Preparing to budget for your service shop in 2022? Where to begin?
In a perfect world, you started next year’s budgeting process at the beginning of 2021, and continued to build on it month to month, based on actual revenue and expenses, says Bill Powers, a budget and planning expert and senior industry advisor at ServiceTitan.
However, if you didn’t think ahead or you’re starting without a good budget to build upon, don’t worry. There’s still time to create a business plan and budget for 2022, Powers says, but it may require a little more time and effort.
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“We always start with a plan,” says Powers, who spent much of his career creating business plans and building budgets for companies in the home services industry. “You always need a plan to move forward, and planning in business is probably one of the most important things you can do to see your business grow and take it to that next level.”
Planning for success makes everyone’s lives easier, he adds, because everyone knows which direction you want the company to go. But first, before making a specific plan for how to get there, identify your company’s obstacles and find ways to bypass or eliminate them entirely, such as:
Never created a budget before? Find help from industry experts, like Powers and ServiceTitan, and gain access to easy-to-use budgeting templates.
No time for budgeting? Take a look at your time management. “Who owns your time? You own your time,” Powers says, and you decide how to spend it.
Got negative employees? Everyone does. Stay on top of creating a positive company culture every day. If the negativity continues, let the employee go before it spreads.
Don’t offer training? Correct this mistake immediately, Powers says. “Training is an investment, an investment in your people, in your company, and in your future,” he says. “If you don't train, you don't learn. If you don't learn, you don't grow.”
If any of these obstacles prevent your service company from planning, budgeting, and growing — ask for help, Powers says. He shares his industry expertise and best tips in a recent webinar hosted by ServiceTitan, where he outlines the five steps to better budgeting in 2022:
Preparing to Budget
Getting Team Buy-in
Building a Budget
Implementing the Budget
Executing the Budget Plan
“To me, this is a fun time of the year, because I get to look back at the whole year and see: How have I been successful? Where do I have areas of opportunities? And where do I want to see the business go in 2022?” Powers says.
As we all prepare to put 2021 in the rearview mirror and start anew in 2022, use Powers’ planning and budgeting advice to better position your service company for greater success.
1. Preparing to Budget
When planning and preparing a budget, begin by creating specific deadlines for each step along the way. This helps to create a sense of urgency for budgeting, one of the most important processes for any service business.
“It sharpens the thinking and it makes things happen,” Powers advises. “Deadlines break the goal into manageable steps.”
Then ask your management team for input on specific budget numbers for each section of your business. For instance, the service manager knows how many calls your company books each day and the average ticket for each service technician. The warehouse manager knows the status of purchasing and inventory, and the general manager can provide costs for hiring and training.
“Let them have the buy-in and let them manage that section of the budget,” Powers says. “Bringing other people within your organization to help will make that plan a team goal.”
It’s also important to put away your cell phones when preparing to budget. This will allow you to ignore that steady stream of calls, texts, and emails, and concentrate on the task of creating a solid business plan with a realistic budget to move your company forward.
“Interruptions are our biggest enemy,” Powers says. “Let’s put away our biggest nuisance.”
Finally, make sure to access historical data when building your business plan and budget for 2022, Powers says.
“ServiceTitan can produce that historical data for you,” he adds. “Of all the systems I’ve used, it’s one of the most robust reporting systems I’ve seen.”
2. Getting Team Buy-In
Budgeting is not just about crunching the numbers, Powers says.
“You have to understand that when you budget, you’re budgeting people,” he says. “One of our greatest assets is the people we have in our service company. We should all remember this.”
Your people need to know where you want the business to go, how you’re going to grow the business, and how you’re going to get there by working as a team. Your company’s goals are more than just your goals, they’re goals for the entire team.
“Setting the groundwork and planning for the future is the most important thing,” Powers says.
Get team buy-in by setting up a meeting with your management teams to share your goals for 2022. Maybe you want to increase sales by 10% to 15%, or acquire another business to grow by 30%. Whatever the goal, share it with your team and work together to create a plan.
“Let them tell you how you're going to achieve it, and help you write the plan. That way, they have immediate buy-in from day one and things start moving forward,” Powers says.
3. Building a Budget
A budget is not a business plan, and a business plan is not a budget, the senior industry advisor says.
“A business plan should incorporate all aspects of your business — your marketing plan, your manpower plan, your operational plan, and your training plan,” Powers says. “People think that's a budget. Well, you're writing a business plan, which includes a budget.”
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In accounting, a budget is defined as “a quantified plan course of action over a definitive time period,” Powers says. For instance, as you create a marketing plan for 2022, you’ll also include a budget for your marketing spend. If you want to hire more people as part of your manpower plan, then you’ll create a budget to cover the cost of hiring, and so on.
A master budget compiles the individual budgets from every functional area of your company for the fiscal year, with most service companies operating on a monthly basis from Jan. 1 through Dec. 31.
“The master budget brings all the pieces together to achieve the organization’s overall strategic plan and company mission,” Powers says. “Just remember, a budget is not a set of handcuffs. It’s a plan. It's a plan that can be adjusted.”
While some industry experts caution against adjusting budgets midstream, Powers says sometimes it’s absolutely necessary, such as when a global pandemic shuts down business, or as material shortages affect the supply chain. If your goal was to increase sales by 20%, and you’re only increasing by 10%, but spending and investing based on that projected 20% increase, your business can land in a world of trouble.
