Have you ever gotten in your car and decided to just drive to a destination without a plan on how to get there? What streets would you take? Would you need to stop for gas? Would you need your GPS? These are just a few of the many items that you would need to consider in order to arrive safely and successfully at your desired destination.
Determining where your business is headed is no different; the best way to improve your chances of reaching your goal is to create a plan (aka a budget). Budgeting is one of the most fundamental financial best practices. Sadly, according to one of our webinar polls, only 50% of heating oil marketers have a budget in place.
What is a budget?
A budget identifies the products and services offered by your company’s divisions and it quantifies the projected profit and loss within each area that will result in your company’s net income for the year.
What does a budget do?
For fuel marketers, a budget allows you to understand your numbers and what pricing levels are required to remain profitable. With a budget in place, you can see the direct link between reducing margins and your ability to meet payroll. You can also keep up with obligations to vendors and lenders while growing the business and become less likely to make short-term decisions that will be detrimental to long-term results. In fact, your budget will also help you optimize short-term results by serving as a basis for your cash flow management, which is another essential element of financial best practices.
How do I create a budget?
Developing a solid budget is all about quantifying your annual business goals. What are the elements that drive your business and how do you expect them to unfold in the short term?
For the fuel distribution industry, the general business drivers are:
- heating degree days (HDDs)
- commodity prices
- service activity & profitability
- installation activity & profitability
- fixed and variable expenses
Here are a few steps to help your company set up a budget:
- Set realistic short term and long-term business goals for the next 12 months
- Based upon your business goals:
- Calculate your estimated expenses for the year (including fixed costs and estimated variable costs)
- Estimate how much gross profit you hope to generate based upon seasonal HDDs and your preferred margin by fuel type
- Seek out industry benchmarks for expense and profit margin goals
- Create a Profit and Loss statement to see what your bottom line could look like each month and make adjustments to your operation based on the goals
- Set up a process to track your budget throughout the year and know which KPI’s could help you evaluate your company’s financial health
Not sure if you have the time or industry data to put together a budget? A financial advisor can help you get started and can help you track your budget throughout the year.
What a budget does not do
Although your budget may consist of anything from simple forecasts to more detailed forecasts, remember that they are estimates. A budget should not be considered an exact blueprint for reaching your targets, however the targets remain important despite the conditions and challenges you may face over the course of the year.
Much like your GPS may offer alternate routes to reach your destination, your budget highlights the various scenarios that can lead to your financial goals, based upon your specific operational traits. And while there will always be market forces and other external factors that will cause variances to your budget, as long as you are tracking performance against your budget on a regular basis, you have the ability to make course corrections throughout the year.
Examples of how a budget can benefit a fuel marketer
Warm weather may limit the total volume of fuel you sell in a given season, while the shuttering or sale of a competitor in the same season may offer you the opportunity to win additional customers to offset the loss of gallons and grow the service business. Your budget will help you determine how much you should spend in marketing to gain enough customers to fill the profitability gap created by the warm weather.
Your budget can also be used to calculate numerous financial and operational efficiency metrics (gross profit/gallon, cost/delivery, gallons/stop, etc.) that you can monitor and manage on a consistent basis in order to improve profitability over time. If you have BRITE, or another business intelligence system, most of these metrics are pre-calculated for you within the system.
Tips for setting up a successful budget
In order for your budget to be effective, your management team must be committed to taking actions that align with the goals established by the budget. A budget without corresponding actions is like an engine without gas; there is the potential for motion but there will be no movement.
Begin to explore the best way to implement or improve your budget. As a first step, check out some of the free resources available online at U.S. Small Business Administration and Investopedia to gain a deeper understanding of the key elements of a sound financial budget and what is involved in developing it. From there, you can decide whether or not you have the resources and expertise to handle these activities internally or you need to seek a financial advisor.
The most important resolution you can make is to commit to putting a financial plan in place because, whether you decide to go it alone or partner with an industry expert like Angus Energy, you owe it to yourself and your business to plot a course for success. To find out more, click here to request a FREE copy of our “Budgeting Best Practices for Fuel Dealers” worksheet.