For many smaller equipment rental businesses, the process of financial planning is limited to meeting next week’s payroll. There are so many financial fires to put out in a given week that one just can’t find the time to do any short- or long-range financial planning. But failing to plan financially might mean that you are unknowingly planning to fail.
The most effective financial budget includes both a short-range month-to-month plan for at least a calendar year and a quarter-to-quarter long-range budget for at least three years. If you are one of the many rental company owners who never quite gets around to preparing a financial plan, you certainly aren’t alone. You might have tried it in the past and become discouraged by the many financial variables that go into a good budget, or you might have done a budget only to have it blow up in the second month because of an unexpected occurrence like a major repair.
It’s true that no one can predict the future, and no financial plan ever turns out right on the money. What a good budget does is allow you to plan ahead for capital expenditures, revenue growth, increased supplier prices, economic changes, etc.
The key reason to budget is financial control. Financial control enables you as an owner to better accomplish important big picture and day-to-day financial objectives. Budgeting helps you become a better macro-manager by enabling you to:
- Manage pro-actively rather than reactively.
- Make it easier to borrow money. Not only can you plan ahead better for financing needs, but sharing your budget with your banker will help in the loan approval process.
- Provide financial planning information for investors.
- Make your operation more profitable and efficient.
- Provide yourself with a great decision-making tool for key financial considerations.
Budgeting helps you become a better micro-manager by enabling you to:
- Avoid investing too much money in inventory and/or fixed assets.
- Maintain working capital needs more efficiently.
- Set sales goals. You need to be growth oriented, not just an “order taker.”
- Improve gross profit margin by pricing your services more effectively or by reducing supplier prices, direct labor, etc. that affect Cost of Goods Sold.
- Operate more efficiently by keeping SG&A expenses down more effectively.
- Perform tax planning.
- Plan ahead for employee benefits.
- Perform sensitivity analysis with the variables involved.
When to budget?
As mentioned, budgeting is most effective when both a short- and long-range plan are maintained. The short-range budget should cover a fiscal year for your equipment rental business coinciding with the year-end you use for financial statement reporting. It should be prepared during the two months preceding the fiscal year-end to allow ample time for sufficient information gathering.
The long-range plan should cover a period of at least three years (some go up to five years) on a quarterly basis, or even on an annual basis. The long-term budget should be updated when the short-range plan is prepared.
While some owners prefer to leave the one-year budget unchanged for the year for which it provides projections, many owners adjust the budget during the year based on certain financial occurrences, such as an unplanned asset purchase or a larger-than-expected upward sales trend. Using the budget as an ongoing planning tool during a given year certainly is recommended, however, here is a word to the wise: Financial planning is vital, but it is important to avoid getting so caught up in the budget process that you forget to keep doing business.
What to budget?
Many financial budgets provide a plan only for the income statement, however, it’s important to budget both the income statement and balance sheet. This enables you to consider potential cash flow needs for your entire operation, not just as they pertain to income and expense items. For instance, if you’re adding a new line of small equipment such as leaf blowers, you will need to consider the impact of inventory purchases on cash flow.