Understanding what is a business : Introduction to the ROKC Method and Uncertainty Model. Why do we budget? Case of John's Lawn Care Company: Challenges of initial budget, process costing, Gross margin by product, Gross margin by market. P&L, Balance Sheet, and Cash Flow Tips & Tricks Sales & Operations Planning

1. Alessandro Daliana
Budgeting: Fighting
for Your Gross Margin
ROKC Capital
Leadership | Strategy | Portfolio Management
rokc.co
© 2017 Chokti Inc.

2. Let’s Get Started

3. What is a Business?
Resource People & Processes Product CustomerProperty
People & Processes
Struggle
Uncertain Outcomes
Struggles with
Uncertain Outcomes

4. Scaling Requires Changes in Property
Time
Scale
Data
Branding
Automation
Education
Entrepreneur
Maximize return on
resource/property.

5. 4 Uncertainties
Struggle-Freedom
Gratitude
Em
otional
Physical
IntellectualMotivational
- Aspirational

6. Returns Vary by Culture
North America
Europe/Oceania/South America/Middle East
South & East Asia

7. When Budgeting, you want to…
1. Identify the resource/property/key component.
2. Identify the customer’s struggle with uncertain
outcome to elicit their gratitude.
3. Connect these 2 points with processes that reduce
struggles for other stakeholders to elicit their gratitude.
4. Capture the value created.

8. Warning!
❖ All resources/property/key components have a finite
lifespan.
❖ There’s competition to satisfy customer struggles.
❖ Processes need to adapt.

9. Why do we Budget?
❖ Make better decisions for all stakeholders.
❖ customers
❖ vendors
❖ employees
❖ financiers
❖ owners
❖ taxman
❖ charities
❖ ….your community!
❖ Reduce their struggles with uncertain outcomes.

10. Practical Example
John’s Lawn Care
Company
14 years in business

11. What is a Business?
People & Processes Product CustomerProperty
People & Processes
COGS/Direct Costs
Overheads/Indirect Costs

12. Resources/Property
Time
Scale
Equipment
Staff
John
Bond

13. Customer Uncertainties
❖ Physical
❖ Strength - lawn care is a physical activity requiring energy and physical
strength.
❖ Emotional
❖ Status - my family, friends, and neighbors are always impressed by the
quality of my garden
❖ Intellectual
❖ Plant varietals - limited understanding of plant, tree, bush,…
❖ Motivational - Aspirational
❖ Effort - the effort to maintain my property.

14. Making Sense of John’s Budget
❖ Benchmark.
❖ Check Assumptions.
❖ Cost of Goods Sold (COGS)/
Direct Costs.
❖ Overheads (OH)/Indirect
Costs.
❖ Identify Processes.
❖ Management System.

15. ASP Low Average High
Snow & Ice
Management 77.75 83.60 89.45
Tree Care 53.36 60.42 67.48
Landscape
Construction &
Design
52.18 54.46 56.74
Lawn Care 47.68 51.93 56.18
Landscape
Maintenance 44.31 46.28 48.25
Company
Average 34.66
Regional Benchmarks
Benchmarking
Average Selling Price
“Houston, we have problem.”

