Planning and Budgeting in Times of Uncertainty

Date September 8, 2021
Categories
Article Authors

As the end of the third calendar quarter quickly approaches, manufacturing executives are looking ahead to the new year. However, after nearly eighteen months of employee health concerns, supply chain disruptions, increasing raw material costs, and labor availability concerns, manufacturers have one question in mind: what challenges will 2022 bring?

The pandemic has reminded us that many of our greatest challenges result from events that were not easily predictable, like the “Great Recession”, the COVID-19 pandemic, the winter storm that hit Texas in early 2021, or the “Great Resignation”. Manufacturers have worked to improve their flexibility and resiliency. Now, as planning, forecasting, and budgeting processes begin for 2022, these traits remain critically important.

Consider four questions that may help you think through potential challenges and their impacts on your upcoming plan or budget:

  1. Should you have one or multiple budgets?

    In times of uncertainty, consider preparing multiple budgets to address possible scenarios. For instance:

    • Prepare budgets for different levels of revenue, so you can determine the cost structure necessary to support your business at these different levels. This will help you react quickly if revenue changes from expectation.

    • In addition to an annual budget, prepare a working budget that you can update as prior periods’ financial results are known or as circumstances change. While preparing multiple budgets takes more time and valuable resources than preparing only one, these tools can be invaluable for decision making and managing the business.


  2. How reliable are your data sources?

    Manufacturing leaders rely on others to prepare the data that is used in plans, forecasts, and budgets. For instance, customers may provide demand projections for the coming year. However, are their projections reliable? Are you in contact with the right people to provide you with dependable data? For instance, a customer’s procurement team may be your primary contacts, but they may not have up-to-date data on projections, trends, or potential product changes that may affect your business with them. Consider the reliability of your data before making business decisions that are dependent on that data.


  3. What if current problems persist?

    Many manufacturers describe their most significant challenge as the availability and turnover of laborers. Businesses should consider what happens if this problem continues in the new year. Should the company identify new partners to help them in recruiting efforts? Should the business reconsider its employee retention strategy? Has the company considered automating processes to reduce reliability on manual labor? Determining possible actions to prevent ongoing problems may help manufacturers be better prepared for the year ahead.


  4. What are your business’s most significant weaknesses?

    Every manufacturing leader can identify opportunities for the business to improve. Have you thought about ways to address those weaknesses? Often, weaknesses can become more significant when the business is presented with other challenges . For instance, a manufacturer with weak supplier relationships can become especially vulnerable when global supply chain shortages persist. By identifying their weaknesses, manufacturers can work to prevent those weaknesses from creating significant challenges.


To discuss your 2022 business plan, forecast, or budget, please contact a member of HBK Manufacturing Solutions.

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Watch: Manufacturing Solutions: Forecasting, Budgeting, and Planning for Manufacturers

Date September 17, 2020

As we approach 2021, manufacturers are beginning to plan for the year ahead. However, with the uncertainties in today’s economic climate, how do manufacturers develop planning tools to make good business decisions? Jim Dascenzo, CPA and Amy Reynallt, MBA of HBK Manufacturing Solutions provide an overview of forecasting, budgeting, and business planning tips that will address this question and more.

Download the materials.

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Manufacturers, Is Your Budget the Power Tool It Needs to Be?

Date January 3, 2020
Article Authors

A budget—or a proforma, forecast, or projection—is a financial prediction of what might happen over a given time period. As such, manufacturing businesses use budgets to prepare for the year ahead. Executives, managers, and financial professionals employ budgets to aid in their decision-making and to ensure their company is on the right path toward meeting its financial goals.

Think of budgeting as a short-term financial planning process for your business. While a budget itself doesn’t serve to increase profits, it can help you gain the visibility needed to make the kind of decisions that increase profitability, improve cash flow, and otherwise better your company’s financial position. A budget can also help you identify red flags and allow you to take quick action to either mitigate or prevent an issue from having negative financial consequences.

Budget for More Than Your Profit
Preparing budgets takes time and insight, likely from many areas of your business: prior year trends, sales forecasts, internal projects, changes in your industry. Also, be sure to include all areas of your financial performance in your budgeting considerations. Some manufacturers only focus their budgeting efforts on their profit or loss, but other areas can be just as important to your future. For instance:

  1. Is your business planning to invest in new equipment? If so, you could encounter a cash outlay that is not reflected on a proforma income statement. A cash forecast can help you plan for a major purchase while ensuring that you do not affect the business’s daily operations.
  2. Are your sales increasing? Will you need to hire new employees? Understanding your compensation and training costs at a detailed level can help you make good decisions as you grow, such as the right timing for adding new hires.
  3. Does your lender require you to meet covenants? Review your covenant agreements and consider preparing forecasts for these financial metrics so that you understand how to remain in good standing.

Prepare for Change
No matter how much time and effort you spend on a budget, it’s not likely to be perfect. Change is constant. So when conditions change, or when you find yourself outperforming or not meeting your budget, what should you do?

The worst thing to do is discard your budget. Even imperfect budgets have great value. Determine why your results differ from your projections. Can you learn from past budget flaws to become more precise in the future?

Consider making changes to your budget or creating a rolling budget. A rolling budget predicts a full year ahead, for example, as opposed to a calendar or fiscal year. Rolling budgets help you project financial performance on an ongoing basis.

For questions or to discuss budgeting options for your company, contact a member of the HBK CPAs & Consultants’ Manufacturing Team at 330-758-8613.

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Better Budgeting Means Better Business

Date November 14, 2017
Categories

Before awarding credit, lenders demand detailed budgets, including cash flow forecasts. They want realistic projections, not unfounded profit and revenue estimates. Cash flow projections are an important element for lenders because they show how you plan to repay the money.

Even if your construction firm doesn’t need credit, a well thought-out budget, including cash flow projections, is important for the ongoing operation of your business. For some construction projections, surety companies look closely at budgets before issuing the bond needed. Additionally, by preparing an effective annual budget and comparing it to your actual financial performance, you can find certain situations that need to be addressed.

For example, a construction firm that expects $5 million in new projects in the first half of the year, but is awarded only half of that amount in contracts, need to review its bidding procedures. Perhaps the company needs to tighten up its bidding process, have someone review the work of the estimator before bids are submitted, and review other internal procedures to get more work.

Upon review of the actual performance, you may find expenses that are out of line and you want to look at instituting controls, safeguards — and perhaps even institute a bonus system for those responsible for controlling the job.

Effective budgeting requires knowledge of the technical aspects of the construction industry — as well as experience with projections, job costing, bonding and a host of related financial matters.

Contact us. We can help you develop a meaningful and reliable budget that will help your company now and in the future.

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