Budgets are an important tool a manufacturing company can use to help increase revenues, improve efficiencies of operations, improve services, and may even help to boost employee morale. Many believe budgets must be strictly followed to be of use, but this is not always the case. Budgets are ever-evolving and should be used to outline goals for a company and help guide owners throughout the year. The following are a few tips to help gain more from the budgeting process:
- Plan First, Then Budget
- Rolling Budgets
- Utilize the Right Tools
- Team Conversation
- Share the Budget
- Cash Flow
- Managing Expenses
MANUFACTURING INDUSTRY CASH FLOW BUDGETING
Plan First, Then Budget
Before jumping into budgeting specific revenues and expenses, a company should develop a plan and specific goals. This plan can be built based on expectations from manufacturing industry data, staffing capacity goals, revenue growth goals, etc. Once a complete plan for the year is in place, try to build a budget to reach the goals. This should simplify the budget process by not modifying amounts multiple times as the goals are already in place before beginning the process.
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A budget should be seen as a rolling forecast rather than a strict guide to follow. Assumptions made when initially creating the budget will be ever-evolving and may cause significant deviations from an initial budget. For manufacturing companies, a change in pricing for a specific material may cause considerable swings in costs and revenue potential. Using a rolling forecast, updating the budget each month or quarter, for example, can help to adapt during the year to reach the goals from the initial plan, or in some cases may help owners realize a new plan is required.
Utilize the Right Tools
Many of those who build budgets using an excel spreadsheet experience frustration with the formulas and passing the document back and forth to team members to make changes. Many of the accounting softwares used by manufacturing companies have built-in budgeting tools and can be used to simplify the process. This can lead to budget efficiency as the software can easily compare things to prior years and analyze current year results compared to the budget.
A single person should not create a budget; budgets work best when built by a team of employees. Allowing employees to have a say when making the budget helps to hold employees accountable. Consider bringing in employees from outside the management team who better know when machinery will need to be repaired or replaced. Allowing employees to have their voices heard may help to boost employee morale.
Share the Budget
Increasing the number of people who can see the budget leads to more feedback, better communication, and transparency. Budget to actual results can be an incentive for certain divisions or employees to increase productivity or limit spending.
Keep the expected cash flows in mind when creating the budget. If significant equipment purchases are expected to be made during the year, the cash required to make these purchases needs to be thought about ahead of time, and the expenditure should be planned to be made when the budget has built up excess cash. Ensuring there is enough money to pay for all expenses is an essential part of creating a budget.
When budgeting for expenses, it is important to understand which costs are essential expenses for the company and non-essential expenses. Those necessary or fixed costs, such as rent and utilities, should be entered into the budget before adding any non-essential or optional expenses. Another way of managing expenses may be to consider a change in vendors. Review each paid product and service when creating the budget, and consider whether a less costly alternative is available.
Manufacturing companies have unique challenges when it comes to financial management. Maintaining a realistic budget will allow you to make informed business decisions that will lead to continued success.
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