16. Subtotal
Produc-on
Overheads Total Company
Benchmark
Na-onal
Benchmark
Variance Range +/-
Sales 845,812.80 845,812.80
Material Costs - - 0.00% 20.05% 20.05% 4.95%
Gas & Oil Costs 36,852.00 36,852.00 4.36% 3.00% -1.36% 1.00%
Labor (Field) 208,860.00 208,860.00 24.69% 25.00% 0.31% 5.00%
Labor Burden (Field) 48,037.80 48,037.80 5.68% 8.25% 2.57% 2.25%
Equipment Expense 129,156.60 129,156.60 15.27% 10.00% -5.27% 2.00%
Micellaneous Direct Job Costs - - 0.00% 0.60% 0.60% 0.50%
Cost of Goods Sold 422,906.40 422,906.40
Gross Margin 422,906.40 422,906.40 50.00% 20.00% -30.00% 20.05%
Adver-zing & Promo 15,150.00 15,150.00 1.79% 4.00% 2.21% 2.00%
Bad debts/write off uncollectable 1,000.00 1,000.00 0.12% 0.75% 0.63% 0.25%
U-li-es 6,155.00 6,155.00 0.73% 0.50% -0.23% 0.25%
Dona-ons 1,200.00 1,200.00 0.14% 0.05% -0.09% 0.05%
Down-me with labor burden - 0.00% 1.25% 1.25% 0.25%
Dues & Subscrip-ons 900.00 900.00 0.11% 0.15% 0.04% 0.05%
Health Insurance 18,000.00 18,000.00 2.13% 1.75% -0.38% 3.25%
Merchant fees 3,000.00 3,000.00
Bank charge - other 500.00 500.00
Bounced check 100.00 100.00
Bank Charges 3,600.00 3,600.00
finance charge fo FS 2,975.00 2,975.00
Interest expense 1,445.00 1,445.00
Interest 4,420.00 4,420.00
Bank Charges & Interest 8,020.00 8,020.00 0.95% 0.30% -0.65% 0.10%
License & related bonds - - 0.00% 0.15% 0.15% 0.05%
Real Green System Services 2,400.00 2,400.00
Computer - Deprecia-on 500.00 500.00
Overhead - Deprecia-on 1,640.00 1,640.00
Office equipment, computers, and sofware 4,540.00 4,540.00 0.54% 0.30% -0.24% 0.10%
Office supplies 8,393.00 8,393.00 0.99% 0.30% -0.69% 0.10%
Agorney fees 500.00 500.00
Consul-ng exp. 3,000.00 3,000.00
Security expense 1,200.00 1,200.00
Professional Fees 4,700.00 4,700.00 0.56% 1.25% 0.69% 0.25%
Telephone exp. 12,000.00 12,000.00 1.42% 0.75% -0.67% 0.25%
Rent expense 11,760.00 11,760.00 1.39% 3.00% 1.61% 1.00%
Router 12,000.00 12,000.00
Fer-lity Technician 12,000.00 12,000.00
Office Manager 22,000.00 22,000.00
President 50,000.00 50,000.00
Office Manager 35,000.00 35,000.00
Mower Technician 43,000.00 43,000.00
Sales 42,000.00 42,000.00
Fer-lity Technician 960.00 960.00
Salaries, office staff, officers 216,960.00 216,960.00 25.65% 11.00% -14.65% 1.00%
Payroll taxes 49,900.80 49,900.80
Workers' comp -
Salaries labor burden 49,900.80 49,900.80 5.90% 13.50% 7.60% 1.50%
Small tools/supplies - - 0.00% 1.25% 1.25% 0.25%
Real Estate Taxes 3,254.00 3,254.00 0.38% 0.10% -0.28% 0.00%
Educa-on 3,084.00 3,084.00
Test Fees 500.00 500.00
Educa-on & Training 3,584.00 3,584.00 0.42% 0.25% -0.17% 0.05%
Meals & Entertainment 2,000.00 2,000.00
Travel & Entertainment 2,000.00 2,000.00 0.24% 0.40% 0.16% 0.10%
Uniform Expense 3,000.00 3,000.00 0.35% 0.40% 0.05% 0.10%
Vehicles - Rep. & Maint. 1,000.00 1,000.00
Vehicle - Insurance 769.00 769.00
Vehicle - Registra-on 250.00 250.00
FS fuel expense 6,142.00 6,142.00
Vehicle - Deprecia-on 9,056.20 9,056.20
Vehicles (Overhead) 17,217.20 17,217.20 2.04% 1.75% -0.29% 0.25%
Yard Expenses 1,100.00 1,100.00 0.13% 0.15% 0.02% 1.85%
Dental Insurance -
Life Insurance 2,500.00 2,500.00
Damages -
General Liability Insurance 2,432.00 2,432.00
Inland Marine Insurance 317.00 317.00
Umbrella Insurance 673.00 673.00
Tailored protec-on insurance -
Commercial Property Insurance 1,401.00 1,401.00
Terror Insurance 113.00 113.00
Insurance 7,436.00 7,436.00 0.88% 0.00% 0.00% 0.00%
Shop repair 2,000.00 2,000.00
Amort -
Miscelaneous (Overhead) 2,000.00 2,000.00 0.24% 0.05% -0.19% 0.05%
Total Indirect Costs 398,270.00 398,270.00 47.09%
Net Income before other income & expenses 24,636.40 2.91%
Benchmark Costs

