Dispatch #54 - Sharpie-level and Full Monty Budgets for 2021

It’s the unofficial start of budget season for calendar-year contractors. Next year might seem far away, but to finish the budget before the holidays means we have 11 weeks of think time. Here’s my budget kickoff pitch to the construction companies I work with.

There are two kinds of budgets: one I call the Sharpie-level budget and the other I call the full monty.

The Sharpie-level budget is a top-level summary, and makes sure that all the financial pieces will fit together next year—profit, cash flow, and bank/bonding ratios. It’s about how one specific year helps cash flow the company’s long-term business plan. It aligns sales, operations and admin, as well as external partners like CPA, banker and surety. It’s simple, fits on one page, and done thoughtfully, it’s highly effective.

The full monty is a detailed budget that addresses each line on the Income Statement and then some. It’s about accountability and financial control:

Accountability in that, we build next year’s revenue and gross profit goals by estimator/sales rep, project manager, customer/customer segment, and/or line of business. We’ll track against those during the year. It’s a great way to spot drift early in the year and then course-correct.

And financial control on the cost of goods sold (COGS) and overhead side of things. We set a budget for each line item and use variance analysis each month to spot cost overruns and then, again, course-correct. This provides feedback to improve cost estimating and scale overhead to revenue and gross profit, protecting the bottom line.

The pandemic and economic uncertainty have NOT rendered budgets useless. We just need to adapt these tools to the present moment, keeping them (and our minds) flexible to changing conditions.

Need help with this or other financial matters faced by construction contractors? Let’s talk!

David Stern CFO makes every effort to provide useful and accurate information. This content, however, is not intended as a substitute for specific business-related financial advice. We disclaim all warranties and liabilities from its use.