Management and Office Best Practices

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Budget Process

Why Budget? Because It’s Your Roadmap to Success.

Think creating a budget with projections and forecasts for your home services business is too complicated to tackle on your own? Once you break things down into manageable chunks, the numbers begin to make sense, and soon budgeting for your business becomes a top priority.

Setting and following a budget is a smart business decision for any company, but it’s not just about the numbers, says Bill Powers, a budget and planning expert who now teaches those best practices as ServiceTitan’s Senior Industry Advisor for Customer Experience and R&D.

“A budget isn’t just numbers,” Powers says. “It's a number of other things, too, that people need to know and understand. You need to have a complete business plan, along with your budget.”

Think of a budget as your roadmap to success, with a final destination clearly outlined and a fully developed business plan, or direct route, to get there. Be accountable to your team and yourself by seeking the right input and data for each department, then break down the budget into manageable chunks to plan yearly, monthly, weekly, daily, or even hourly goals.

Budgeting for your business really comes down to either planning your own way, or being planned for, says Powers.

“In my younger football years, I was at a camp and a famous coach walked into the room and said to us: ‘In your search for perfection, you’ll find excellence. You'll never find either, though, unless you have a plan,’” Powers says. “Thank you, Vince Lombardi.”

Just like legendary football coaches strategize before every game, contractors running home services businesses must strategize before every service call. That starts with preparing a well-defined budget based on a solid business plan.

What is a Business Plan?

A business plan is the promise you make to yourself, your family, your shareholders, and the rest of your team, Powers says. It includes things like your mission statement, goals, budget, and manpower plan.

It clearly explains the exact steps to achieve specific goals for the year, and then breaks each one down into manageable chunks, so everyone knows what needs to happen each month, each week, and each hour, to meet them.

Powers advises companies to work as a team to develop a solid business plan, such as owners meeting with the management team to come up with overarching goals for the company. Then managers share specific goals with each department and member of the team for full buy-in and commitment.

Many company owners often find their teams are willing to commit to higher goals that exceed even their own expectations.

“There's what's called a stretch goal and a company goal,” Powers explains. “As an owner, I always want the stretch goal out there, with my actual goal written off to the side. I want people to stretch, because if you get them to stretch, they'll usually achieve it, or even exceed stretch.”

Just keep your mission statement, budget, and goals simple but realistic. For instance, your mission statement should only be 30 words or less, and should clearly explain why you do what you do.

“I'm a simple man in a simple business, so we need to keep it simple, but we need to keep it direct,” Powers says. “I found that contractors, if that's the way you make them look at things, they'll achieve greater success.”

Components of a Business Plan

The components of a business plan generally include:

  • Priority List: What are your sales goals for the year? What are your closing percentages? What’s your plan for marketing in the community?

  • Budget: How much revenue do you need to bring in each month to grow your business by 10% or 20% by year’s end? Do you need to adjust pricing to prepare for supply chain issues?

  • Manpower Plan: What are your techs’ average tickets? What types of incentives do you need to offer to attract new recruits?

  • Marketing Plan: Have you identified your Strengths, Weaknesses, Opportunities and Threats (SWOT) to develop a multi-pronged marketing plan? What was your most successful campaign this year? Do you have a good club membership program? Is there a new subdivision coming in? Do you have new competitors marketing to your demographic?

  • Organizational Chart: Do you have a strong management team in place, and are you developing leaders to promote by year’s end?

  • Training Plan: Are you making time to train your employees to not only teach new recruits, but also develop existing employees for new roles?

Your business plan should spell out what you want to accomplish in one year, five years, and 10 years.

“You always have a one-year plan, what you want to exceed in the next business year. You always want a five-year plan, because you always want to be looking forward, and where do you want to be 10 years from now? That could include retirement. It could be the sale of the company,” Powers says.

To plan for business disruptors — such as COVID-19 shutdowns, and the resulting supply shortages — Powers says it really all boils down to what kind of relationship you have with your distributors and manufacturers. When they run out of one item, for instance, you may be able to find something comparable to replace it more quickly.