17. Subtotal
Produc-on
Correc-on Subtotal
Produc-on
Corrected
Overheads Total Company
Benchmark
Na-onal
Benchmark
Variance Range +/-
Sales 845,812.80 845,812.80 845,812.80
Material Costs - 169,162.56 169,162.56 169,162.56 20.00% 20.05% 0.05% 4.95%
Gas & Oil Costs 36,852.00 36,852.00 36,852.00 4.36% 3.00% -1.36% 1.00%
Labor (Field) 208,860.00 208,860.00 208,860.00 24.69% 25.00% 0.31% 5.00%
Labor Burden (Field) 48,037.80 48,037.80 48,037.80 5.68% 8.25% 2.57% 2.25%
Equipment Expense 129,156.60 129,156.60 129,156.60 15.27% 10.00% -5.27% 2.00%
Micellaneous Direct Job Costs - - - 0.00% 0.60% 0.60% 0.50%
Cost of Goods Sold 422,906.40 169,162.56 592,068.96 592,068.96
Gross Margin 422,906.40 (169,162.56) 253,743.84 253,743.84 30.00% 20.00% -10.00% 20.05%
Adver-zing & Promo 15,150.00 15,150.00 1.79% 4.00% 2.21% 2.00%
Bad debts/write off uncollectable 1,000.00 1,000.00 0.12% 0.75% 0.63% 0.25%
U-li-es 6,155.00 6,155.00 0.73% 0.50% -0.23% 0.25%
Dona-ons 1,200.00 1,200.00 0.14% 0.05% -0.09% 0.05%
Down-me with labor burden - 0.00% 1.25% 1.25% 0.25%
Dues & Subscrip-ons 900.00 900.00 0.11% 0.15% 0.04% 0.05%
Health Insurance 18,000.00 18,000.00 2.13% 1.75% -0.38% 3.25%
Merchant fees 3,000.00 3,000.00
Bank charge - other 500.00 500.00
Bounced check 100.00 100.00
Bank Charges 3,600.00 3,600.00
finance charge fo FS 2,975.00 2,975.00
Interest expense 1,445.00 1,445.00
Interest 4,420.00 4,420.00
Bank Charges & Interest 8,020.00 8,020.00 0.95% 0.30% -0.65% 0.10%
License & related bonds - - 0.00% 0.15% 0.15% 0.05%
Real Green System Services 2,400.00 2,400.00
Computer - Deprecia-on 500.00 500.00
Overhead - Deprecia-on 1,640.00 1,640.00
Office equipment, computers, and sofware 4,540.00 4,540.00 0.54% 0.30% -0.24% 0.10%
Office supplies 8,393.00 8,393.00 0.99% 0.30% -0.69% 0.10%
Agorney fees 500.00 500.00
Consul-ng exp. 3,000.00 3,000.00
Security expense 1,200.00 1,200.00
Professional Fees 4,700.00 4,700.00 0.56% 1.25% 0.69% 0.25%
Telephone exp. 12,000.00 12,000.00 1.42% 0.75% -0.67% 0.25%
Rent expense 11,760.00 11,760.00 1.39% 3.00% 1.61% 1.00%
Router 12,000.00 12,000.00
Fer-lity Technician 12,000.00 12,000.00
Office Manager 22,000.00 22,000.00
President 50,000.00 50,000.00
Office Manager 35,000.00 35,000.00
Mower Technician 43,000.00 43,000.00
Sales 42,000.00 42,000.00
Fer-lity Technician 960.00 960.00
Salaries, office staff, officers 216,960.00 216,960.00 25.65% 11.00% -14.65% 1.00%
Payroll taxes 49,900.80 49,900.80
Workers' comp -
Salaries labor burden 49,900.80 49,900.80 5.90% 13.50% 7.60% 1.50%
Small tools/supplies - - 0.00% 1.25% 1.25% 0.25%
Real Estate Taxes 3,254.00 3,254.00 0.38% 0.10% -0.28% 0.00%
Educa-on 3,084.00 3,084.00
Test Fees 500.00 500.00
Educa-on & Training 3,584.00 3,584.00 0.42% 0.25% -0.17% 0.05%
Meals & Entertainment 2,000.00 2,000.00
Travel & Entertainment 2,000.00 2,000.00 0.24% 0.40% 0.16% 0.10%
Uniform Expense 3,000.00 3,000.00 0.35% 0.40% 0.05% 0.10%
Vehicles - Rep. & Maint. 1,000.00 1,000.00
Vehicle - Insurance 769.00 769.00
Vehicle - Registra-on 250.00 250.00
FS fuel expense 6,142.00 6,142.00
Vehicle - Deprecia-on 9,056.20 9,056.20
Vehicles (Overhead) 17,217.20 17,217.20 2.04% 1.75% -0.29% 0.25%
Yard Expenses 1,100.00 1,100.00 0.13% 0.15% 0.02% 1.85%
Dental Insurance -
Life Insurance 2,500.00 2,500.00
Damages -
General Liability Insurance 2,432.00 2,432.00
Inland Marine Insurance 317.00 317.00
Umbrella Insurance 673.00 673.00
Tailored protec-on insurance -
Commercial Property Insurance 1,401.00 1,401.00
Terror Insurance 113.00 113.00
Insurance 7,436.00 7,436.00 0.88% 0.00% 0.00% 0.00%
Shop repair 2,000.00 2,000.00
Amort -
Miscelaneous (Overhead) 2,000.00 2,000.00 0.24% 0.05% -0.19% 0.05%
Total Indirect Costs 398,270.00 398,270.00 47.09%
Net Income before other income & expenses (144,526.16) -17.09%
Adjust Assumptions

