The budget is the financial strategic plan used by a business; it takes into account the financial objective as well as market forces that define profitability. A budget (from the old French bougette, meaning purse) is a list of all planned expenses and revenues.
The purpose of budgeting is to provide a forecast of revenues and expenditures. When reviewed in conjunction with financial statements, a budget enables the actual financial operation of the business to be measured against the forecast.
Unfortunately, few equine businesses have a budget, and almost none use a budget effectively as a management tool.
A budget presents you with an opportunity to manage your business through the windshield instead of in the rear-view mirror. If you only study your financial statements, you are looking at what has happened to your business, not what will happen.
Often budgets are prepared with only one goal in mind, to make a profit. However, it isn’t enough to simply turn a modest profit from one year to the next if you want to enhance your enterprise value. Additional factors should be considered in order to increase the value of your business now, thus the value to any future partners or potential buyers at retirement or when planning to exit.
Farms and stables should budget to make a profit and set goals of sustaining performance that will create a positive net income to meet the debt service required for potential investors.
Preparing a budget takes time. A budget should not be viewed as a failure if actual financial performance varies from the budget.
There are several components to effective budgeting:
- Compiling a reasonable budget
- Sticking to the budget
- Routinely comparing actual performance to the budget and adjusting or modifying the budget as new trends develop or as operations may require.
Budgeting can be an eye-opening education into your equine business operations. A budget requires knowledge of the basic components of financial reporting: the income statement or profit-and-loss statement (P&L), the balance sheet and a cash flow statement. The P&L statement is the report on which budgeting relies most heavily.
It is recommended to be conservative when first creating a budget. The conservative approach tends to overestimate expenses and underestimate revenues. This should not be so conservative that you worry about going over or under budget each month. Your projections are simply your best guesses based on past history, your current performance and assumptions for the upcoming year.
Begin the budgeting process by reviewing your prior year’s P&L statement for an understanding of your net income or loss and the revenue and expense categories. You can print your previous year’s P&L statement and mark it up to create your budget, or you can drop the P&L statement into an Excel document and build the budget electronically. If you don’t have a P&L statement talk to your accountant or CPA and get them to create one for you.
There are software accounting programs that can help you in the budgeting process. For example, Quick Books has a budget function that is a good place to start.
Many find it easier to break down the business’ P&L statement into categories to assist in the budgeting process. Some farms and stables have multiple profit centers or income-generating departments (boarding, foaling, training, show fees, etc.). Other farms and stables simply record all operations under one central company.
If your income and expenses are reported in a few “big buckets,” it is difficult to build a meaningful budget. The more detail you see on your P&L statement (for both income and expenses), the more effective your budget will be. For example, if you break down your boarding into seasonal, full-care, self-care and extra services (and you could break these down, too), you will have a better understanding of where your money comes from.
No matter how your financial information is organized, the best approach is to begin with your revenues. Since many expenses can vary based on the volume of sales or services you provide, determine estimated annual revenues for the company, profit centers, service areas, by staff member (grooms, trainers, foaling staff, etc.) depending on the level of detail you are willing to calculate or are capable of obtaining.
When estimating future projections for revenue, it is important to review the following:
- Industry and economic trends
- Pricing and services offered
- Price increases and volume
- Will increasing prices add to revenue dollars?
- Will price increases have a negative effect and decrease the quantity sold or services provided, thus lowering total dollars?
- Can a volume increase of certain services be obtained without a price adjustment?
- Can your equine business provide new services or bundled options to increase revenue?
- New services
- Existing clients: Do they anticipate maintaining the same number of horses in the upcoming year?
- Existing clients: Are there any services that you provide that they will be eliminating, reducing or adding to in the coming year?
- New clients: Is there potential for obtaining new clients?
- New clients: Are there new areas or locations to advertise your services?
Of course, trends and assumptions will be unique for each farm or stable. It is necessary to have a clear understanding of these trends in order to effectively assess your revenue potential for the short-term budget and long-term growth of your business and potential business value.
Budgeting the expenses can take more time and thought, as there are fixed expenses and variable expenses.
Fixed expenses are those that do not change, such as a mortgage payment or a lease.
Variable expenses are just that, they vary from month to month. Supplies can be lumped in this category as re-orders are based on usage and usage can vary greatly from month to month or year to year.
It is easiest to identify the fixed expenses first and plug those expenses in accordingly. There are many methods that equine businesses can use when budgeting expenses. The key is to focus on the type of expense, then evaluate what factor’s could have an impact on whether that expense increases or decreases. Using those assumptions you can reasonably estimate any kind of expense.
You should further identify those expenses that are a significant portion of your total expenses. In most businesses that includes salaries/wages, bedding, feed, and potentially fuel (if you transport your clients to shows or events).
Budgeting is not an exact science. However, it requires a good knowledge of your farm’s or stable’s operations and realistic expectations for revenue increases and reduction of expenses.
Often a simple detailed look at revenues and their sources can identify new opportunities for growth, or reveal services that are underpriced. That detailed look can also give you additional awareness of expenses, which can result in elimination of unnecessary operational expenses or help you identify operating inefficiencies that can result in expense reductions.
Often equine businesses prepare a budget, but do little to monitor their progress against the budget. Further analysis—with a detailed look at operations and expenses and testing “what-if” scenarios for profits and expenses—can yield larger savings and an enhanced awareness of the farm’s or stable’s operations.
It is common that businesses will occasionally fall short of achieving some budget projections. Examine these variances routinely to understand their cause. The variances might simply be a result of an overly aggressive budget, such as projecting revenues too high.
Sometimes budget shortfalls can be a result of underestimating expenses. Or it could be that you budgeted expenses reasonably, but the farm or stable is spending too much and a stricter policy of adhering to the budget needs to be put in place.
The key to successful budgeting is to review your performance routinely (preferably monthly). This will allow for more timely adjustment of actual expenditures and any reallocation of budget shortfalls. In addition, routine review will assist you in staying “on the pulse” of your business operations and assist in managing the cash flows of the company to ensure you are meeting obligations.
Utilizing these tools and being proactive in generating a budget can prepare any equine business for unexpected events and help you better manage the shortfalls as well as the excess income that is earned. These are key to reaching your goals.
Andrew R Clark, DVM, MBA, is founder and president of Andrew R Clark, DVM, MBA, LLC. You can find out more about him and his services at dvmmba.com.