While people around the country are breaking out their scarves and sweaters and preparing for the impending cold weather, executives and managers at custom-design manufacturing companies are preparing to tackle next year’s budget planning process.
Creating a budget for the next year relies on analyzing the financial data from previous years and projecting what these numbers will be in the upcoming months. Some companies opt to draft annual budgets, some choose quarterly ones and a newer trend has been monthly budgets. No matter which incremental approach is instituted, the basic budget-planning techniques will essentially remain the same.
Crafting a well-researched and strategic budget involves more than simply jotting down some numbers and calling it a day. A budget is ultimately a map that outlines which route the company will be taking in the coming year, including its priorities, goals and potential problems. Although the business environment can be treacherous and create unexpected obstacles, having a solid budget can help executives and managers maintain control. Consider these five steps to creating a robust and effective budget for engineer-to-order manufacturers:
“A budget is a map that outlines a company’s future trajectory.”
1. Meet with department heads
It’s imperative to have input from each of the department heads to ensure that not only are all of them receiving sufficient funding to effectively operate, but also to provide an outlet for these managers or directors to provide input on the overall budgeting process. These individuals can provide additional insight on the company’s resource allocation that might be otherwise overlooked. Since a budget touches nearly every single aspect of a business, having the various department heads involved help ensure that the financial projections are accurate and that all potential expenses are included in the document.
2. Estimate cash flows
This can be one of the trickiest but most important aspects of the budgeting process. During this phase, managers must accurately project the amount of money they anticipate the company spending and receiving in the upcoming year. This is crucial, since any mistakes can leave the company short on capital, making it unable to pay its employees, its bills or its vendors.
For many aspects of this estimation, it can be a straightforward method of simply taking last year’s expenses and tweaking them slightly to cover inflation and other cost-of-living increases. It’s also a good idea to budget for more expenses than expected to cover any unanticipated costs or sudden surprises, such as a machine malfunction or unforeseen downtime. For example, these are typical overhead costs for manufacturing companies:
- Administrative salaries
- Administrative payroll taxes
- Freight in and out
Unlike projecting expenses, where it’s best to overcompensate, when forecasting revenues for the new year, it’s a good idea to under-estimate. It’s much better to plan for lower cash inflows and then end up with more money than initially expected, than to be overly confident in the sales figures and end up missing these projections.
This is also a good time to mention that while having realistic cash flow estimates, it’s also important to stick to the budget. Simply drafting the document and then dumping it into the bottom of a drawer and never looking at it again will not help out the company.
3. Conduct a “SWOT” analysis
Miller Bernstein LLP, a Toronto-based full-service accounting firm, recommended conducting a “SWOT” analysis of the company’s strengths, weaknesses, opportunities and threats. By identifying these specific factors, engineer-to-order companies can allocate resources accordingly. For instance, if a review of last year’s financial data indicates a particular client is providing a greater percentage of revenue than the rest, it could be wise to consider focusing on engagement with this particular client and perhaps pulling back on clients who are not contributing that much to the bottom line. However, this is just a suggestion and might not necessarily equate for success, as this is territory that must be carefully treaded.
Further, identifying a potential threat, such as risks to the network in the form of data breaches, hackers or malware, can lead management to carve out a bigger budgetary allocation for the information technology department, such as providing more funding to implement greater cybersecurity measures.
4. Identify miscalculations
Since a budget acts as a guideline for resource allocation, if the numbers don’t line up after all is said and done, it’s important to locate and identify where the budget went astray from projections. This means poring over every line item to see how off-base the forecasts were. For example, if a manager projected $100,000 in sales from a particular client but only generated half of that, this discrepancy needs to be highlighted and incorporated into future budgets. Whether it’s a drop in clients, a decline in the orders these clients requested or something else entirely, it’s crucial that any miscalculations or unexpected hiccups be incorporated and accounted for in future budgets.
5. Use a solid ERP solution
There are a significant number of managers out there who are not fans of budgets. These individuals lament that budgets don’t reflect the realities on the shop floor, or that it boxes in a department, discourages risk-taking and leads to poor decision-making. This might be true for manufacturers that rely on pen-and-paper or spreadsheet budgets that are locked into place, but it’s a different story for custom-design manufacturers that use an ERP system.
Questica ETO, an ERP platform specifically designed for engineer-to-order manufacturers, offers a software solution that displays data in real time. This allows each project to be up to date so that managers can view any job throughout the entire organization and ensure that each department and individual remains in line with financial projections.