesses Budget
Create Assumptions
Revenue Forecast
Budgeting Direct Costs
Gross Margin
Budgeting for Sales and Marketing
Budgeting for General and Admin. Costs
Net Income
AGENDA

4. A budget is a financial document used to
project future income and expenses.
WHAT IS A BUDGET?
The budgeting process may be carried out by
companies to estimate the amount of revenues
and profits that will be gained by execution of
management strategies.
A budget may be prepared simply using paper
and pencil, or on computer using a spreadsheet
program like Excel

5. Running a business often requires owners to carefully
plan and review their finances:
WHY BUSINESSES BUDGET?
✔ Most companies use, financial statements, forecasts and other tools for
managing financial information.
✔ Business budgets maybe one of the most important accounting tools a
company uses in their business.
✔ Some form of accounting for identifying, measuring, analyzing and
reporting their financial information.
✔ Accounting tools may include budgeting

6. WHY BUSINESSES BUDGET?
Limit
Expenditures
• A major benefit to using a business budget is the ability to limit
how much money is spent on certain operations.
Creates
Financial
Roadmap
• Budgets often allow companies to have a financial roadmap for
business operations. Many companies review previous year’s
budgets to determine how well they followed the guidelines
and why budget variances occurred. Not all budget variances
may indicate a negative business situation. If budget variances
occurred due to unexpected growth in sales revenue,
companies may need to increase the budget amounts for
future sales increases.

7. Show Me
The
Money!!
Revenues
Direct
Costs
Gross
Margin
Marketing
Exp
Sales Exp
General
and Admin
Expense
Overhead
Allocation
(Firms with
Multiple
Branches)
CHART OF
ACCOUNTS

8. CREATE ASSUMPTIONS

9. Expense Category Industry Norms
Pest Materials 6-8%
Termite / Lawn Materials 14-20%
Hardscape / Contracting Materials 25-35%
Pest Labor 20-25%
Sales Labor 4- 7%
Office Labor 8%
Overall Payroll 45-50%
Total Vehicle 6-8%
A/R Collections 90 Days < 6%
Days Sales in A/R 30 Days
Owner Compensation and Net Profit 13-15%
Some industry
norms based on
our client base
EXPENSES

10. Residential
● One Times
● Initials
● Route Work
● Renewals
● Product Sales
Other
● One Times
● Initials
● Route Work
● Renewals
● Product Sales
WDI
● One Times
● Initials
● Route Work
● Renewals
● Product Sales
You can add divisions as needed, but you need to separate
recurring vs non recurring work
Commercial:
● One Times
● Initials
● Route Work
● Renewals
● Product Sales
REVENUES

11. REVENUE FORECAST
Existing Customers:
• Regular Services to Regular
Customers
• Annual Services to Regular
Customers
• One Time Services
New Customers
• Projected New Sales

12. REVENUE FORECAST
Consider Retention

13. REVENUE FORECAST

14. Direct Costs – Costs associated with producing one unit of our service. For
our purposes, one unit of a service will be one hour of service. Thus,
variable costs are those costs that rise and fall based upon the number of
hours that we provide service.
All costs associated with putting a technician on the road
DIRECT COSTS
Tech Labor Vehicle Costs Materials
Uniforms, Tech
Workers Comp,
Other Direct

15. Sample Company: Labor
BUDGETING DIRECT COSTS

16. Vehicles
BUDGETING DIRECT COSTS

17. The difference between Revenue and the Direct Costs.
GROSS MARGIN
Example:
If we bill our service at $100 per hour and a technicians gets $20 per hour and
all other direct costs associated with providing that hour of service are $35,
our gross margin would be $45.
(figured: $100 billed less ($20+$35) direct costs).

18. This is an extremely important number
for every business to manage, as it
impacts both the likelihood of reaching
breakeven and the amount of profit that
is earned beyond breakeven.
In other words, it directly impacts
risk and return.
GROSS MARGIN

19. As a simple example of how gross
margin affects breakeven and profit,
consider a business with $300,000 in
fixed overhead.
If this firm's gross margin as a
percent of sales is 50% (which means
fifty cents out of each dollar in sales
is retained in the company to cover
fixed costs), it would need to reach
sales of $600,000 to cover its
overhead.
GROSS MARGIN

20. A. How Much are you willing to spend
for a New Sale?
B. How Many New Sales Do You Want?
Marketing Budget
= A x B.
It’s that Simple!
BUDGETING FOR SALES AND MARKETING