18. Subtotal
Produc-on
Corrected
Overheads Pre-
Produc-on
Produc-on Post-
Produc-on
Total Company
Benchmark
Na-onal
Benchmark
Variance Range +/-
Sales 845,812.80 845,812.80
Gross Margin 253,743.84 253,743.84 30.00% 20.00% -10.00% 20.05%
Adver-zing & Promo 15,150.00 15,150.00 15,150.00 1.79% 4.00% 2.21% 2.00%
Bad debts/write off uncollectable 1,000.00 1,000.00 1,000.00 0.12% 0.75% 0.63% 0.25%
U-li-es 6,155.00 6,155.00 6,155.00 0.73% 0.50% -0.23% 0.25%
Dona-ons 1,200.00 1,200.00 1,200.00 0.14% 0.05% -0.09% 0.05%
Down-me with labor burden - - 0.00% 1.25% 1.25% 0.25%
Dues & Subscrip-ons 900.00 900.00 900.00 0.11% 0.15% 0.04% 0.05%
Health Insurance 18,000.00 2,832.18 11,701.56 3,466.25 18,000.00 2.13% 1.75% -0.38% 3.25%
Merchant fees 3,000.00 3,000.00 3,000.00
Bank charge - other 500.00 500.00 500.00
Bounced check 100.00 100.00 100.00
finance charge fo FS 2,975.00 247.92 2,479.17 247.92 2,975.00
Interest expense 1,445.00 1,445.00 1,445.00
Bank Charges & Interest 8,020.00 247.92 7,424.17 347.92 8,020.00 0.95% 0.30% -0.65% 0.10%
License & related bonds - - - 0.00% 0.15% 0.15% 0.05%
Real Green System Services 2,400.00 2,400.00 2,400.00
Computer - Deprecia-on 500.00 500.00 500.00
Overhead - Deprecia-on 1,640.00 1,640.00 1,640.00
Office equipment, computers, and sobware 4,540.00 - 2,900.00 1,640.00 4,540.00 0.54% 0.30% -0.24% 0.10%
Office supplies 8,393.00 8,393.00 8,393.00 0.99% 0.30% -0.69% 0.10%
Acorney fees 500.00 500.00 500.00
Consul-ng exp. 3,000.00 3,000.00 3,000.00
Security expense 1,200.00 1,200.00 1,200.00
Professional Fees 4,700.00 - 500.00 4,200.00 4,700.00 0.56% 1.25% 0.69% 0.25%
Telephone exp. 12,000.00 2,000.00 10,000.00 12,000.00 1.42% 0.75% -0.67% 0.25%
Rent expense 11,760.00 11,760.00 11,760.00 1.39% 3.00% 1.61% 1.00%
Router 12,000.00 12,000.00 12,000.00
Fer-lity Technician 12,000.00 12,000.00 12,000.00
Office Manager 22,000.00 22,000.00 22,000.00
President 50,000.00 25,000.00 25,000.00 50,000.00
Office Manager 35,000.00 35,000.00 35,000.00
Mower Technician 43,000.00 43,000.00 43,000.00
Sales 42,000.00 42,000.00 42,000.00
Fer-lity Technician 960.00 960.00 960.00
Salaries, office staff, officers 216,960.00 67,000.00 67,960.00 82,000.00 216,960.00 25.65% 11.00% -14.65% 1.00%
Payroll taxes 49,900.80 15,410.00 15,630.80 18,860.00 49,900.80
Workers' comp -
Salaries labor burden 49,900.80 15,410.00 15,630.80 18,860.00 49,900.80 5.90% 13.50% 7.60% 1.50%
Small tools/supplies - - - 0.00% 1.25% 1.25% 0.25%
Real Estate Taxes 3,254.00 3,254.00 3,254.00 0.38% 0.10% -0.28% 0.00%
Educa-on 3,084.00 3,084.00 3,084.00
Test Fees 500.00 500.00 500.00
Educa-on & Training 3,584.00 3,584.00 3,584.00 0.42% 0.25% -0.17% 0.05%
Meals & Entertainment 2,000.00 2,000.00 2,000.00
Travel & Entertainment 2,000.00 2,000.00 2,000.00 0.24% 0.40% 0.16% 0.10%
Uniform Expense 3,000.00 3,000.00 3,000.00 0.35% 0.40% 0.05% 0.10%
Vehicles - Rep. & Maint. 1,000.00 1,000.00
Vehicle - Insurance 769.00 769.00
Vehicle - Registra-on 250.00 250.00
FS fuel expense 6,142.00 6,142.00
Vehicle - Deprecia-on 9,056.20 9,056.20
Vehicles (Overhead) 17,217.20 8,608.60 8,608.60 17,217.20 2.04% 1.75% -0.29% 0.25%
Yard Expenses 1,100.00 1,100.00 1,100.00 0.13% 0.15% 0.02% 1.85%
Dental Insurance -
Life Insurance 2,500.00 2,500.00 2,500.00
Damages - -
General Liability Insurance 2,432.00 2,432.00 2,432.00
Inland Marine Insurance 317.00 317.00 317.00
Umbrella Insurance 673.00 673.00 673.00
Tailored protec-on insurance - -
Commercial Property Insurance 1,401.00 1,401.00 1,401.00
Terror Insurance 113.00 113.00 113.00
Insurance 7,436.00 7,436.00 7,436.00 0.88% 0.00% 0.00% 0.00%
Shop repair 2,000.00 2,000.00 2,000.00
Amort - -
Miscelaneous (Overhead) 2,000.00 2,000.00 2,000.00 0.24% 0.05% -0.19% 0.05%
Total Indirect Costs 398,270.00 109,248.70 115,216.53 173,804.77 398,270.00 47.09%
Net Income before other income & expenses (144,526.16) -17.09%
Potential Business Processes to Track
Pre-Production
Licensing, bonding, insurance, permitting,…
Advertising, PR, outreach, social networking,…
Sales funnel, analytics,…
Sales, contract negotiation, closing,…
Research & Development
New product development
Training
Production
Purchases
Routing
Travel time, gas up, material pick up,…
On site preparation/set up time
Weeding, mowing, mulching, fertilizing, pruning, pest control,…
Supervising
On site clean up, travel time, in depot clean up, reporting,…
Post-Production
Invoicing & collection
Bookkeeping & reporting
Taxation: monthly quarterly, and yearly
Management, leadership, meetings, board meetings,….
Process
Costing

