A new year is upon us. It’s time to pull out our crystal ball and chart a path for the future. Pilots call this flight planning. We gather all the information known to us at the time, create a plan and adjust as needed throughout the flight. In business, the flight plan is replaced by the business plan and budget. Most people separate the two. I don’t believe we should. I believe the budget is just a business plan in action. Let’s go through the process of designing a budget for this New Year.

Revenue

Sales:Sales for most part of the country will generally be up. It looks to be a cold, wet winter which will keep sales soft in the first quarter, but sales should take off in spring and summer. There is strong pent-up demand on distressed properties and new housing starts are seeing an uptick. However, material pricing and insurance deductibles may keep the replacement segment depressed. In all, plan for growth of 5 percent to 15 percent over last year. Keep a sharp eye on expenses and increase pricing immediately as needed. It will cost more to be in business this year than it did last year.

Direct Expenses

Direct labor: With a slow but steady rebound in the general economy, plan on a tighter labor market. Costs will be up. Leading the way will be overall hourly wages and per square pricing for sub crews. Plan accordingly by upping your sales pricing before the spring rush. Keep an eye on immigration policy changes throughout the year and adjust immediately at the first signs of labor price increases. Look for systems that require fewer field employees and are faster to install.

Material pricing:General material prices will be up. Items on the EPA watch list such as asphalt and other petroleum-based products will most likely have the sharpest increases. Look for systems that are less dependent on asphalt to hedge against the price increases. Work with suppliers to lock in pricing every quarter to help give you time to adjust pricing to the customers. Don’t get caught in the middle of the buying cycle while having to come out of pocket for the increased material pricing. Don’t forget about contract provisions that allow for increases in pricing as material prices increase more than, let’s say, 5 percent. Also, expect permit, licensing, inspection and dumping fees to rise over the next 12 months.

Overhead Expenses

Ads:If you are planning on taking advantage of a growing economy, advertising will need to be increased. Take time to dissect your ad expenses and look to spend money on campaigns that convert ads into jobs, not leads. If done right, you could save money on advertising and be more effective at the same time. Focus on a strong and active Web presence with a professional. Dial back phone book and print ads. Target postcard mailings to individual areas and build highly detailed mailings aimed at a very specific client. Radio and TV pricing will be lower now that we are out of an election year, but effectiveness will be down as consumers go elsewhere for their entertainment.

Fuel: Plan for a sharp increase in pricing and over $4 per gallon as the norm. Plan on supplier shipping/delivery charges, which have to be added to the budget somewhere. To help head off the increases, invest in more energy-efficient vehicles, narrow your work territory, keep jobsite visits to a minimum and don’t let employees take company vehicles home.

Auto service: Older vehicles need more repairs and are less fuel efficient. Upgrading the fleet to new vehicles will help in both budget items. If you’re not in a position to replace, add a little more to this budget item to perform quarterly maintenance. A small increase here will be a big help with the fuel bill.

Equipment expense: As work increases it may be time to purchase new equipment. My suggestion is to continue being frugal on this front and only replace or buy new only when absolutely necessary.

Bad debt:The bankruptcies have increased year over year and are projected to peak this year. Plan on not being able to collect on all invoices. Be careful which contractors you decide to sub from. They have been hard hit over the last few years and are bidding at historically low numbers. Protect yourself from the new construction money game by being selective. If your business is focused on storm restoration, look at deductible structure changes as a potential issue in collecting money. In some areas, certain insurance companies are raising their storm-related deductibles to a percentage of the value of the building from 1 percent to 5 percent. If your customers didn’t read their policy right and you rush to start construction, you both could be in a world of hurt when the insurance company comes back and says that their deductible is more than the entire project. Be careful.

Late fees and finance charges:As customers hold payments longer, plan on spending more on supplier late fees and finance charges. Dedicate your company to a timely collections process and never make exceptions.

Bank charges:It looks like credit card charges are becoming increasingly popular and business owners find it a must to accept them. Charges can range from 1.75 percent to over 4 percent, depending on the type of card presented. To help regulate these charges, look to companies like Square that charge a flat 2.75 percent rate and can be used on smart phones. This will avoid the terminal rental fee, regulate charges, speed up collections and help keep pricing consistent. We find credit cards to now be more than half of all our payments. We build the fees into our pricing by adding 2 percent to every order. This also covers our financing charges, which are 5.25 percent, but are only utilized on less than 7 percent of all sales. Hey, that’s 7 percent more than we would have had if we didn’t offer it.

Dues and subscriptions:Now is not the time to cut your association membership dues. In fact, get involved. You’ll need to know ahead of time when things are about to change so you can react accordingly.

Education: If you are truly considering learning a new system or using a new product line it will cost you at first. Make sure the education budget line has money in it for training, travel, lodging, meals and downtime. Training is a vital part of running a good company, but it does cost, even when the manufacturer pays for it.

Insurance: All insurance costs will be going up. This includes workers’ comp, liability, inland marine, auto and especially health. Although most of the new health care provisions won’t be in place for another year, insurance companies will certainly take steps to protect profits from the losses they expect to incur from the medical side of their businesses. My suggestion is to re-price all of your coverage. Don’t simply rely on your existing personal or professional insurance agent connection. Better yet, work directly with a roofing insurance specialist who will fight for you and your company to get the best rates.

Medical: Full implementation of OSHA’s new fall protection guidelines will help prevent loss of life, but have been shown to increase minor injuries on the roof due to lifeline hazards. Plan on an increase in medical expenses this year. Help prevent the extra costs by holding weekly safety meetings, rewarding for injury-free performance and by avoiding the emergency room for small injuries. My suggestion is to partner with a local small urgent care facility and have them review the smaller employee injuries. Report the incident to your workers’ comp carrier and the OSHA 300 log as normal, but pay for the expenses directly to avoid higher workers’ comp mods and high deductible expenses.

Office equipment:With the release of Windows 8 and exciting new hardware, now is the time to treat your staff to the latest and greatest. You will gain productivity throughout your organization. Smart phones are a key product to invest in, if you haven’t already. The cloud is finally cheap, secure and easy to use. 

Payroll: It’s time to let someone go. With productivity advancements and a consumer base moving to electronic communications, this is the year to eliminate a position and pass on the saved salary to those who pick up the slack. Reward your all-stars through a direct incentive plan and utilize their talents to the fullest. Quick test for each employee: Ask yourself, “If they quit today, would I rehire them?”

Taxes: We can all agree taxes are going up. Depending on the state you work in the increase could be substantial. Plan on a 3 percent to 13 percent increase on taxes over last year. If you didn’t have a payroll liability last year plan on a 33 percent to 48 percent tax increase.

Profit

 Bottom Line Growth:The bottom line is that sales will be strong, but expenses will be higher. Remember, whatever you don’t spend will become profit.