You’ve likely already begun your manufacturing company’s 2025 budget planning. A comprehensive, realistic budget allows you to identify potential cash shortages, production capacity constraints and other threats. However, be aware of certain pitfalls when creating your budget. Here are just a few.
Basing next year’s budget on the past year’s results
Too often, companies create budgets by applying an across-the-board percentage increase to the prior year’s actual results. This approach may be oversimplistic in today’s ever-changing marketplace.
Historical results are a good starting point. However, some costs are fixed rather than variable based on revenue, and certain assets — such as machines — 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.
Failing to obtain companywide input
Your finance or accounting department shouldn’t complete the budget alone. Rather, seek input from people in every department and at various levels of management.
One potential benefit is increased accuracy. 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.
Another benefit is that soliciting broad participation 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.
Creating unattainable goals
Good budgets encourage hard work to grow revenue and cut costs. But the targets should also be attainable.
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.
Ignoring cash flows
Cash is king. Production and cost fluctuations, slow-paying customers, and uncollectible accounts can lead to temporary cash shortages — even if annual revenue is forecasted to be enough to cover expenses for the year.
An unexpected shortfall can seriously derail your budget. So, look beyond the income statement and balance sheet. You may need to forecast cash flows on a weekly or monthly basis. Then create a plan for managing any anticipated shortfalls.
For example, you may need to contribute extra capital or apply for a line of credit at your bank. Alternatively, consider buying materials on consignment, revising payment terms with customers or delaying payments to suppliers to manage the cash flow cycle more effectively.
Not a static document
Budgeting is an ongoing process as markets constantly evolve. We can help you develop a reliable budget and monitor your budget vs. actual results in real time. Continual monitoring allows you to take corrective actions and build a better budget going forward.
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