19. Pre-
Produc*on
Produc*on Post-
Produc*on
Total Company
Benchmark
Na*onal
Benchmark
Variance Range +/-
Sales 845,812.80 845,812.80
Gross Margin 109,248.70 115,216.53 29,278.61 253,743.84 30.00% 20.00% -10.00% 20.05%
Adver*zing & Promo 15,150.00 15,150.00 1.79% 4.00% 2.21% 2.00%
Bad debts/write off uncollectable 1,000.00 1,000.00 0.12% 0.75% 0.63% 0.25%
U*li*es 6,155.00 6,155.00 0.73% 0.50% -0.23% 0.25%
Dona*ons 1,200.00 1,200.00 0.14% 0.05% -0.09% 0.05%
Down*me with labor burden - 0.00% 1.25% 1.25% 0.25%
Dues & Subscrip*ons 900.00 900.00 0.11% 0.15% 0.04% 0.05%
Health Insurance 2,832.18 11,701.56 3,466.25 18,000.00 2.13% 1.75% -0.38% 3.25%
Bank Charges & Interest 247.92 7,424.17 347.92 8,020.00 0.95% 0.30% -0.65% 0.10%
License & related bonds - - 0.00% 0.15% 0.15% 0.05%
Office equipment, computers, and soware - 2,900.00 1,640.00 4,540.00 0.54% 0.30% -0.24% 0.10%
Office supplies 8,393.00 8,393.00 0.99% 0.30% -0.69% 0.10%
Professional Fees - 500.00 4,200.00 4,700.00 0.56% 1.25% 0.69% 0.25%
Telephone exp. 2,000.00 10,000.00 12,000.00 1.42% 0.75% -0.67% 0.25%
Rent expense 11,760.00 11,760.00 1.39% 3.00% 1.61% 1.00%
Salaries, office staff, officers 67,000.00 67,960.00 82,000.00 216,960.00 25.65% 11.00% -14.65% 1.00%
Salaries labor burden 15,410.00 15,630.80 18,860.00 49,900.80 5.90% 13.50% 7.60% 1.50%
Small tools/supplies - - 0.00% 1.25% 1.25% 0.25%
Real Estate Taxes 3,254.00 3,254.00 0.38% 0.10% -0.28% 0.00%
Educa*on & Training 3,584.00 3,584.00 0.42% 0.25% -0.17% 0.05%
Travel & Entertainment 2,000.00 2,000.00 0.24% 0.40% 0.16% 0.10%
Uniform Expense 3,000.00 3,000.00 0.35% 0.40% 0.05% 0.10%
Vehicles (Overhead) 8,608.60 8,608.60 17,217.20 2.04% 1.75% -0.29% 0.25%
Yard Expenses 1,100.00 1,100.00 0.13% 0.15% 0.02% 1.85%
Insurance 7,436.00 7,436.00 0.88% 0.00% 0.00% 0.00%
Miscelaneous (Overhead) 2,000.00 2,000.00 0.24% 0.05% -0.19% 0.05%
Total Indirect Costs 109,248.70 115,216.53 173,804.77 398,270.00 47.09%
Net Income before other income & expenses - - (144,526.16) (144,526.16) -17.09%

20. A Better Way of Budgeting
❖ Benchmark to industry standards and/or with local competition.
❖ Define units of measure used for billing.
❖ Define average selling price per service.
❖ State assumptions:
❖ In-season is 35 weeks.
❖ Off-season is 7 weeks; “Snow Removal”.
❖ Breakeven with seasonal business.
❖ Distinguish between COGS/Direct Costs & OH/Indirect Costs
❖ View them as process driven: pre-production, production, post-production.
❖ Use Key Performance Indicators (KPIs) to measure productivity.

21. Sales by Vehicle/Team
Hourly Rates Vehicle/Team 1 Vehicle/Team 4
Team Size 2 1
Weeks 35 35
Man Hours per Week 40 40
Total Man Hours Available 2,800 1,400
Vacations, Sickness, Holidays,
…
-480 -240
Actual Man Hours 2,320 1,160
Lawn Care - Man Hours 2,088 1,044
Pest Control - Man Hours 48 24
Tree Care - Man Hours 184 92
In Season Total - Man Hours 2,320 1,160
Snow Removal - Man Hours 240 120
Lawn Care Sales $57.30 $119,642 $59,821
Pest Control Sales $49.22 $2,363 $1,181
Tree Care Sales $68.83 $12,665 $6,332
Snow Removal Sales $91.24 $21,898 $10,949
Total Sales $156,567 $78,284

