BUDGETING IN A MANUFACTURING OPERATION

BUDGETING IS important of all kinds of businesses. However, its impact is felt more in a manufacturing business where numerous and a variety of costs can greatly complicate matters. In fact, the importance of keeping track of all these costs and organizing them in a manner more condu­cive to effective decision mak­ing, has led many manufactur­ers to adopt a budgeting technique known as "cost accounting.' Specifically, cost accounting allows owner-managers to better control business operations by informing them more fully about their specific costs, permitting an easier more in-depth analysis of these costs, and making It more obvious where corrective action may be required. In con­junction with sales revenue figures, it can also help you identify the most profitable areas of your business and put you in a position to optimize your business performance.

Understanding Cost Accounting

In cost accounting, costs are classi­fied as being either direct or indirect and as being either fixed or variable. This is unlike general accounting, where costs are usually classified into well-established summary level accounts, such as selling expenses, administrative expenses or cosis of goods sold.

Direct costs - Direct costs are those in­curred in the fabrication of a prod­uct and can readily be identified with the product. Two examples of these costs include the raw materials used to make the product and the labor required to convert these raw materials into the finished product. In some situations. power, fuel, water and other sig­nificant costs can also be classi­fied as direct costs.

Indirect Costs - Indirect costs are generally the costs of activities re­quired to support the manufactur­ing operations. Such costs usually include plant administration, qual­ity control, purchasing, insurance,depreciation, property taxes and other similar activities.

Variable Costs - Variable costs are those that vary directly wilh the quantity of prod­ucts being produced. Naturally, raw mate­rial consumption will increase as more products are produced. As well, the labor spent in processing the raw materials may also be a vari­able cost if the amount of la­bor required is directly propor­tional to the quantity of goods produced.

Fixed Costs - Fixed costs do not vary with the quantity of production. These costs gen­erally include all of the indirect costs associated with plant overhead such as Insurance, administration and deprecia­tion.

Applying Cost Accounting to Manu­facturing - When applying cost account­ing to a manufacturing opera­tion. costs are usually classified under the following three com­binations:

• direct-variable costs • direct-fixed costs • indirect-fixed costs

Figuring Out Your Standard Cost per Unit - Manufacturing cost accounting can be particularly helpful when used to calculate a stan­dard cost per unit. This unit cost is what you would expect each prod­uct to cost under normal operating conditions.This figure usually totals all theraw materials, labor and other costs incurred in producing the prod­uct plus an allocation of the support costs.

STARTING AND OPERATING A WHOLESALE BUSINESS

TYPES OF WHOLESALERS

THERE are two basic types of wholesalers:

• Wholesalers of industrial goods who act as Intermediaries between manufacturers & industry service providers.

• Wholesalers of consumer products who act as intermediaries between manufacturers & retailers.

Budding entrepreneurs who enter the wholesale trade seem to be attracted to major lines of goods, such as:

• ceramics

• chemical cleaning compounds

• confectionery

• hardware

• janitorial supplies

• office supplies

• plants and flowers

• stationery

• wall coverings

For more information, see the chart on the following page.

'Figures derived by dividing total wholesale sales figures for each classification by the total num­ber of wholesale establishments in thecategory.

STRATEGIES FOR EXPANDING INTO WHOLESALING

USE THE following start-up and operating strategies to help you expand into whole­saling.

Wholesaling Start-up Strategies

1) Choose your wholesaling warehouse carefully. To ex­pand into wholesaling you can either build and maintain your own strategically located depot or rent/lease space in a public warehouse. To make the right choice, find out how much It costs to lease or buy a warehouse. Calculate this cost as cost per foot in order to compare it to other locations. When choosing a warehouse, you must also pay particular attention to its construction features. Does it offer any laborsaving approaches to materials handling, warehousing methods or in­ventory procedures?

2) Coordinate your "order flow" system. To maximize productivity and minimize costs, most internal operations should be designed for the sole pur­pose of facilitating the delivery of goods to your retailer's accounts. Two primary components must thus be coordinated: a) the entire order flow system, and b) auxiliary structures -such as the warehouse itself, which enable the order flow system to operate.

