How to Create an Accurate Budget

Have you ever received a new project, walked into the shop, set a block on a machine and just started cutting to see what happens? No design, no plans, no programming—just using your experience and intuition? Of course not. What a ridiculous notion! All professional mold builders understand that accurate planning is integral to a project’s success.

With this in mind, it is surprising that so many shops operate without a financial plan. As with a mold project, you can only achieve optimal business success through proper planning. A major component of this process is budgeting. Many methods of budgeting and assigning costs are available. Larger companies may require more intricate budgets. This article will focus on the fundamentals of basic budgeting and the steps for developing an annual financial plan.

Budgets should be dynamic. If trends emerge or events occur that contradict previous assumptions, make adjustments to the remainder of the year.

Budget Basics

A budget is an essential tool that helps you communicate goals and spending guidelines. A budget sets the tone for the year and provides the basis for which your shop can measure success. Therefore, it is very important that you dedicate serious effort to this process. Personnel from operations, sales, human resources, purchasing and management should provide input and play a key role in drafting the budget.

Start the process a few months before the next fiscal year. Start by collecting data, such as information on the company’s performance history to establish a baseline and information from trade groups, customers and suppliers to predict potential trends. Remember to consider the impact that price increases, customer losses or gains and workforce and capacity changes will have on the operation over the budget period.

Next, set a profit goal. Establish revenue targets using sales forecasts and information from the current month’s pricing column. From there, list a detailed account of all expected expenses and subtract them from revenue. Compare the bottom line to the profit goal, and make adjustments as necessary.

The only two ways to increase profit are to raise revenue or decrease costs. Shops should always focus on increasing revenue, as costs can only be reduced to zero, which is not practical. Revenue, on the other hand, can be improved as far as capacity will allow. Several iterations may be necessary, as the objective is to be as accurate as possible with predictions.

Most businesses do not have revenue and expenses that are evenly distributed throughout the year. To address that, break down the annual budget into periods, such as months. This provides for a much more accurate and useful tool. As I discussed in “Making Sense of Financial Statements,” it is vital that you use percentages of income for each line item along with dollar amounts. This will help you identify issues and opportunities throughout the year.

Complete the final document at least one month before the fiscal year begins. Then schedule a budget meeting to review the entire year and the first period. Moving forward, schedule these meetings immediately before the upcoming period. This provides an opportunity to prepare and review actual year-to-date performance related to the budget.

Monitoring performance, addressing issues and capitalizing on opportunities are critical parts of successful management.

Budgets on the Move

Budgets should be dynamic. If trends emerge or events occur that contradict previous assumptions, make adjustments to the remainder of the year. This is one area where using percentages is very useful. For example, if raw material expenditures are up for the period, but the percentage of income is in line with expectations because of higher sales, there may not be a reason to worry. If the higher expense is related to an unforeseen price increase, however, make changes to this line item for future periods.

It is important to make changes based only on those things that are outside of the shop’s control. Failure to manage income and expenses effectively is not justification for making adjustments. When deficits occur, develop a strategy on how to correct course. Do not allow the budget expectations to deter risk or defer required maintenance.

The process will improve continuously as the team learns lessons from month to month and year to year. Therefore, do not be discouraged by predictions that miss the mark. Be encouraging throughout the process and work hard to ensure that the team views the process positively. Budget meetings do not need to include streamers and cake, but it is necessary to battle the negative connotation that the word “budget” evokes.

Monitoring performance, addressing issues and capitalizing on opportunities are critical parts of successful management. I would say that implementation, analysis and corrective action are equally as important as the act of planning. An apropos quote often attributed to Benjamin Franklin is, “If you fail to plan, you are planning to fail.” While budgets alone will not ensure success, mold builders are guaranteed to have a better idea of how their businesses are performing by following these guidelines.