“The budget is a tool, it is not a set of handcuffs. You can adjust your budget,” Powers says. “If you do your budget to actuals on a monthly basis, your budget then becomes a tool for you to grade your performance and to hold yourself accountable.”
Why do you need to budget?
A budget holds you accountable.
A budget gives you and your team direction.
A budget guides the company on a daily basis.
A budget helps you achieve long-term goals.
A budget with specific goals keeps everyone on your team, including technicians, CSRs, managers, and more accountable for performing their jobs at the highest level. This accountability shows you when the team meets its goals, and identifies areas for improvement.
“If you don't have a budget, you can't hold anyone accountable and you don't know what your areas of opportunity might be,” Powers explains.
A budget also provides direction, much like checking a map or smartphone GPS before taking a trip. Without direction, your team may take a different route that doesn’t necessarily align with your goals.
“Your job is to give them that direction. And that comes through writing your business plan and budgets, so they have that direction,” he says.
With ServiceTitan’s customized dashboards, Powers says service companies can use their budgets to be proactive in real time, versus reactive when it may already be too late. For instance, if you see calls are down at noon on a particular day, you can quickly make scheduling adjustments, rather than waiting to learn that information at the end of the day, when everyone has gone home.
Budgets also help you achieve long-term goals, as long as you create a plan and “live that plan” on a daily basis, Powers says. As an example, he helped a plumber on the verge of bankruptcy turn his company into a $35 million business within six years by following a step-by-step business plan and budget with a long-term goal.
The plumber’s goal? To choose whether he came to work every day, or not.
“Now, he plays golf four times a week and goes into the office three times a week,” Powers says. “Do you have those long-term goals? If you don't, you need to start looking at that, and building your business plan toward achieving those long-term goals.”
4. Implementing the Budget
Planning for growth begins with establishing realistic goals for your company and setting a budget that allows your team to achieve those goals.
Powers suggests setting a stretch goal to increase revenue by 20%, but be willing to accept anything between 15% and 20%. The point is to include stretch goals right alongside realistic goals.
“I guarantee you, if you give your people the stretch goal, you’ll come closer to that stretch goal than what you would ever imagine. People always strive to be the best, and they don't like to fail,” he says. “On average, I think a 20% increase in revenue on a yearly basis will increase your profitability tenfold over a three- to five-year period.”
Look at your historical data for the previous year, then use those percentages to estimate your budget on a monthly basis for the next year. You can always go back and adjust the numbers based on your actuals, but budget for the entire 12 months.
“Don't be afraid to adjust your budget, but annualize it,” Powers says.
Are you budgeting for club memberships? If not, you should be. “This is a true customer, this is a sticky customer,” Powers says.
Determine how many club memberships you sold as of Dec. 31, 2021, then calculate 10% attrition for 2022. For example:
Total club memberships on 12/31/21 = 500
10% attrition of 500 = 50
500-50 = 450
450 x $20 per membership = $9,000 per month
$9,000 x 12 months = $108,000 per year
“For every 1,000 club members you have, it normally equates to $1 million in revenue,” Powers says. “If you’re not offering club memberships right now, I strongly suggest you get the sticky customers, because it will equate into revenue and cash flow.”
Next, account for replacement revenue. In the HVAC industry alone, replacement or install revenue can account for 60% to 70% of total income. Look at your historical data to determine how many replacements you did in 2020, then you’ll know how much to budget for in 2022.
For example, if you had sales revenue of $1 million for replacements, and you performed a total of 166 installations, you divide the $1 million by 166 replacements to determine an average ticket of $6,000.
Knowing your company’s average ticket helps to project a 2022 budget that helps you increase manpower, build a training program, and add more inventory.
“So you know you’ll have what you need, as far as human assets and material assets, to grow your business,” Powers says.
It’s also important to track where those sales leads come from, such as demand service for replacement, marketed leads, service and repair, or club memberships. Knowing which areas generate the most revenue helps you establish realistic goals.
“Are techs fixing more than replacing? Are they not giving people options? Are my marketed leads not working? Is my marketing not reaching the right type of client? Club memberships, are we looking at the age of equipment and are we fixing more than what we're replacing? Are we offering them?” Powers says.
Determining your average ticket for scheduled service repairs can also help you plan for marketing and manpower needs. Here’s an example to determine the average ticket for service repair:
Repair Sales Revenue = $351,000
Total Repair Tickets = 1,560
$351,000 divided by 1,560 = $225 average ticket
Other tips for implementing your budget:
The budgeting process forces you to estimate. If you want to sell 20% more in 2022, make sure to plan for securing those materials, especially with supply chain issues right now.
Understand your company’s costs. Is your pricebook current for the cost of materials? Are you collecting receivables within 30 days or less? Do you know what you pay to access the internet? Do you know how much it costs to hire one technician, plus taxes and benefits? Are you planning for possible fuel price hikes?
To make sure your company has the resources it needs to achieve success, a budget must include plans for manpower, equipment, and cash.
5. Executing the Budget
Executing the budget means you know the business has adequate financial resources to stay the course, Powers says.
Budget functions include:
Planning and goal-setting
Reviewing options for attaining goals, then predicting cost and benefits
Using estimates for projections (but always estimating higher)
Deciding how to best attain goals
Coordinating and communicating the budget
“We need to bill for it, plan for it, budget for it, and go get it, because if we don’t, then we’ll stay stagnant or we’ll digress in our business realm, and our growth will not happen,” Powers says.
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