22. COGS by Vehicle/Team
Vehicle/Team 1 Vehicle/Team 4
Sales/Net Sales $156,567 $78,284
Materials $30,532 $15,266
Gas & Oil $6,142 $6,142
Labor $33,900 $19,400
Labor Burden/Payroll Taxes/Social Chgs. $7,797 $4,462
Equipment Expense $16,470 $13,933
Miscellaneous $0 $0
Total Cost of Goods Sold/COGS $94,841 $59,203
Gross Margin $61,726 $19,081

23. Vehicle 1 Vehicle 2 Vehicle 3 Vehicle 4 Vehicle 5 Vehicle 6 Pre-
produc5on
Produc5on Post-
produc5on
Total
Sales 156,574.24 156,574.24 156,574.24 78,287.12 156,574.24 63,800.00 768,384.09
Material Costs 30,531.98 30,531.98 30,531.98 15,265.99 30,531.98 12,441.00 149,834.90
Gas & Oil Costs 6,142.00 6,142.00 6,142.00 6,142.00 6,142.00 6,142.00 36,852.00
Labor (Field) 33,900.00 34,600.00 33,900.00 19,400.00 37,760.00 19,200.00 178,760.00
Labor Burden (Field) 7,797.00 7,958.00 7,797.00 4,462.00 8,684.80 4,416.00 41,114.80
Equipment Expense 16,470.80 19,470.09 16,816.01 13,933.05 27,702.28 16,231.85 110,624.07
Micellaneous Direct Job Costs - - - - - - -
Cost of Goods Sold 94,841.78 98,702.07 95,186.98 59,203.03 110,821.06 58,430.85 517,185.76
Gross Margin 61,732.47 57,872.18 61,387.26 19,084.09 45,753.19 5,369.16 251,198.33
Gross Margin used to pay for OH (61,732.47) (57,872.18) (61,387.26) (19,084.09) (45,753.19) (5,369.16) 6,059.50 15,200.00 229,938.83 -
Net Gross Margin - - - - - - 6,059.50 15,200.00 229,938.83 251,198.33
Adver5zing & Promo -
Bad debts/write off uncollectable 1,000.00 1,000.00
U5li5es 4,000.00 4,000.00
Dona5ons -
Down5me with labor burden -
Dues & Subscrip5ons -
Health Insurance 6,600.00 2,400.00 9,000.00
Bank Charges & Interest 2,000.00 2,000.00
License & related bonds -
Office equipment, computers, and soaware 500.00 500.00
Office supplies 1,600.00 1,600.00
Professional Fees 500.00 9,200.00 9,700.00
Telephone exp. 2,000.00 3,000.00 5,000.00
Rent expense 11,760.00 11,760.00
Salaries, office staff, officers 77,000.00 77,000.00
Salaries labor burden 17,710.00 17,710.00
Small tools/supplies - -
Real Estate Taxes 3,254.00 3,254.00
Educa5on & Training 1,700.00 1,700.00
Travel & Entertainment 2,000.00 2,000.00
Uniform Expense 3,000.00 3,000.00
Vehicles (Overhead) 5,059.50 5,059.50 10,119.00
Yard Expenses 600.00 600.00
Insurance 7,436.00 7,436.00
Miscelaneous (Overhead) 2,000.00 2,000.00
Total OH/Indirect Costs - - - - - - 6,059.50 15,200.00 148,119.50 169,379.00
Net Income before other income & expenses - - - - - - - - 81,819.33 81,819.33

24. Vehicle 1 - Gross Margin Per Hour
Lawn Care Pest Control Tree Care
Snow
Removal
Average
Selling Price
57.30 49.22 68.63 91.24
Materials 11.17 9.6 13.42 17.79
Gas & Oil 2.65 2.65 2.65
Labor 13.58 13.58 13.58 10.00
Labor Burden 3.12 3.12 3.12 2.30
Handheld
Equipment
0.38 0.38 0.38
Vehicle 2.87 2.87 2.87
Trailer 0.61 0.61 0.61
Small Tools 0.05 0.05 0.05
Mower 3.19 3.19 3.19
COGS 37.62 36.05 39.87 30.09
Gross Margin 19.68 13.17 28.76 61.15
Most Common Mistake
❖ Allocating COGS as a
percentage of Sales Man Hours
we would conclude:
❖ The COGS is the same for
every service rendered
except for Snow Removal.
❖ The Gross Margin
contributed by each service
varies only in function of the
average selling price.

