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 make a specific plan on how you will reach it. The financial planning tool that successful businesses employ is a budget. Budgeting is one of the most fundamental financial best practices and it is critical to companies in all industries.
Just think of some of the most well-known and successful brands, such as Google, Apple, and Samsung in the technology arena. Businesses such as these recognize the need to implement financial best practices in order to grow their businesses. The seasonality of the fuel distribution business increases the importance of having a budget because there is a limited window to earn the majority of the profits that must sustain the business throughout the year. 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. The key to developing a realistic budget is to base it on the latest available company-specific information, while also accounting for targeted marketing, capex, cost cutting, or other initiatives, and factoring in the risks that your company will face during 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. Consequently, it becomes likelier that your company will base its pricing on its true cost structure rather than simply reacting to the competition. 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 business goals for the next 12 months. 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
However, each company will also have its own specific business drivers that may not impact the industry at large, such as the average age of local HVAC equipment and the associated opportunity for maintenance/repairs/upgrades revenue, or, for example, the regional installation of a new natural gas pipeline and the potential for conversion away from other energy sources.
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? You can always contact a financial advisor to help you get started. Financial advisors can handle the legwork for you and even help you track your budget throughout the year. Click here to find out how a financial advisor can help you put together a budget.
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 is a framework that 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.
Tip 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.
Now that you have an understanding of the basic concepts of a budget and how it empowers you to take greater control of your business, you can begin to explore the best way to implement your first budget or improve upon your existing budgeting. As a first step, you can review some of the available free resources 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 about Angus Energy’s unique approach to industry-specific financial planning, click here.