Optimism fuels improvement, but realism pays bills!
That’s what budgeting is all about. To start with, you need a well-positioned budget you can take to your CFO to justify the finances you need and the returns you promise. Whether it is hiring additional resources or tools or whatever it is that you plan to do to take your operations to the next level – you need a budget to get there. Your success is measured by how well you can plan, control, and reduce the costs of the operations.
Think of your budget as the roadmap to success. It’s like checking the map before taking a trip to ensure you’re on the right route.
To convince the CFO or the company leadership why you need the funds you need to get budgeting right.
Here’s a 6-step approach to building a budget that works for you:
- Align logistics planning with overall business goals
- Run historical analysis to identify cost centers
- Get a buy-in from your team and leadership
- Trace out revenue and profit margins
- Forecast sales to project revenue
1. Align logistics planning with the overall business goals
Effective budgeting starts with a detailed look at how logistics fit into the overall business goal. After figuring out the goals, you need to determine what needs to be done to hit those goals.
Below are a few factors you must account for:
- What is the increase in growth/revenue, and what is the expected contribution from operations?
- Are there any plans to expand the business line or expand into new markets? Is acquiring companies a top priority? In either case, you need to standardize processes. That requires a system in place that could unify all these.
All that you need to achieve these goals should reflect in your budget. Be it more drivers, trucks, or software – all of it should be accounted for.
2. Run historical analysis to identify cost centers
Cost-cutting is one of the major targets of a budget. Scoping out current workflows and processes helps identify what needs to be optimized and what needs to be eliminated.
Some of the top most expensive layers of logistics are:
- Inefficient routing – This results in drivers taking longer routes or multiple trips. That adds up to increasing the overall fuel costs. In case of order delays, there are additional charges to pay.
- Hiring and retaining drivers – Companies waste a lot of dollars on hiring drivers. Most of them end up quitting because their life on the road is burdensome.
Fleet operators are in a tricky spot with driver shortage as the top concern. Consider dedicating some funds to retain drivers. Training programs or access to a platform that can help them manage their time more efficiently is a must-have in your budget.
- Vehicle breakdowns – Another component you must add to your budget is vehicle upgrades or monthly maintenance.
- Old-legacy dispatch softwares – Most of them require frequent server maintenance that costs a bomb, and yet at the end of the year, you have no improvement to show for these costs incurred
Once you identify these, you can quantify the losses the company has faced due to these bottlenecks. That helps you build a stronger case for your budget.
In fact, you must also put a number on the dollars you would be saving by implementing specific systems that eliminate the above challenges.
Request funds for big-ticket improvements like a cloud-based dispatch software that helps you automate most of your processes, including routing, order tracking, shift planning, etc. It enables you to save up tens of thousands of dollars.
3. Get buy-in from team members and other departments
A perfect budget has buy-in from multiple stakeholders.
Talk to your CFO/Leadership – Understand the CFO’s requirements and communicate any trends in the logistics space that might impact the budget. For example, driver shortages, rising fuel costs, innovative tech stacks, etc. are some factors that significantly impact your financial numbers.
Talk to your team – Figure out what your team needs to perform their jobs better. It could be additional personnel or some tools to fast-track their daily work. Accommodate those requirements on your budget.
4. Trace out your revenue and profit margins
Work out the revenue and profit margins you expect to earn from each customer. That helps you put down the margins/markups for customers and estimate the revenue generated from each customer.
Another way to look at this is to ask your finance team how they track KPIs and revenues generated by the operations team.
5. Forecast sales to project revenue from operations
To achieve your sales target, you need to account for the assets, materials, and personnel you would need.
6. Filter segment in logistics that are most profitable
You must figure out the different segments that are more profitable than others. Segments that contribute not only to the top line but also to the bottom line. You may be generating high revenue from certain processes, but the cost might be higher too. So you need to pin down the segments that lead to higher operating profits. This is where you also need inputs from your team. Your junior operations folk might not be interested in the budget – but it’s still important to understand their requirements and the impact on the P&L.
While these are like thumb rules for creating an effective budget, there are a few things you must absolutely avoid doing!
The 5 Don’ts of Budgeting
- Don’t rely on short-term solutions
- Don’t fall for the recency bias
- Don’t hesitate to invest in modern dispatch softwares
- Don’t misunderstand budgeting for crunching numbers only
- Don’t run away from making adjustments to your budget
1. Don’t rely on short-term solutions:
It’s easy to get sucked into preparing a budget that would help you get to your immediate goals. But that’s a big no in budgeting. It’s important to not lose sight of the bigger picture and figure out the most cost-effective way and not just in the immediate future.
Let’s say one of your goals is to increase sales by 20% this year. Now ideally, you would look at maximizing deliveries. You would want to hire more drivers and probably purchase more vehicles to get that done. But is that the only way? Is that really a long-term solution?
In all certainty, it isn’t.
The smarter way to approach this would be to invest in a tech stack that would help you deliver better customer services (on-time deliveries, same-day invoicing), fulfill more orders in lesser trips, and so on.
2. Don’t fall for the recency bias
After years of seeing your logistics budget fall in the same range, you might have the instinct to create a budget that aligns with the previous years.
Be sure to account for unforeseen events, fluctuating fuel prices, and more situations like these.
3. Don’t hesitate to invest in modern dispatch software
Trying to make do with old and people-dependent systems might seem like a financially sound decision, but it is actually counterproductive.
4. Don’t misunderstand budgeting as crunching numbers only
When you prepare a budget, you can’t do that without a buy-in from your team.
Understand the how-to of your targets by letting your team in on the shared goals. That’s how you will be able to move things faster.
5. Don’t run away from making adjustments to your budget
Your budget is not set in stone. It’s just a tool that gives you a clear direction on what you need to do. However, this doesn’t mean you can’t change it when needed.
Don’t look at budgeting as a one-time activity. It’s something you need to keep going back to and analyze if things are going as planned.
Compiled list of budget components you can’t miss
As you have your spreadsheet laid out in front of you, here’s a quick checklist of critical components you must add to your budget in 2023:
- Fuel Prices
- Vehicle upgrades and maintenance
- New equipment
- Dispatch software
You can’t think about budgeting components one at a time. Multiple factors come into play to get budgeting right. It could be your business module, sales volume, the infrastructure, the people you need to keep running your day-to-day operations, or the technologies you need to make processes more efficient.
Budgeting basically brings all of these pieces together to help you achieve the set goals most effectively!