NOTE A common problem among whole­saling firms is to occasionally lose track of orders as they are processed through their internal system. When customers phone in to inquire about the status of their orders or to add or subtract merchandise, the result is confusing and upsetting. Often this results in delays for both customer and sup­plier.

3) Establish a competitive credit policy. As a wholesaler you can gain a competitive edge over other suppliers by offering more favorable payment terms and perhaps higher credit limits. In fact. in the wholesaling industry, a sound credit policy is critical to suc­cess.

4) Set up your receiving and ship­ping bays properly. Ideally goods from manufacturers are brought in

through truck bays onto receiv­ing platforms were they are ac­cepted by the receiving depart­ment. Here each incoming de­livery is recorded in the receiv­ing log - a register where infor­mation such as date and time of shipment, name of supplier, name of transporting agency. invoice number, and number of cases or cartons received - are recorded. The delivery is then unloaded and checked against the accompanying bills for quantities, contents, possible damage and the like. Those goods re­ceived are then consigned to specific locations within the warehouse as re­serve stock. When the shipping de­partment receives orders from the sales division, order pickers in the warehouse select the merchandise specified, put to­gether the order in a staging area, and then ship it out. Of course, shipping times and routing are worked out in ad­vance with an eye to transporta­tion capabilities and costs.

5) Think about setting-up in the Southwest part of North America because of easier access to the Pacific Rim, Mexico and South America. Presently. and in the future. Mexico, as well as many of the developing Asian and South American countries, will be taking over the manufacturing of numerous items formerly produced by In­dustrialized countries. Setting up warehouses as close as pos­sible to these areas will likely reduce your distribution shipping and transportation costs.

Wholesaling Operating Strategies

6) Aim to operate at maximum effi­ciency. To improve your wholesaling firm's operating results, seek improve­ment within all four major areas of wholesaling activity, namely: purchasing, warehouse opera­tions sales and office manage­ment. In other words, to end up with a better operation state­ment you'll need to buy better, sell better, and improve internal operations.

NOTE Purchasing merchandise for a wholesale business represents a large portion of total operating expenses - close to 75 percent of sales. In light of this infor­mation, the important of intelligent pur­chasing should be clear to every small business owner.

7) Buy goods in large quantities and repackage them into smaller lots. Repackaging can add considerable value and convenience to a product e.g., buy a ton of nails. and repackage them in groups of six.

8) Don't overlook the public relations value of main­taining close contact with your merchant retailers. You can build rapport with your re­tailers via a newsletter, but Its' far bet­ter to get out of your office as often as you can and visit them in person. This is a lesson many large corporations have only now begun to learn after suffering losses in sales due to com­plaints of poorer service. It seems hu­mans whether they be merchant retail­ers or John Doe consumers, don't like voice mail, completely computerized and automated order-entry systems, nor do they jump up and down and come back for more when they feel they're being treated like a number. Not surprising, people prefer talking to and dealing with other peo­ple.

9) Educate your merchant re­tailers. Use the following strategies to help your retailers stay and become more profitable:

• Give demonstrations of new products -Whenever you are introducing a new product, especially one that is unique and revolutionary, send in a demonstration team to properly explain all its new benefits and build excitement.

• Have problem solving clinics. Once or twice each year, run problem-solving clinic where your customers can talk over mutual business problems.

• Introduce new stock methods. Introduce your customers to modem methods of stock control.

• Keep merchant retailers abreast of new techniques. Keep your merchant retailers up-to-date on newer retailing methods and techniques that they can use to improve their business. This can be done through your salespeople and/or a monthly newsletter.

• Provide instruction materials on operations management. Provide retailers with instructional materials on all aspects of managing their operations.

10)Furnish your merchant re­tailers with promotional ma­terials. Furnish stands, display racks, signs and point-of-purchase material at nominal cost (or if possible free of charge) to your most loyal re­tailers.

