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Articles From Lumsden McCormick

Budget Planning for Manufacturers

As you embark on your manufacturing company’s 2025 budget planning, it's crucial to create a comprehensive and realistic budget. This will help you identify potential cash shortages, production capacity constraints, and other threats. However, be mindful of certain pitfalls when crafting your budget. Here are a few key considerations:

Avoid Basing Next Year’s Budget Solely on Past Results

Many companies make the mistake of applying a blanket percentage increase to the previous year’s results. While historical data is a good starting point, it’s important to recognize that some costs are fixed and not variable based on revenue. Additionally, assets like machines have capacity limitations. Accurate forecasts should be prepared on a department-by-department basis, utilizing technology to capture real-time data.

Seek Companywide Input

Your finance or accounting department shouldn’t be the sole creators of the budget. Instead, gather input from every department and various management levels. This approach can increase accuracy, as different departments have unique insights. For example, the sales department can estimate future revenue, while the production manager can provide information on maintenance expenses and equipment upgrades. Broad participation also fosters a sense of ownership among employees, enhancing engagement and improving the likelihood of achieving budgeted results.

Set Attainable Goals

While good budgets encourage hard work to grow revenue and cut costs, the targets should be realistic. If employees view the budget as unachievable, they may become discouraged and start ignoring it. Tying annual bonuses to specific targets can motivate employees to buy into the budget.

Don’t Ignore Cash Flows

Cash flow management is critical. Production and cost fluctuations, slow-paying customers, and uncollectible accounts can lead to temporary cash shortages, even if annual revenue is sufficient. To avoid unexpected shortfalls, forecast cash flows on a weekly or monthly basis and create a plan for managing any anticipated shortfalls. This might involve contributing extra capital, applying for a line of credit, buying materials on consignment, revising payment terms with customers, or delaying payments to suppliers.

Remember, Budgeting is an Ongoing Process

Budgeting isn’t a one-time task; it’s an ongoing process that evolves with the market. Continual monitoring of your budget versus actual results allows you to take corrective actions and build a better budget moving forward. We can help you develop a reliable budget and monitor it in real time.

Budget Planning for Manufacturers

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Jon leads audits, reviews, compilations, tax, and consulting services for manufacturers, contractors, and other commercial business entities. He serves as the audit practice leader for the Firm's manufacturing and construction niches and manages the Firm’s pre-qualification to perform third-party reviews of tax credit applications for the Film Industry according to agreed-upon procedures established and published by Empire State Development (ESD). In addition, Jon serves a variety of exempt organizations. 

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