I could think of a 1,000 things that I would rather be doing in October and November than formulating the organization’s budget for next year. That said, I can’t think of a single process that provides more clarity or direction for achieving success than crafting the company’s budget.
Budgeting forces you to examine the business, look at the direction you’re heading and chart the course for the year ahead. For this reason, accountants, operations managers, controllers and facility managers will cram into conference rooms during the next several months as part of the annual ritual to develop next year’s budgets.
Why We Budget
There are a number of reasons we budget:
1. Set the course and identify priorities for the year ahead.
2. Provide structure and guidance for all of the company’s major financial decisions.
3. Ensure you have adequate dollars to provide maintenance and repair of your recycling equipment, building and rolling stock.
4. Predict cash flows to identify potential shortfalls when you may need to make adjustments, obtain additional financing or adjust payment schedules.
5. Help control spending by establishing boundaries to eliminate unallocated expenses.
6. Identify capital expense projects to ensure that you have adequate financing and resources to fulfill your big projects and purchases.
How To Budget
Budgeting is team event in which managers, supervisors, controllers and accountants work collaboratively to develop a realistic budget that will serve as the road map to financial success over the next year.
Additionally, a capital budget will help guide the organization for the next several years in terms of big expenditures for machinery, construction projects and facility upgrades. Therefore, getting your budget right is key.
You will need some basic information to formulate your budget. For starters you will need:
Historical data on income and expense items. At recycling centers, your income will come from gate receipts and the sale of commodities. A good starting point is to look back at last year’s volume and sales numbers.
Educated and realistic predictions. Your team will need to make predictions about volumes and commodity pricing for the year ahead. You may want to talk with your contacts at mills to help forecast the sale of commodities.
With historical data and predictions, you can now start to identify the company’s revenue for each month of the coming year.
Identifying expenses can work the same way. Take a look at your expenses during the last 12 months and make some predictions for the year ahead. Essentially, you will have two types of expenses – fixed and variable.
Fixed expenses are fairly consistent from one month to the next, regardless of how much material you are processing at your recycling center. Examples include rent or mortgage, property taxes, utilities, insurance costs, etc…
Variable expenses fluctuate from month to month based on how much material you are processing. This could include the cost of rebates for material, fuel, labor, etc…
In addition to fixed and variable costs, you also need to plan for large, one-time capital expenditures (also known as “Capex”). Examples of Capex include plant and equipment upgrades, new machinery and rolling stock. A separate Capex budget will help detail big ticket expenses and identify how items will be financed (cash, loan, lease, etc…).
With the data from last year, it now time for the team to start talking about the year ahead and developing the new budget. At this point, you should think about the seasonality of volume. For example, on Long Island, there is greater volume of recyclables throughout the summer months and around the holidays. In Florida, winter months have higher volumes as tourism and snowbirds flock to warmer climates.
You can now identify the revenue you expect to receive and the expenses you forecast for each month. Using this information, you should be able to control spending while increasing revenue and maximizing profitability.
Every recycling operation needs a budget to help guide the organization and properly manage financial resources. The budgeting process should be an annual exercise that includes a review of the prior year and a forecast for future revenue and expenses. The team that developed the budget should review the budget several times throughout the year to compare actual results with the budgeted expectations.
Remember, the budget process takes time and thoughtful consideration. Investing the time in the fourth quarter will help ensure your success in the year ahead.
Will Flower is president of Green Stream Recycling in Long Island, N.Y. The company is focused on advancing recycling throughout Long Island.