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:
- 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.
- 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.
- 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.