Key Takeaways
- To craft a workable financial plan, take your time, consider categorizing costs, and remember that precision is not necessary.
- Implementing an ERP solution is an easy way to track financial information. The right ERP will also help eliminate errors and miscommunication.
Despite the importance of following an operating plan, some Engineer To Order companies opt not to use it.
Further, those who do draft a plan typically either do so incorrectly, or they use it as a suggestion. It’s typically quickly discarded when it becomes a burden or inconvenience. ETO companies should avoid this because financial planning is essential.
As noted by The Wall Street Journal, there are many reasons why managers get their plans incorrect. Whether it’s a disjointed process, a failure to account for major expenses or a general indifference to the plan. It’s important to keep in mind that financial plans are more than just numbers on a page or a screen. Instead, think of them as a numerical representation of a company’s priorities, strategic goals, and immediate steps to reach them. This means even the least financially savvy executives have no excuse for not establishing and following a plan.
Helpful Tips for Crafting a Workable Financial Plan:
1. Don’t rush it
These plans can steer operations, so we should consider every aspect. Top management should contribute by providing additional insight. Soliciting input from different departments ensures everyone has a voice in the process. Furthermore, it assures that critical projects or divisions won’t be underfunded. For ETO companies, such planning can be extra difficult because of the last-minute nature of every project. That doesn’t make it any less important, though.
2. Categorize costs
Divide the company’s expenses into distinct categories and then further break down these into subsections. According to AccountingTools, four of the main categories for manufacturing companies, including ETO organizations, consist of overhead, production, direct materials, and labor.
Overhead costs cover items such as administrative salaries, depreciation, rent, supplies, utilities, and other expenses necessary for regular business operations. The source noted that the overhead costs may potentially account for a large proportion of the company’s total amount of expenditures, so it’s important that these expenses are accurate and allocated for.
A simple equation derives direct material costs: Add raw materials needed for production to the planned ending inventory balance to get the total raw materials required. Subtracting the beginning raw materials inventory in stock from this number provides the raw materials to be purchased. Of course, this is a simplified version, but it essentially follows the same format.
Much like the direct materials, the production budget also includes a simple equation that covers the forecasted unit sales added to the planned finished goods ending inventory balance. The total production required is the product of this equation. Unlike iterative companies, ETO manufacturers typically do not subtract finished goods inventory from the total production required, so they manufacture the total number of products specified.
The labor budget involves the total hours of labor required to build the finished product. This helps manufacturing companies estimate how many employees they will need and provides a gauge for determining when layoffs might be necessary.
3. Precision is not a requirement
It’s not necessary to plan to the very last penny. The goal of the plan is not to accurately predict the exact number of sales or the amount of every expense. However, it is supposed to guide the entire operation, and the plan should provide direction to the company. This is a big relief for all manufacturers, particularly those in the ETO space. Trying to predict precise costs and revenue will only bog down the process and potentially give everyone headaches.
4. Compromises are key
The funding process does not approve every request, and creating a workable plan typically involves making a series of trade-offs. An Engineer To Order manufacturing operation needs to allocate its limited resources accurately. This means that adding a new, necessary expense to the plan might require removing another line item somewhere else. Compromising between many different factors and trying to find that balance can be tricky, and it requires the discipline to know when to make cuts and when to shift resource allocation for a better chance at reaching strategic goals.
5. Implement an ERP solution
Keeping track of all of this critical financial information can be difficult without the right tools. Furthermore, storing all the data in a single location or among several isolated systems can lead to errors, duplicated entries, and miscommunication. Even the smallest mistake or wrong entry can throw off a company’s alignment with its operating strategy.
Total ETO, a manufacturing-centric ERP solution, stores all this crucial financial data in a single repository. Managers can ensure that all orders, payments, and costs align properly with the project estimates and that they are meeting the strategic goals set forth, with real-time access to every expense and cost associated.
See the difference an ERP designed for Engineer To Order manufacturers can make, request a demo today.
Written by RJ Ahuja