“There's equipment and products out there,” Powers says. “It's just how you created the relationship with the manufacturer and with the sales representative. If you don't, you're starting from the ground up. You're starting from ground zero. You're scampering right now.”

Business Plan Table of Contents 

The table of contents in your business plan should include the following:

  • Executive Summary

  • General Company Overview

  • Products and Services

  • Marketing Plan

  • Operational Plan

  • Management and Organizations

  • Personal and Company Financial Statements

  • Financial Plan

The executive summary re-emphasizes your mission statement, clearly explaining your company’s purpose, the problems you seek to solve, and your target market. The general company overview outlines what your company does, where it operates, who leads it, how many employees you have, and your financial projections.

Describe the products and services your business sells, and how they benefit customers. Develop a marketing plan to reach your target audience either online or at home, and spell out how you’ll execute that strategy.

While management and organizations mostly describe the legal structure of your business, the operational plan will detail an exact organizational chart to show who is in charge of which department, and how those roles form a cohesive team. You may even include the resumes for your key stakeholders.

A financial plan typically includes projections for the next five years, based on your income statements, balance sheets, cash flow statements, and capital expenditures. If you’re a start-up, you’ll need to estimate these numbers, but established businesses can simply provide financial statements from the last three to five years. 

Profit is Not an Option. It is a Mandate.

When projecting revenue for an existing business, don’t just pull numbers out of the air, Powers says. Start with the number of calls.

“What you need to do is build from the number of calls you're running today, the average ticket that you're doing, the number of calls that produce revenue,” Powers says. “In many cases in our industry, people want to see anywhere from a 10% to 15% increase in year-over-year growth. You never want to start with dollars. You want to start with calls.”

Factors to consider for a reasonable growth-rate projection include:

  • Time in business

  • Dollars invested in marketing

  • Existing revenue run rate

  • Company financial historical data

Making growth projections requires a different mindset, Powers says, because it’s not about your company just breaking even. It’s about making more money.

“Profit is not a dirty word,” he says.

And just because you have cash flow, that doesn’t necessarily mean you’re making a profit. For instance, paying off a long-term debt can affect your cash flow in the short-term, but not your overall profit margins.

“There are a lot of contractors out there, even in this day and age, who run their businesses out of their checkbook,” Powers says. “Just because you have money in your checkbook doesn't mean you're profiting. You need to make sure that you're looking at your balance sheet and watching your cash flow, because it will change depending upon the season you're in.”

Any cash flow projections also need to include a fixed asset schedule, so you know which assets, such as your company’s trucks, need to be sold or replaced, and when. 

“You want to keep your trucks for a minimum of five years,” Powers says. “You should have a good rotation. You don't want all new trucks every five years. You want to be rotating a quarter of your fleet out every five years.”

Some questions to consider when determining your fixed asset schedule include:

1. Are your fixed assets being depreciated properly? Is your accountant documenting this information monthly?

2. Do you have a capitalization policy? When you buy equipment, is it counting against your income statement immediately, or are you spreading out the debt over a period of time? 

“You want to set a dollar amount. In most small companies, it’s $1,000. Anything over $1,000, you’ll capitalize, advertise, and depreciate it over a certain amount of years. It's not hitting your income statement all at once,” Powers says.

3. Is your accountant following straight-line depreciation? This formula follows the number of years divided by what you pay. Ask your accountant if this method provides your company with the most tax advantages. It may depend on the state in which you operate.

Defining the terms you need to know:

Fixed Asset: Fixed asset, also known as property, plant, and equipment (PP&E), is a term used for assets and property which cannot easily be converted into cash. This can be compared with current assets, such as cash or bank accounts, which are described as liquid assets. 

Cash Flow: Cash flow refers to the movement of cash into or out of a business, project, or financial product. It’s usually measured during a specified, finite period of time. 

Expenditure: Money paid out for goods or services. 

Depreciation: Depreciation is a term used in accounting, economics, and finance to spread the cost of an asset over the span of several years.

