Best Budget Management Practices for Consumer Product Manufacturers Using QAD EE
Posted on: January 7, 2021 | By: Guy Logan | QAD Business Process, QAD Distribution, QAD Financials, QAD Manufacturing
A good budget process is essential to effectively managing a business. Budget management is the process of projecting and developing estimates for future financial results. While budgets are used to manage and track incomes and expenses, sales side people often refer to revenue budgets as “projections” while cost-side people typically stick to the word budget. The overall budget process usually starts with the creation of an annual fiscal year sales projection. Cost of sales and operating expense budgets typically consider sales projections, since these costs are often highly impacted by if not directly proportional to sales. There is also a budgeting or planning process for financing and investment activities, like capital expenditures.
A robust ERP system like QAD EE can help an organization manage its budget process. Budget planning helps an organization prioritize spending and investment to determine the most effective allocation of resources for production, distribution and administration. The budget process also measures performance to ensure various parts of the business are held accountable for their respective sales projections and/or costs of items. Below are two important factors to consider when implementing a budget process.
1. Start Budget Process Early
Successful consumer product manufacturers execute a budget process and track actual results against that budget. The budget process typically addresses sales and costs, often broken down by aspects like geographies, divisions, business units and cost centers. To the extent the organization’s budget process is complex due to global operations or diverse manufacturing processes or products, budgeting can take a lot of time (and elapsed time). For the budget to be ready before the end of the year, preparation should begin well in advance — sometimes as early as Q3 but certainly by Q4 of the current year.
As a best practice, the Chief Financial Officer should ensure all budgets are finalized or near completion within one month of the end of the fiscal year. While budgeting serves to help a company’s management plan for the upcoming year, budgets are not perfect. Naturally, these sales and cost predictions are typically better for the immediate upcoming months and less accurate and reliable for later months/quarters of the upcoming year. It’s simply harder to predict the future the further out one looks. Sales or cost predictions made in late Q3/early Q4 are less likely to accurately forecast sales and costs 10-15 months into the future. This is especially true of the sales projections, which in turn drive cost items impacted by if not directly driven by sales. The best practice is to implement systems to accurately track and report actual data and financial results against budget. Management can then analyze the actual to budget results and consider if the company should take action to serve the best interests of the company.
2. Plan for an Unexpected Event
What happens to the budget when an unexpected event substantially impacts actual results to the point where the budget no longer makes sense? Disruptive events like losing a significant client or the COVID-19 pandemic which significantly impacted the consumer goods sector can make tracking actual performance against the original budget impractical because of the extreme deviations. Under these unusual circumstances, the company should consider creating a new, secondary budget so that the company can track results against both the new and original budget plan.
For example, consider a manufacturer that specializes in selling toilet paper. During the COVID-19 pandemic, there was a significant increase in sales for household goods, including a jaw-dropping 845% increase in toilet paper demand. While this increase was temporary and 2020 toilet paper demand was choppy, overall 2020 toilet paper demand more than doubled. When a company experiences a doubling of sales demand, it might want to consider creating a new, secondary budget plan that better reflects the new sales reality. The company can track results against both the new budget for short term management but also against the original budget for longer term actual to budget reporting, like the organization’s 5-year plan.
Sound budget execution is critical to a company’s financial success. This execution requires systems capable of handling the actual to budget functionality your company requires. To learn more about how Logan Consulting can assist the preparation of a successful annual budget management plan using QAD EE, click here.