As a construction business owner, one of the key components of managing your finances effectively is developing an overhead budget. An overhead budget helps you understand and control the costs associated with running your business, allowing you to make informed decisions and improve profitability.
IMHO the most important reason to establish an overhead budget is to then be able to first, determine the company’s breakeven point for the upcoming year and second, use this overhead budget for financial projections so that you can identify financial goals, next steps and actionable items.
In this article, we will guide you through the process of developing an overhead budget that works for you, helping you take control of your financial management.
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Understand Your Overhead Costs:
Before creating your overhead budget, it’s essential to identify and understand all your overhead costs. These costs include items such as rent, utilities, insurance, office supplies, salaries, and other expenses not directly tied to specific construction projects. Conduct a comprehensive review of your expenses to ensure that you capture all overhead costs accurately. -
Categorize and Prioritize Expenses:
Once you have identified your overhead costs, categorize them according to their nature. This categorization will help you understand how expenses are distributed across different areas of your business, making it easier to allocate resources effectively. Common categories may include administrative expenses, marketing costs, equipment maintenance, and professional fees. Additionally, these costs should be located below gross profit on your Income Statement.3. Analyze Historical Data:
Assessing and analyzing historical data is crucial for accurate budgeting. Review past financial statements and identify patterns and trends related to your overhead costs. This analysis will help you better understand cost fluctuations, identify areas of overspending, and adjust your budget accordingly. Running a month-over-month trend report can be a great report to analyze.4. Develop Realistic Projections:
Based on your historical data analysis, project your future overhead costs. Consider factors such as inflation, changes in industry regulations, new hires, or any planned expansion. These projections will serve as the foundation for your budgeting decisions, enabling you to stay on top of your expenses.5. Utilize Technology:
Leverage technology to streamline your overhead budgeting processes. Most accounting software allows you to enter the monthly budget and then compare to the actual expenses. Accounting software can help to maintain accurate records of your expenses, track budgets, and generate real-time reports. This will provide you with better visibility into your financials, allowing for more informed decision-making.6. Involve Key Stakeholders:
Collaboration is key to developing an effective overhead budget. Involve your key staff members, such as accountants, project managers, and department heads, in the budgeting process. Seek their input to ensure that all operational aspects and unique challenges within your construction business are properly addressed. Additionally, consider assigning a champion to certain accounts for management of the budget to actual costs.7. Set Realistic Targets and Monitor Progress:
Establish realistic targets for each category of overhead expense. These expense account targets should align with your overall business goals and financial objectives. Most of the time overhead budgets are in line with prior years and should not have giant changes. Regularly monitor your progress against these targets and identify any deviations early on. This will allow you to take corrective actions promptly and prevent unnecessary financial strain.8. Review and Adjust Regularly:
Your overhead budget is not a static document. It should be reviewed and adjusted periodically to reflect changing business conditions and new opportunities. Revisit your overhead budget on a monthly or quarterly basis, assess its effectiveness, and make amendments as necessary. This ensures that your budget remains relevant and responsive to your evolving business needs.
Conclusion:
Developing an overhead budget is a crucial step towards achieving financial stability and driving profitability in your construction business. By understanding your overhead costs, categorizing expenses, utilizing technology, involving key stakeholders, and periodically reviewing and adjusting the budget, you can take control of your finances and make informed decisions. A well-developed overhead budget will not only help you manage expenses effectively but will also provide you with the financial insights necessary for overall business growth and success.
We have a special section on building overhead budgets in our All Access training library. The overhead budget is also a necessary ingredient for using our financial projection software, the Atlas Growth Model.