A few years back, I decided that I was tired of working for “Corporate America” and set out to become an entrepreneur… be my own boss, so to speak. It sounded good, but boy, was I in for a rude awakening.
As a small business owner, I discovered just how easy I had it, working for a bigger company and having dedicated staff to deal with the landlord, bankers, lawyers, regulatory officials, and many more.
How do you answer their questions like “Is your company a good credit risk?” or “Can you pay the bills?” Most often, the answer is found in your company’s financial statements, especially when combined with an annual budget. If you are in the manufacturing business, you know how daunting it can be to just keep up with what you spent today, much less what you are going to spend the following year.
Your accountant can tell you what you spent last month or last year on a host of different expenses, and this generally translates into the basis of a manufacturing overhead budget. Many of a company’s costs are highly predictable. Rent, administrative labor costs, licenses, utilities – all of these would fall into this category.
But there are the many unknowns too, such as direct labor costs, healthcare, transportation, raw materials, etc., where you can only make an educated guess after factoring volume and projected increases (or decreases) in what things will cost.
A manufacturing budget is your crystal ball; what you need to see into your financial future. Past performance is certainly useful in financial forecasting, but how can you be more accurate? Most accounting software will help you track variances from budget, and that helps to refine your budget to something more reflective of the company’s performance.
But to get really accurate, you need to know specific details, and lots of them. Knowing you were $50,000 over your direct labor budget last month is useful, but knowing that most of that spend was on overtime for a valued customer’s special order is even more so. With Enterprise Resource Planning (ERP) software and tools like standard costing, you can measure any number of variances, from how many pounds of starch went into the secret sauce, to how long it took to package it. Information of this type can be used not only to refine a manufacturing budget, but also to improve manufacturing efficiencies and product quality.
It is often difficult to justify the purchase of ERP software, especially for smaller firms. A typical Return on Investment (ROI) calculation will look only at labor savings in the administrative offices. But, what about improved efficiency, better manufacturing planning, cash flow forecasting, inventory turnover, quality control and knowing what things cost? What is that worth?
Learn more about the role technology plays in food safety, compliance, and quality in today’s food processing business – join a panel of experts for Blytheco’s upcoming webinars:
- The Role of Technology in Food Safety and Recalls – July 16, 1pm ET. Register here.
- The Role of Technology in Food Processing Compliance and Traceability – September 25, 2pm ET. Register here.
About the Author: Michael Siegmund is Supply Chain Executive at Winslow Bainbridge Consulting, former President of RM Foods, former Director of International Supply Chain at Starbucks Coffee. Thoughout the “Traceability and Beyond” blog series, Mr. Siegmund will be sharing with us “Best Practices in Food Processing,” tips for Processors to improve efficiency throughout their business lifecycle.