25. Vehicle 1 - Gross Margin Per Man Hour
Lawn Care Pest Control Tree Care Snow Removal
Average Selling
Price
57.30 49.22 68.83 91.24
Materials 11.17 9.60 13.42 17.79
Oil & Gas 2.94
Mower - Fixed
Costs
3.54
Handheld - Fixed
Costs
0.42
Small Tools -
Fixed Costs
0.05
Trailer - Fixed
Cost
0.68
Vehicle - Fixed
Costs
3.19
Labor 13.58 13.58 13.58 10.00
Labor Burden 3.12 3.12 3.12 2.30
Gross Margin 18.61 22.92 38.71 61.15
Variable 14.11 9.60 13.42 17.79
Fixed 27.52 16.70 16.70 12.30
Correct Way of Allocating Costs
❖ Lawn Care is principal business.
❖ And, Pest Control, Tree Care,
and Fertilizing are product line
extensions.
❖ Snow Removal is sold
separately.
❖ COGS are:
❖ 1/3 variable; 2/3 fixed costs.
❖ Fixed unit costs decrease with
higher utilization rates thereby
increasing Gross Margin.

26. Key Performance Indicators (KPIs)
❖ Some example KPIs are:
❖ surface area mowed/trimmed per man hour
❖ linear feet edged per man hour
❖ units, tens, dozens,…plants/trees/bushes planted/pruned per man hour
❖ hours small tools/handhelds/mowers/truck used
❖ downtime for maintenance and repairs
❖ sales call to customer acquisition conversion rate
❖ vendor invoices processed per man hour
❖ time allocated to office work

27. Vehicle 1 - Equipment Costs
Equip.
Max. -
Hours
Budget -
Hours
Utilization
Rate - Hours
Max. Util.
Rate
Budget
Small 8,322 175 2.1% $0.01 $0.62
Handheld 7,884 512 6.5% $0.11 $1.71
Mower 7,446 1,400 18.8% $0.99 $5.28
Trailer 8,059 1,400 17.4% $0.18 $1.01
Vehicle 7,446 350 4.7% $0.90 $19.05
Equipment Utilization Rate
❖ As the utilization rate
approaches its maximum the
unit cost approaches its lowest
possible value.
❖ None of this equipment comes
close to its maximum
utilization rate and cost.

28. Are these employees on
lunchtime or work-time?
What is their utilization rate/productivity?
Managing labor productivity helps to:
❖ involve team members in the business
by understanding how their cooperation
and collaboration contributes to the
business’s health,
❖ creates internal competition improving
productivity and profitability, and
❖ promotes transparency.

29. Discussions & Decisions for GM Improvements
❖ Understand market potential.
❖ Split financials by market: residential, commercial, municipal,…
❖ Split financials by service/product line: lawn care, pest control,…
❖ Improve product/service mix.
❖ Add new services.
❖ Employee training.
❖ Specialize vehicles/teams.
❖ Use trucks only as traction.
❖ Add 2nd or 3rd shift.
❖ Rent idle equipment to/from 3rd parties.
❖ Question municipal market profitability.

30. The Balance Sheet
Resources/Property Ownership Interest
Working Capital Short-term Financing
Tangible & Intangible
Assets
Long-term Financing
Cash Retained Earnings
Processes

31. Cash Flow Statement Budget 2017
Cash Flow from Opera;ons
Net Income before other income & expenses 97,579.33
Vehicle - Deprecia>on 37,855.40
Interest expense 11,757.47
Trailer - Deprecia>on 1,171.00
Mowers - Deprecia>on 15,895.20
Spray Rig - Deprecia>on 3,200.00
Weed Eater, Blower, Trimmer - Deprecia>on 3,675.00
Small Tools - Deprecia>on 542.00
Vehicle - Deprecia>on 6,000.00
Add back deprecia>on expense 80,096.07
Adjusted Net Profit 177,675.40
Beginning Balance:
Accounts Receivable 65,237.02
Accounts Payable 40,015.86
Payroll Taxes 27,618.46
Ending Balances
Accounts Receivable 64,032.01
Accounts Payable 38,000.00
Payroll Taxes 25,392.00
Cash In flow/(out flow)
Accounts Receivable 1,205.01
Accounts Payable (2,015.86)
Payroll Taxes (2,226.46)
Cash from Working Capital Variances (3,037.31)
Cash Flow from Opera;ons 174,638.09
Cash Flow from Inves;ng Ac;vi;es
New Truck (52,000.00)
Proceeds from Sale of old Truck 6,000.00
Equipment Replacement (33,000.00)
Cash Flow from Inves;ng Ac;vi;es (79,000.00)
Cash Flow from Financing Ac;vi;es
Notes Payable - Vehicles 286,186.53
Aveerage rmeaining term (3 years) 2.50
Principal Repayment on Notes (114,474.61)
New Truck Financing 45,000.00
Cash Flow from Financing Ac;vi;es (69,474.61)
Total Cash in flow/(out flow) for the period 26,163.48
Star>ng Cash Balance 50,472.88
Ending Cash Balance 76,636.36
Balance Sheet = Cash Flow
❖ To budget a balance sheet you
must make assumptions about
each account balance at the end
of the period. For example:
❖ Financial ratios.
❖ Payroll cycle.
❖ Government deadlines.
❖ Contracts.
❖ Generate cash flow statement.

32. The 5 Ws/ The “When”
1. Breakdown budget by period: month/week/day/hour.
2. Review P&L, Balance Sheet, & Cashflow by period.
3. Make decisions.
4. Revise budget.
5. Keep revising until you have a plan that effectively
reduces the struggles with uncertainty for all
stakeholders.
6. Repeat steps 1 - 5 at least every quarter.

