Preparing an accurate budget is an essential part of maintaining your manufacturing company’s profitability. In addition to giving you a reference for your company’s financial performance, your budget helps you set prices, increase efficiency and plan for future growth.
Both large and small manufacturers benefit from improved budgeting methods. Learn more about manufacturing budgets and strategies below.
Components of a Manufacturing Budget
A manufacturing budget is a document that details the costs associated with producing an estimated number of product units. Though what you include in your budget will depend on your business model and individual needs, it will typically consist of two main parts: a production budget and an overhead budget.
Your company’s production budget accounts for all the direct costs associated with producing a specific product. This includes the cost of raw materials and direct labor that goes into making the product. To calculate direct materials costs, multiply the total cost of materials for one unit by the number of units to be produced. To calculate direct labor costs, estimate the number of labor hours needed to produce one unit and again multiply this by total units.
Your company’s overhead budget accounts for all the indirect costs associated with operating your factory for the duration of production. Examples of overhead costs include power and utilities, machine maintenance and purchasing, marketing and rent, if applicable.
In addition to overhead and production costs, your budget should incorporate information that helps you understand how your company is doing financially. Cash flow statements, profit margins and estimated tax liability are all important to consider.
Tips for Budgeting for Your Manufacturing Business
Though creating a budget requires you to consider many aspects of your business, the process doesn’t have to be overly time-consuming. These tips can help you prepare an accurate budget efficiently:
- Work off of last year’s budget. If you have a budget and detailed financial records from the previous year, use these resources while creating your new budget. This gives you a template to work from and shows you where your old budget fell short, which allows you to make more accurate predictions for the upcoming period.
- Account for all indirect costs. When calculating overhead, it’s easy to budget for the best possible scenario. However, by accounting for potential and contingency costs as well as certain ones, you’ll have room in your budget to deal with potentially unforeseen problems.
- Adjust the budget as you go. For the most accurate picture of your company’s budget, make adjustments throughout the year as your financial situation evolves. For example, if you end up having more sales than expected, you may need to adjust the amount of tax you’re withholding.
Get Financial Advising and Budgeting Help From MANTEC
Manufacturing companies have unique challenges when it comes to financial management. At MANTEC, we provide many financial services for South Central Pennsylvania manufacturers including budget projections. As a non-profit consulting firm, we’re equipped to effectively guide your business and train your employees at a low price. Contact us today to learn more about how we could help your business grow.