11)Give away free advertising templates. As a service to your merchant retailers, offer free newspa­per templates of professionally pre­pared advertisements, making sure to leave space for them to put their own name and address. The same treat­ment, Incidentally, can also be accorded to brochures, flyers and catalogs.

12) Know everything you can about your merchant retail­ers to maintain a competi­tive edge. Know the special competitive challenges that your merchant retailers face as well as how they go about moving their products. Insight into your customer's needs allows you to develop more sharply focused personal marketing and selling strategies to win over and keep their business. Empathy with the buyer is the key to a successful and mutually beneficial buyer-seller relationship. And that’s your goal: positive ralationships with your customers.

13) Offer extended terms and loans to your most loyal re­tailers. Within reason, help ba­sically sound but temporarily fi­nancially troubled businesses. This kind of service can help cement long-term relationships.

14) Organize occasional con­tests. To help create both re­tailer and consumer excitement and boost sales, organize a contest that rewards increased sales or perhaps promotes a new product.

15) Prepare for the new "direct to consumer" economy. Corporations have already exorcised them­selves of significant numbers of middle-management staff. It seems inevitable that they will also strive to get rid of as many distribution middlemen as they can and increasingly sell straight to the consumer. It is also advisable to con­sider the new "retail warehouse" trend and how it might impact your wholesaling operation. It is evident that retailers like Home Deporand Office Depot ate functioning more and more like wholesalers serv­ing both consumer and corporate accounts.

16) Think about opening a cash and carry branch. Customers outside your territorial coverage can be serv­iced by mail through your wholesale catalog and order form. However, it's sometimes worthwhile to open a "cash and carry" branch in a distant city where there is sufficient demand for your products to warrant such an outlet.

TYPES OF RETAILERS

THERE ARE two basic types of retailers:

• outlet retailers

• non-outlet retailers

Outlet Retailers

Outlet retailers are merchants who buy merchandise from wholesalers or manufacturers for resale to the public. Four major types of outlet retailers are small outlet retailers. chain store retailers, franchise re­tailers and no frills discount retailers.

Small Outlet Retailing - Adding a single retail outlet to your business operation is an option worth considering if you need to display your merchandise, clear out old stock, or want to get closer to your customers in order to understand their needs better. Usually this outlet will look like a shoebox with one end having an entrance and show window, and the other end, a partition and back room. Inside it will have floor, wall and celling coverings, and con­tain fixtures, merchandise, displays, store personnel, and most importantly. shoppers. Depending on the size and scope of this outlet, your initial investment can be as low as several thousand dollars to considerably more than $100.000.

Chain Store Retailing - Adding several retail outlets to your business op­eration is an option worth considering if you want your multiple locations to make it more convenient for customers to find you. Opening a few or many retail outlets will also lower your overall advertising budget as a percentage of sales, since radio, TV and newspaper promotions can cover your entire market area for all stores.

NOTE If you are considering adding several retail outlets to your existing operation, in addition to the added costs of real estate and holding multiple inventories, carefully ana­lyze the cost of hiring a manager for each location, the cost and avail­ability of labor and training, and the cost of installing an efficient moni­toring and accounting system. These costs must be justified by the potential increase in sales.

Franchise Retailing - Adding a franchise outlet to your business operation is an option worth considering if you don't have access to the necessary capital to add retail outlets yourself. It is also a good idea if rapid expansion is nec­essary to secure your market position.

NOTE The movement towards fran­chise operations is one of the most notable trends in retailing. While an exact figure is hard to pin down, it is estimated that currently more than a half-million retail establishments are franchised and their income is ap­proximately $650 billion a year.

No Frills Discount Retailing -Adding a no frills discount retail warehouse to your business opera­tion is an option worth considering if the market you are selling to is highly price conscious. This Is es­pecially true if customers in your market area have the habit of wailing for markdowns and re­turning merchan­dise bought at a regular price after seeing the identi­cal item advertised or on display somewhere else at a lower price.

Date: 2015-12-24; view: 593