It’s challenging to succeed in the manufacturing industry without a plan, or at least some written goals. A basic plan should include your annual budget. Even better, it should include multi-year budgets and projections.
Forecasting may be time consuming, but is a necessary step in predicting and controlling future success. Many of the most successful manufacturing companies we work with not only engage in forecasting, but do so with their entire executive team and on a regular basis.
- Expenses First: It’s easier to know what you plan on spending than what sales you might make. Focus on fixed costs (rent, wages) versus variable costs (materials, cost of goods sold). Fixed costs will generally remain steady. For variable costs, identify certain costs – say materials or marketing – that are likely to fluctuate and adjust these in your projections and estimates.
- Be Conservative: Don’t overestimate your future budgets – plan on low revenues and a limited introduction of new products and sales staff. It’s always best to underestimate, lest you find your company in a hole.
- Be Aggressive: OK, scratch that – be aggressive! Well, at least in one forecasting model to see the potential impact. In this model, introduce multiple new products, increase sales staff presence – think big! It’s beneficial to plan for both possibilities and contrast with the more conservative approach to create several viewpoints.
- Monitor Key Ratios: The most important ratios to weigh in forecast planning are:
- Gross Profit – are you earning quality revenue? Remember the industry average of 25-35% of sales.
- Operating Profit – ratio of operating costs to total revenue. This factors in overhead costs and removes financing costs. It should be a positive movement as revenues grow.
A great way to grow revenue is to expand your sales territory, into new counties or possibly into new states. Expanding sales into new states, however, generally comes with new rules – but hopefully they’ll be worth the investment:
- Consider registering your business: Many states require any business doing sales within its borders to register. Also, depending on the extent of the business you are conducting in the state, there may be sales tax ramifications.
- Consult your legal advisor: State business laws may vary widely – it’s best to talk to your attorney about any compliance requirements in states where you’re looking to expand.
- Talk to your CPA: Depending on your operations in new states, there may be tax implications, also known as nexus. Every state’s nexus rules are different, but most state’s apportion income on three criteria: sales, payroll and property within the state. The more instate activity, the greater chance you may have nexus in the state – having sales representatives, taking orders, signing contracts, storing inventory and renting equipment or facilities will all create nexus allowing the corporation to apportion its income.
Forecasting helps manufacturers identify advantageous opportunities and develop a strategic mind-set. But even the most forward-thinking executive can’t do it alone – in addition to working hand-in-hand with your leadership team, it’s important to have an experienced financial advising team in place, including bankers, financial planners and CPAs who work in your industry.