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Budget estimation is a good foundation for the operational planning. It forces managers to consider how conditions might change and what contingency plans should be put in place. It can help co-ordinate the organization’s activities by asking managers to look at relationships between their own operation and the operations of other company departments. Other outcomes of the budget include:
- Plan to control resources
- Communicable plans
- Motivation for managers to achieve budget goals
- Evaluation tool for the performance of managers
- Visibility into the company’s performance
- Accountability
TIP: A separate estimate is needed for each production level to be considered.
Goals of This Chapter
Upon completion of this chapter, you should be able to:
- Provide a forecast of revenues and expenditures – to construct a model of how a business might perform financially if specified strategies, events and plans are carried out.
- Measure the actual financial results against a forecast.
- Establish the cost constraint for a project, program, or operation.
Manufacturing cost estimates can usually be organized as shown below.
- Up Front Costs
- Development “Guesstimate” –a low-reliability but easy to calculate prediction of the cost to develop a “production ready” technology.
- Product Design – the work needed to specifically describe a product sufficiently that it can be produced. This is different from development in that there is no unproven product or production technology involved.
- Tooling Design and Fabrication – usually done by a tool maker, it takes into account production levels and peak capacity as well as anticipated tool life.
- Production Setup – the cost to set up a production run. This usually includes some amount for the unavoidable waste while tuning and testing the process.
- Production costs
- Production Cost – the incremental cost to produce “one more” after an item is in production. This usually includes raw material and other supplies, machine time and operator cost, and then post production finishing.
- Assembly Setup & Assembly Cost; Packaging Cost – similar to above.
- Quality Control – addresses what sample testing might be needed to assure the finished product meets expected standards.
Other items to consider are assembly tools and fixtures, assembly set up costs, waste, and freight. Advertising, administrative overhead, sales, etc. are not included in a manufacturing estimate.
The Development Guesstimate involves the greatest degree of uncertainty and everything else depends on it. Where unproven technology is involved, it is not wise to invest much time fine tuning other components of the estimate. If it is decided that the idea doesn’t work, then cost to make becomes irrelevant.
It may be worth beginning by estimating the costs for full production, as that is the most expensive level. However, full production volume may not be reliably known until you test the market in limited areas. It’s also likely that you won’t know the exact formulation of the final good until you get enough feedback from future customers.
This is where development strategy comes into play. Ask, “How will we use our resources to reach our goals?” This involves taking small steps to define the product and market before betting on the unknown.
Business start-up budget
Calculating the costs of starting a small business begins with a list of all necessary purchases including tangible assets, such as equipment or inventory, and services, such as remodeling or insurance. It also should include plans for working capital and collateral.
Part of the budget should contain a narrative that explains how the budget was decided, how a reserve fund was set and a description of the expected financial results over the short and medium terms. Any assets should be valued with each and every cost. Expenses are like labour factory overhead are also included into business budgeting.