21. Future Customer Acquisition Requirements
Year Revenue # Customers Current New Customers Cash
Projection Needed # Customers Required Requirement
Current Yr $500,000 1000 1000 0 $0
1 $600,000 1200 1000 200 $25,000
2 $720,000 1440 1200 240 $30,000
3 $864,000 1728 1440 288 $36,000
4 $1,036,800 2073.6 1728 345.6 $43,200
✔ Target Annual Revenue Per Customer: $500.00
✔ Cost To Acquire 1 New Customer (average): $125.00
✔ Expansion Goals: Double Revenues over 4 Yrs (20% per Yr)
✔ Assume 100% retention
NEW SALES – WORK BACKWARDS

22. HOW MUCH WILL IT COST TO GROW?
Over 4 Years we need $134,200 in Marketing Dollars
How does it get Paid For?
Through Daily
Operations &
Cash Flow
Through Financing
(i.e. Bank,
Finance
Companies, etc.)
By Giving Up Equity
(i.e. Silent
Partner, Not so Silent
Partner,
Joint Venture)

23. The Magic Question……
Mature companies usually spend 6-8% on
marketing
Start Ups spend a lot more
What percentage of Revenue does a
service company spend on marketing?
HOW MUCH SHOULD WE SPEND?

24. The Magic Question…Why ?
If we sign up a new customer who will give us
$500 in revenue at 6% is it likely that the cost
of that closed sale cost us $30?
Not likely, in fact the cost per closed sale is
usually much higher in the service business.
So….. how than is it that a mature service
company only spends 6% on marketing?
HOW MUCH SHOULD WE SPEND?

25. The 6% number is a percentage of total
revenue.
The magic of the recurring revenue model
is that once you secure a customer, there
is no marketing cost associated with that
service in the future.
So in a mature service business, there is
plenty of revenue that the marketing cost
associated is Zero.
HOW MUCH SHOULD WE SPEND?

26. If the zero marketing revenue is
combined with new revenue where
marketing dollars are spent, the
combined marketing cost is driven
down as a percentage of overall
revenue.
In the case of a mature service
company that percentage is usually
6-8% of revenue.
HOW MUCH SHOULD WE SPEND?

27. Why is this important?
Because the magic question is the wrong question…….
The right question is how much are you willing to spend on
marketing to secure a new customer ?
Is the answer a function of the percentage of revenue?..... No
But you do need to figure out
How much you will pay for this marketing effort
&
How many new customers do you want ?
HOW MUCH SHOULD WE SPEND?

28. How much will you spend to
secure a New Customer ?
HOW MUCH SHOULD WE SPEND?
If you answer this question, you
will have your answer to the magic
question.
What is a good customer worth?

29. What is a good customer worth?
HOW MUCH SHOULD WE SPEND?
✔ Know your customer
✔ By understanding how much he is worth
you gain an understanding of what you are
willing to invest to attract him
✔ This tells you how important it is to keep
good customers happy
✔ Usually the cost of retention is lower
than getting a new customer

30. What is your
average sale
(transaction
amount) ?
HOW MUCH SHOULD WE SPEND?

31. What is the frequency of your
Average Customer ?
This calculation can be expressed in
transactions or visits per week,
month or year, depending on the
type of operation you run.
HOW MUCH SHOULD WE SPEND?

32. What is the average life of a new customer?
Once you get a customer, how long will that
customer continue to buy from you before
he or she moves, gets mad, or no longer has
a need for your product or service?
This length of time can generally be
expressed in months or years. It may be a
more difficult number to get, but do your
best.
HOW MUCH SHOULD WE SPEND?

33. HOW MUCH SHOULD WE SPEND?
Gross
Margin?
Gross Margin =
Selling Price – Direct Costs
Gross Margin Contributes to Paying
all Fixed Costs……
Once the Fixed Costs are Paid, We
Make Profit at the Gross Margin Rate

34. HOW MUCH SHOULD WE SPEND?
Lifetime Value of Customer
Annual Gross Revenue x Gross Margin x
Average Life Cycle
For those of us who have taken finance
courses we can Present Value the result :
However that is beyond the scope of this
presentation
So what’s the Value ?

35. Example :
Annual Gross Revenue
Gross Margin
Average life
Lifetime Value
What would you pay for this customer ?
It’s up to you but would $125 be unreasonable ?
= $500
50%
5 Years
$500 x 50% x 5 Answer: $1250=
HOW MUCH SHOULD WE SPEND?
=
=

36. Example Continued :
Annual Revenue = $ 500
Cost for Marketing = $ 125
In the first year I’m willing to pay 25% of the revenue.
A little higher than the 6-8% of Total revenue of the mature company
HOW MUCH SHOULD WE SPEND?

37. It depends on how many customers
you want.
If you are thinking about an aggressive
campaign it also depends on if you
have the funds available to embark on
such a campaign.
So what is the answer to the Magic Question?
HOW MUCH SHOULD WE SPEND?

38. BUDGETING
FOR GENERAL
AND ADMIN
COSTS

39. NET INCOME

40. PUTTING IT ALL TOGETHER