How A/E Firms Benefit From Sticking To A Budget
December 4, 2020
While developing and sticking to a budget is a common practice for business in many industries, that isn’t necessarily the case with architecture and engineering (A/E) firms. In fact, many of the firms we work with have never had a budget or have only recently created one. And many firm principals who are operating under their first budget and taking a look at the numbers after six months will say, “Our budget is already busted. Many things have happened already that just make it unworkable.”
Yes, it’s true that sticking to a budget in the face of unexpected events can be hard. But that doesn’t mean that budgeting is a waste of time. Quite the opposite, actually. Having a budget to come back to when something has thrown you off track can be very helpful.
Investing in Your Budget is Investing in Your Business
There’s no question that putting together a well-researched and realistic budget requires a significant amount of time and effort. However, the owners we talk with find that ultimately this investment is an investment in the financial health of their firm. A quick, “best guess” exercise isn’t likely to help drive better results, but a careful assessment of the available data that leads to a solid budget definitely can.
Understanding Budgets vs. Forecasts
It’s been our experience that the term “budget” gets applied to two different things: budgets and forecasts. The difference is that a budget is dependent on a plan and a forecast is simply a prediction of where a firm will end up if it keeps doing what it’s doing—working for the same clients, maintaining the same headcount, staying in the same industries, etc.
There’s nothing wrong with producing a forecast, of course. It just shouldn’t be called a budget. And if you choose to produce a forecast only, what you’re saying is that operationally you don’t intend to change much in the year ahead. On the other hand, if you intend to enhance your operations, you need a budget.
Actions like hiring more staff, going after bigger clients, offering new services, or opening a new office are activities where you expect to see some ROI. Your budget should define how you’ll know if your money has been spent effectively.
So, while a forecast may be affected by market forces beyond your control, a budget is different. Those forces will definitely play a part, but hitting your budget numbers is more a function of the actions you take. In other words, a budgeting approach is more active and puts you more in the driver’s seat of your firm’s success. Often the best use of a forecast is to establish a “baseline” of sorts for your budget, but the budget itself is your recipe for financial success.
“Having a budget and sticking to it even when things are going well can ensure that you’re ready to react if things take a turn for the worse.”
Budgeting and Performance Tracking
You’ve identified some goals for the year ahead and developed a budget for reaching them. In essence, you’ve converted objectives into dollars and cents. The next step is to track your performance against those figures.
A product like Factor can help you develop metrics so that you’re actually benchmarking your future. You say, “This year we hit a labor multiplier of 3.0, but if we stick to our budget next year, we’ll achieve a 3.2.” As long as your budget doesn’t have any unreasonable expectations, your team now has numbers to focus on.
We don’t advocate making “course corrections” based on any given month, since results can vary widely in smaller A/E firms. But as trends begin to develop over the course of a financial quarter, having a budget means you’re well positioned to take action. And, obviously, altering the budget is not a beneficial tactic! What the firms we’ve worked with have come to realize is that budgeting isn’t a numbers exercise, it’s an operational exercise.
Budgeting in Good Times and Challenging Times
When the economy is good and firms have all the work they can handle, the push back against budgeting is, as you’d expect, “We’re so busy we don’t have the time for creating a budget. And, clearly we don’t need one!”
But, of course, there are countless unforeseen circumstances that can turn a great year into a challenging one. Having a budget and sticking to it even when things are going well can ensure that you’re ready to react if things take a turn for the worse. Every firm hopes that demand for their services will stay strong, but we all know that hope is not a plan!
Strategic Plans for Bigger Firms
For firms with 50+ employees, budgeting is a bit of a different animal. It has to become more strategic. At that size, developing a budget means taking a multiple-year view and requires a significant amount of upfront data collection, economic assessments, interviews with clients about their plans, etc.
Some bigger firms will say they’ve developed a budget, but they haven’t really collected the “intel” to do it right. So, the retreat where the principals were going to craft the plan ends up producing a fairly uninformed “guesstimate” that doesn’t drive any change in the way the firm operates.
We encourage larger A/E firms to produce a solid, realistic, three-year budget (a “strategic plan”) broken down into one-year segments. This is helpful, since some of the operational changes needed take multiple years to accomplish. What they find when they take this approach is that investing the time, effort, and focus to meet objectives in Year 1, Year 2, and Year 3 feels much easier, and then, of course, leads to hitting the three-year targets.
Ultimately, whether you have a single-year budget or a multi-year strategic plan, the key to success is taking the actions outlined in those documents, monitoring your progress, and taking action to ensure you stay on track.
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