Prepare to Budget

For most home services businesses, it’s best to prepare for your budget by reviewing three to five years of historical data. If you haven’t been in business that long, then you’ll need to start with industry standard KPIs, or key performance indicators.

Use the SMART formula to prepare your budget, and understand that one priority a month equals 12 priorities accomplished in a year. 

“One month at a time,” Powers says. “Your budget has to be built one month at a time.”

  • S = Specific

Who is involved? What do I want to accomplish? Identify your location, establish a time frame, identify requirements and strengths, and provide specific reasons, purpose or benefits of the accomplishment.

  • M = Measurable

How much? How many? How will I know when it’s accomplished?

  • A = Attainable

When you identify goals that are most important to you, you begin to figure out ways you can meet them. You develop the attitudes, abilities, skills, and financial capacity to reach them. You can attain most any goal when you plan your steps wisely and establish a time frame that allows you to carry out those steps.

  • R = Realistic 

To be realistic, a goal must represent an objective toward which you are both willing and able to work. A goal can be both high and realistic, but be sure that every goal represents substantial progress.  

  • T = Time Bound 

A goal should be grounded within a time frame. With no time frame tied to it, there's no sense of urgency.

“A goal is not a goal unless it’s written down,” Powers says. “If it’s not written down, it’s just a dream.”

Once you’ve identified your SMART goals, establish a timeline for your budget. Contractors who follow best practices start at the end of every month, while the previous month is still fresh in their minds. Start the annual process in early September, and plan to complete it by December 1. Gather owners and other key management personnel to discuss budget items in an environment with no interruptions.

The historical numbers you need to build your budget will include:

  • Current employee expense

  • Current vehicle expense

  • Current admin expense

  • Current facility expense

  • Current advertising expense

  • Call history

  • Average ticket

  • Tech closing %

  • # of phone calls

  • Call conversion rate

  • Marketing results

  • Identified anomalies (pandemic, act of God, etc.)

  • Evaluate current hours of operation, including weekend and holiday policy:

  1. Budget for 6 days, but work a full 7 days

  2. Budget 6 days for running leads

  3. Manage your schedule for the 6 days to control overtime. Be creative with staggered start and finish times, etc.

  4. Holidays: Does it make sense to work the holiday – perhaps a split shift? Is this a “pick-up” day? In other words, schedule an unbudgeted day, yet staff and run the day as a full or partial workday.

  • Determine manpower needs to meet budget

  • Research third-party contracts and renegotiate, if needed

If you have no historical stats, you’ll need to build a budget from scratch using the same process, but based on educated estimates, Powers says.

“You have to realize what percentage of your business is going to be new construction, commercial, or residential,” he explains. “If you want the biggest bang for your buck, you're going to start off with residential and build your business there, and then grow into the other two. There are a lot of companies out there that like to start in new construction.”

Meet with your management team to discuss performance and sales, and write new yearly goals for each area of operation. Plan with an open-book format, clearly showing the numbers for revenue, costs of sales, gross margin, and all expenses for advertising, employees, facility, vehicles, and administration—so everyone understands the big picture for your organization.

“They have to realize there's more that goes into their pay than just a paycheck,” Powers says. And if they want to earn more next year, show them how they can achieve this by increasing calls, average tickets, lead turnover, club membership sales, IAQ, and/or other upsell opportunities. 

Also provide a written plan for how bonuses are paid for each member of the team. Who participates? Who doesn't? Which key performance indicators are tied to the bonus?

Build your budget

Now, you’re ready to build a budget. 

  1. Use Material Prepared—Start with number of incoming phone calls, phone calls  converted, # of calls ran, # of calls closed, and # of calls canceled.  Plan for credit rejects, rescinds, and customer returns and allowances.

  2. Use Appropriate Templates (available directly from ServiceTitan, beginning in October).

Prosperity Wizard—simple start-up budget for growth over 3 years

Advanced Version—advanced budget based on historical data

  1. Execute in an environment where you can work with the right people to build an accurate and realistic budget. 

  2. Ask for help.

  3. Review your plan with an expert.

  4. Make sure the numbers you come up with make sense.

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