33. Why do we Budget?
❖ It is an inclusive process by which we seek to make better decisions with and for
all stakeholders.
❖ It is a way of reducing the struggles with uncertain outcomes for all stakeholders.
❖ An exercise in leadership.
❖ Worldview
❖ Conception
❖ Communication
❖ Cooperation
❖ Collaboration
❖ Coordination

34. Gross Margin is a Fixed Amount
❖ GROSS MARGIN IS NOT A PERCENTAGE OF
SALES.
❖ GROSS MARGIN IS NOT A PERCENTAGE OF
SALES.
❖ GROSS MARGIN IS NOT A PERCENTAGE OF
SALES.
❖ GROSS MARGIN IS NOT A PERCENTAGE OF
SALES.
❖ GROSS MARGIN IS NOT A PERCENTAGE OF
SALES.
❖ GROSS MARGIN IS NOT A PERCENTAGE OF
SALES.
❖ GROSS MARGIN IS NOT A PERCENTAGE OF
SALES.
❖ GROSS MARGIN IS NOT A PERCENTAGE OF
SALES.

35. Source: The Great Wall, 2016, China Film Group, Universal
Fight For Your Gross Margin

36. Tips & Tricks

37. Tips & Trick: Financial Ratios
❖ The same financial ratios used for financial analysis. For examples:
❖ DSO, DPO, DIO,…;
❖ debt to equity;
❖ price/earnings for stocks;
❖ return on equity (ROE);
❖ return on assets (ROA).
❖ Any ratios for financial analysis can be employed to develop your
budget.

38. Month
Sales w/o
VAT
Sales w/
VAT
Accounts
Receivable
DSO
Ending
Balance
78,215
N 27,800 33,360 33,360 30
N-1 24,200 29,040 29,040 31
N-2 18,500 22,200 15,815 21
N-3 12,800 15,360
N-4 45,980 55,176
Subtotal 78,215 82
Doubtful
Acc’ts
853
Total 79,068
Tips & Tricks: Days of Sales Outstanding
❖ The quick and dirty calculation
is taking the ratio of accounts
receivable (adjust for Sales tax)
to sales and multiplying by
360/365 days.
❖ A cleaner method involves
actually counting back the
number of days per month.

39. Tips & Tricks: State Your Assumptions
❖ Write down ALL your assumptions or you will forget
them.
❖ Once you make assumptions, TEST them all year round.

40. Mftg. Dist. Retail. e-Com
Public Price 19.99 19.99
VAT 20% 20%
Gross Selling
Price
9.51 12.52 16.66 16.66
Discounts 0.50 1.26 1.64 1.64
Net Selling
Price
9.01 11.26 15.02 15.02
COGS 8.11 9.01 11.26 9.01
Gross Margin 0.90 2.25 3.76 6.01
Mktg 0.10 1.00 2.01 3.01
Net 0.80 1.25 1.75 3.00
Distribution Companies
❖ Always start from Public Prices
(adjust for Sales tax) and work
backward.
❖ Where is your business
situated in the value chain?
❖ What is your discount
policy?
❖ What are your costs?
❖ Manage your Gross Margin!

41. SKU
Inventory
Level (m)
Period 1 Period 2 Period 3 4 5 6 7 8
100052687 0.5
Beginning
Inventory
583 481 179 343 140 250 350 250
Receipts 750 660 522 483 390 600 600 750
Shipments 852 962 358 686 280 500 700 500
Ending
Inventory
481 179 343 140 250 350 250 250
10006983 1.3
Beginning
Inventory
0 1499 1414 430 563 63 0
Receipts 1499 1015 346 413 0 0 0
Shipments 0 1100 1330 280 500 210 0
Ending
Inventory
1499 1414 430 563 63 0 0
Sales & Operations Planning

42. Tips & Tricks: Balance Sheet
❖ Always make sure your balance sheet accounts are
properly valued.
❖ So your cash flow will be true.

43. Tips & Tricks: Risk Assessments
❖ A popular tool is the SWOT Analysis, Strengths-
Weaknesses-Opportunities-Threats Analysis, but…
❖ Only focus on those affecting your
❖ resource/property/key component, and
❖ customer struggle with uncertain outcome.
❖ To maximize your Return On Key Component,
ROKC.

44. Tips & Tricks: Financial Projections
❖ Everything outlined in this presentation can be applied to just
about any financial projections you require.
❖ Forecasts or re-budgeting exercises (1 year horizon)
❖ Business Plans (usually 3 year horizon)
❖ Strategic Plans (10 year horizon)
❖ Buyer/Seller side M&A Business Plans (horizon varies)
❖ Public/Private Company Valuations
❖ Investor Decks

45. Thank you for your attention.

46. Alessandro Daliana
Budgeting: Fighting
for Your Gross Margin
ROKC Capital
Leadership | Strategy | Portfolio Management
rokc.co
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