A Path to a Better Budget

Tom Pierce, CPA

The manufacturing industry and its markets are constantly evolving, so budgeting is an ongoing process. The sooner you identify problems, the less likely you are to be blindsided by threats or miss opportunities to grow and improve performance. Is your budget doing its job? Continual monitoring allows you to take corrective actions and refine future budgets. Here are some tips to improve your budgeting process.

Use current data

Too often, companies create a budget by applying an across-the-board percentage increase to the prior year’s actual results. This approach may be too simplistic in today’s ever-changing marketplace.

Historical results are a good starting point. However, some costs are fixed, rather than variable based on revenue. Additionally, certain assets — such as machines and people — have capacity limitations to consider. Accurate forecasts of revenue and expenses are prepared on a department-by-department basis and use technology to capture “real-time” data.

Solicit broad participation

Your finance or accounting department should not complete the budget alone. Rather, you should seek input from people in every department and at various levels of management, if possible.

For example, your sales department may be in the best position to estimate future revenue. The production manager may offer insight into anticipated maintenance expenses or necessary investments in equipment upgrades, and the product development team can help forecast revenue and expenses related to new products and processes.

Soliciting broad participation also gives employees a sense of ownership in the budgeting process. In turn, this can help enhance employee engagement and improve your odds of achieving budgeted results.

Get employee buy-in

Good budgets encourage hard work needed to grow revenue and cut costs, but the targets should also be attainable and based on industry trends as well as your company’s challenges and opportunities.

Employees will likely become discouraged if they view the budget as unachievable or out of touch with what’s happening in the market. After years of failed attempts to meet the budget, workers may start to ignore it altogether. Tying annual bonuses to the achievement of specific targets can help encourage employees to buy in to the budget.

Plan for shortfalls

Cash is king. Even if expected revenue is forecast to cover expenses for the year, production and cost fluctuations, as well as slow-paying customers and uncollectible accounts, can lead to temporary cash shortages.

An unexpected shortfall can seriously derail your budget. So, look beyond the income statement and balance sheet. You will need to forecast cash flows on a weekly or monthly basis. Then create a plan for managing any anticipated shortfalls.

For example, owners may need to contribute extra capital, or you might need to apply for a line of credit at the bank. Alternatively, you might consider buying materials on consignment, revising payment terms with customers, or delaying payments to suppliers to manage the cash flow cycle more effectively.

Recognize the power of fluidity

Remember, no budget is ever perfect. Review it regularly throughout the year, not only at year end or when the annual budgeting process starts again. Check every line item to ensure that it matches expectations and market rates. If necessary, make adjustments accordingly, on both the revenue and expense sides.

Every manufacturer should prepare a comprehensive, realistic annual budget that identifies potential cash shortages, production constraints and other threats. A comprehensive budget will help you develop a strategic plan that takes advantage of opportunities to improve performance. Your CPA can help develop a reliable budget and monitor it against actual results in a timely manner.

For more information, contact Tom Pierce at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.

What a Business Plan Can Do for You

Andy Dombro

While the large market fluctuations seen during the COVID-19 pandemic are in the rearview mirror, uncertainties about geopolitical risks, inflation, interest and employment rates, and cyberattacks are still present. Because of these unknowns, the need for financial assistance may still exist for some manufacturers. Every manufacturing company should take the time to create — or update — a business plan. An accurate business plan reflects your company’s strategies and growth expectations.

Keep it simple

The first section of your business plan should generally contain an executive summary and a business description. Do not forget to include an overview of your management team.

From there, you can move on to your industry and marketing analysis. Then, most important, have a separate section for your company’s financials. Conclude your business plan with a section discussing how you intend to implement the plan.

Small or midsize manufacturers might balk at compiling a comprehensive business plan. However. it is an essential part of the loan application process for start-ups. It is also key when a company needs financing for a major capital expenditure or is contemplating bankruptcy.

Remember, the best plans can be quite simple. You do not want to bury management’s message in a long-winded plan. For a small business, the executive summary should not exceed one page, and the maximum number of pages should generally be fewer than 40.

Define your vision

Business planning involves long-term vision. Determine where the company is now and where it wants to be in six months, the next year, or three, five or 10 years.

Determine the audience for the plan is key whether it be for internal management functions, investors or third parties. Investors may be more interested in the changes to return of capital or potential dilutions while executives may be more interested in the affects a plan would have their external relationships with customers and vendors.

Lenders tend to look at executive summaries first, but they are the last page management should write. It’s better to start with historic financial results. From there, identify key benchmarks that management wants to achieve. These assumptions will drive the financials.

Outline your financials

After reviewing the executive summary, lenders will dive into a business plan’s financials section. Management’s goals are fleshed out in its budgets and financial forecasts. The financials section outlines how much financing your company needs, how it plans to use those funds and when you expect to repay the loans.

For example, suppose a company with $4 million in sales in 2024 expects to double that figure over a five-year period. How will the borrower get from Point X ($4 million in 2024) to Point Y ($8 million in 2029)? Many roads may lead to the desired destination.

Let’s say the management team decides to double sales by hiring two new salespeople and acquiring the assets of a bankrupt competitor. These assumptions will drive the forecasted income statement, balance sheet and cash flow statement.

Do not forget to determine the resources required to arrive at your goals. If additional cash is need a plan for obtaining financing or new investors are being sought  there is a need to forecast the results and any additional costs as a result of trying to obtain additional resources. 

When forecasting the income statement, management makes assumptions about fixed and variable costs. Salaries and rent are generally fixed. Direct materials are generally considered variable. But some fixed costs can be variable over the long term. For example, rent may become variable if the company has a lease that is about to expire and management decides to relocate to a different facility to accommodate changes in size.

Balance sheet items, such as receivables, inventory, payables and so on, generally grow in tandem with revenue. In a business plan, management makes assumptions about its minimum cash balance, then debt increases or decreases to keep the balance sheet balanced. Remember, your bank will be expected to fund any cash shortfalls that take place as the company grows. This makes cash flow forecasts among the most significant for lending purposes.

Make adjustments

Be sure to provide reasonable and well-founded data and analyses in your business plan. A realistic business plan will help you and those who want to help you. Additionally, it is not a one-and-done endeavor — adjust your plan as needed for changes in your business and economic conditions.

For more information, contact Andy Dombro at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.