Financial Projections and Budgets

Sun, Apr 23, 2023

John Kenney, CPRC, CEO, Cotney Consulting Group

 

A great transformation in financial awareness begins in the roofing contracting business when you use financial information to look into your company’s future instead of the past. When financial data becomes relevant and interesting to company managers, they stop looking in the rear-view mirror to see what happened
last year or month and begin to concern themselves with what’s happening now, in the coming month and year. When this change occurs, the entire financial process dramatically improves as it becomes more important to everyone, not just the accounting department, to get it right.


There may be a reluctance at first to create future financial information since most contractors are used to  focusing on the here and now, especially on a project- to-project basis, but the skills are the same.

The projection process typically starts with building profit projections under various conditions, different volume levels, potential gross profit margins and overhead options until a likely, realistic and acceptable scenario is chosen. The forecast is then detailed and
presented as a budget that serves as a road map in which your team is expected to conform in order to achieve your company’s profit model in the next year. It’s best to have a solid understanding of some key conditions before beginning the projection process.

Financial capacity: Your company’s financial health, including all critical financial analysis areas and the company’s status with crucial creditors.
Operational capacity: What your company should do, can do and can’t perform in an operational sense, including determining the best type of work, key customers, the strength of field staff and estimating and a sense of your company’s capacity for getting and performing work.
Market conditions: The availability of profitable work by type, the strength of the competition, significant new opportunities and other conditions that help project the market in the future. Your company will take on many unnecessary risks without accurately understanding these three conditions. The best strategy is to make the first two conditions known, leaving only the third factor, market conditions, as a variable. Understanding market conditions is the most challenging variable of the three and becomes the basis for the “what if” scenarios to build projections. Once you have a complete and accurate understanding of these three conditions, the best course of action can be developed for your company.

The Projection Process

The projection process aims to play out various external market scenarios, using the knowledge about the internal financial and
operational capacities as a guide to the best solutions for your company. The market scenarios are variations of projected volume
and the related gross profit percentage, the first two elements of the profit model.

Explore three scenarios: optimistic, pessimistic and realistic. The realistic one should be selected as your model but the other two
scenarios provide valuable options and insight into a plan. For example, some conservative moves in the pessimistic case can be considered in your realistic model or held in reserve if things worsen during the year.

Though it can be challenging to look at the big picture calculating these projections, you must spend more time considering the big-picture concepts of your company’s profit model than considering how much office expenses or phone bills have been costing.

Putting Your Projection to Use

Once you have settled on the projection, your company will use it for your forecast. Your forecast is then converted to a budget by adding sufficient detail in the expense areas. A budget is used for control purposes, which is your guide to help verify that your company is on track to accomplish the profit model you designed.

If your company has separate divisions or profit centers, the projections for each can be built separately and assembled. They can usually be input into your accounting system with the divisional breakout so you can assess them individually.

Short-Term Cash Flow Projections

Short-term projections should be for three months or less. The goal is to determine the expected cash effects of events that have already occurred or are well within sight. These short-term projections are useful if your company becomes cash-stressed when you take on additional work. Here are some steps you can use to set up a short-term cash projection:

■ Set up a spreadsheet for the next three months, broken down by week.
■ Using accounts receivable aging, divide the out collect them. If expected collections fall later than the time frame you’re working on, they can be ignored for now and put into your future projection when they are collected.
■ Using the accounts payable aging, spread the outstanding balances into the weeks they are expected to be paid. They are the same as collections if they go beyond the time scope of the working spreadsheet.
■ Enter the expected payroll by week, including payroll-related cash outlays.
■ Using your job schedule, estimate the current month’s billings and costs and place them in the weeks expected to collect. Go into the following months, doing the same thing until the whole period is covered.
■ Put overhead expenses, loan payments and other known cash outlays into the weeks they are expected to be paid.

Once complete, the next three months are laid out with expected collections and payments. If your company becomes cash-stressed, a short-term projection will be critical to survival.

Let’s review the essential points of this article. To successfully establish a desirable profit model, first go through some pre projection steps that assess key internal factors, particularly financial and operational capacity, key external factors and market conditions. Operating in a high-risk industry such as ours requires mitigating whatever risks are possible in these three areas.

After building the projection and checking it against other models, it can be used as a type of road map and guideline for your company. It is extremely beneficial to keep the projections updated over time as more accurate information becomes available. Over time, you will become more comfortable with making and using projections and plans for your company’s future.

FRM

John Kenney, CPRC has over 45 years of experience in the roofing industry. He started his career by working as a roofing apprentice at a family business in the Northeast and worked his way up to operating multiple Top 100 Roofing Contractors. As CEO, John is intimately familiar with all aspects of roofing production, estimating and operations. During his tenure in the industry, John ran business units associated with delivering excellent workmanship and unparalleled customer service while ensuring his company’s strong net profits before joining Cotney Consulting Group. If you would like any further information on this or another subject, you can contact John at jkenney@cotneyconsulting.com.


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