Financial planning is the cornerstone of success for any manufacturing business. It ensures that you can allocate resources efficiently, manage risks, and meet your long-term goals.
To help you create a strong financial plan, we’ll explore the key components of financial planning for manufacturing businesses, including budgeting, forecasting, cashflow management, and capital investment.
Understanding your financial position
Before diving into the specifics of financial planning, it’s always important to clearly understand your current financial position. You can learn about your business’s finances by putting together and reviewing your financial statements, which are made up of your:
- Balance sheet: This provides a snapshot of your company’s assets, liabilities, and equity at a specific point in time.
- Income statement: This shows your company’s revenues and expenses over a period, highlighting profitability.
- Cashflow statement: This tracks the inflows and outflows of cash, giving insight into your company’s liquidity.
You could also measure some key financial metrics, including your sales revenue and net profit margin to determine how much money your business is bringing in. Especially relevant to manufacturing businesses are your average fixed and variable costs, which tell you how much money it takes for your business to produce its goods.
Budgeting
A budget is a financial plan that outlines projected revenues and expenses over a specific period, usually a year. This document is absolutely necessary, helping businesses efficiently allocate resources, plan for future growth, and manage their cashflow.
Most importantly, you can identify discrepancies and adjust strategies by comparing actual performance over a year against your budget. Budget also aids in setting financial goals, prioritising spending, and ensuring that the business remains profitable. Lastly, they’re essential for accessing outside funding.
Cashflow management
Effective cashflow management will ensure your manufacturing business has the liquidity it needs to meet its obligations and invest in growth opportunities. The main task you’ll want to do here is to create short-term (monthly and quarterly) and long-term (yearly) cashflow forecasts, which use your historical sales data to predict future income.
By accounting for different potential scenarios (such as a slower summer or higher input costs than usual), you’ll be better prepared to tackle whatever comes your way.
From there, you’ll know whether you need to improve your cashflow. The most important cashflow strategies for manufacturing businesses will include:
- Optimise inventory levels: Balance having enough inventory to meet demand without tying up too much cash.
- Negotiate payment terms: Work with suppliers and customers to negotiate favourable payment terms that enhance cashflow.
- Control overhead costs: Regularly review and manage overhead costs to maintain a lean operation.
Investment decisions
Manufacturing businesses always need to weigh investment opportunities carefully, with special attention paid to the potential return on investment that the asset could provide. They also need to consider investment strategies, with options including internal financing from cash reserves, bank loans, and asset finance.
Capital allowances, meanwhile, allow businesses to deduct a portion of the cost of capital assets from their taxable profits. The Annual Investment Allowance (AIA) is particularly beneficial for manufacturing businesses, allowing for 100% of the cost of qualifying assets to be deducted up to a certain limit (currently £1 million).
Risk management
Risk management is essential for any business, particularly for manufacturing businesses that can face supply chain disruption, regulation changes, and currency fluctuations, as well as for those who trade with overseas customers.
Mitigating risks can involve diversification, spreading investments and operations across different markets and products to reduce exposure to any single risk. Insurance can protect against potential losses from unforeseen events, and contingency planning helps develop responses to emergencies and unexpected disruptions.
Continuous improvement
Financial planning is not a one-time activity but an ongoing process. Instead, you need to regularly review and update your financial plans to adapt to changing circumstances and capitalise on new opportunities. Specifically, you should conduct regular audits and track your key performance indicators (KPIs)
If you need expert assistance with financial planning for your manufacturing business, Venthams is here to help.
Contact us today to learn how we can support your financial management and drive your business towards sustained success.