Tag Archives: inventory

Should I Forecast my Inventory Requirements?

Why having the ability to plan inventory needs is important.

Inventory is one of those things that you never seem to have the right quantity of.  You either have too many of certain items in stock, or you constantly get caught not having sufficient quantities of other items that for unknown reasons generate customer demand in inverse proportion to the stocking levels of these items. What to do…

Play it safe and keep higher stocking levels, usually done with increasing the minimum stock quantities or establishing safety levels for certain items, and you are unnecessarily tying up cash in inventory and using additional storage space that could be put to better use, both of which having a negative impact on finances and operations.

Only purchase minimum inventory levels that you know will be in demand and you will get caught in shortages of material, parts and other finished goods your customers may be looking for, often not accepting your proposed long lead times. The result is frequently losing sales to competitors who have a better optimized inventory system or perhaps more sophisticated purchasing rules and policies.

It’s been said by many people that maintaining the right inventory levels is more of an art than science. At a minimum it requires experience and tremendous discipline in managing, tracking and re-ordering inventory items. This is also true for in-house manufactured items.

Whether inventory control is an art or a science, it still requires a well designed and implemented inventory control system, usually incorporated into the company’s ERP software solution. A warehouse management software application can also be employed and be part of an integrated enterprise software.

MRP (Manufacturing Requirements Planning) is a very popular software application, also part of an ERP implementation, which looks at customer demand (as evidenced by entered sales orders) and recommends, using business rules and other system settings, when to replenish certain inventory items, how many to purchase; suggests vendors to purchase from and more. It can also suggest processing quantities of in-house made items, when to start production and what materials must be purchased for these proposed production work orders.

MRP alone cannot be the only tool to forecast inventory needs, as it only takes into consideration existing customer demand. With the assumption that an annual budget and periodic reforecasting of sales and expenses exists, the budgeted sales imply that certain inventory items, either purchased or manufactured, will be needed in certain periods of the budget year. These will require procurement of materials and finished goods as well as scheduling labor and work centers in order to meet the sales forecasts. The output of this budget and reforecasts can be an additional input to the MRP system where in-house sales orders can drive MRP to perform as if customer demand already existed. In this setup, products shown in the budget will drive the “make to stock” process, anticipating customer orders.

For those who use Budget Maestro published by Centage Corporation, and for anyone in SMB (Small and Medium size Business) who is looking to implement an all-encompassing budgeting and planning solution, the sales module provides a powerful inventory option where inventory needed to fulfill sales can be planned using revenue item forecasts.

If Inventory is enabled in the revenue line properties, one can enter the beginning unit quantity, indicate whether or not Budget Maestro will replenish the inventory required by the sales forecast and if so the Min / Max replenishment levels as well as the order quantity multiples. Another nice feature is the Lead Time attribute that can be set specific to each inventory item and will assist the system to automatically calculate when these items must be ordered.

Although this is not a true and complete extension of the MRP software into the budget periods, Budget Maestro allows its users to forecast their inventory needs based on forecasted revenue in the sales module. As these revenue forecasts are updated, the inventory requirements will follow these revenue forecast changes.

As is always the case in Budget Maestro, every change you make in the model will cause all system generated forecasted financial statements to change accordingly. For example, as revenue line amounts or spreads are adjusted, inventory valuations of all affected items will change on the balance sheet (i.e., total inventory valuation will reflect the specific changes in individual inventory items affected by the budget update). Of course, specific reports pertaining to revenue forecasts can be produced independently from financial statements and greater detail of revenue items can be displayed.

Inventory forecasting is hard to do but given the tools we have at our disposal I think it would be wise for every Budget Maestro user to take advantage of these features (available in the advanced version) and put them to good use. It will certainly take some of the guesswork out of the “art” part of inventory forecasting.

Businesses of every description rely on the Budget Maestro™ family of software solutions by Centage Corporation to improve the efficiency and effectiveness of their business budgeting and planningfinancial forecastingfinancial consolidation and reporting processes. For more information, take a tour of Budget Maestrocontact Centage, or call 800-366-5111 now.

 

Are Financial Planning and Cash Processes High Priorities on Your List?

See what industry experts and companies’ finance executives think

I recently read the results of the 2015 Finance Priorities  survey conducted by the global business consulting and internal audit firm Protiviti which confirmed my observations and experience working with clients in a variety of industries. To quote the first three most important findings, which also represent the top priorities of finance executives:

1.       Finance functions are striving to gain greater visibility toward the “cash” horizon.

2.       Finance executives are placing more importance on strategic planning, risk management, executive dashboards, profitability analysis and other strategic areas of financial analysis.

3.      Finance functions want to manage and improve related processes in a comprehensive manner.  Strategic planning, budgeting and forecasting rank among the highest priorities in the entire study, which demonstrates as intent to strengthen overall corporate performance management.

This clearly confirms that corporate strategic and financial planning is not only essential but also greatly recognized as such by the 372 participants in this survey who are a good representation of finance executives and managers across many industry sectors.

The conclusion is that strategic planning, budgeting and analysis must be an integral process in finance, with its results clearly and timely communicated to executive management, the Board of Directors and certain shareholders.  I am encouraged that the survey participants have recognized this and correctly voiced their opinions.

As the number one finding in this survey indicates, Cash remains the most important component in finance.  It is cash that allows a company to grow and achieve its objectives, but also to survive in difficult economic times.  A company can be very profitable according to its income statement, yet suffer a chronic shortage in cash and lack the ability to meet its cash obligations or finance its basic operations.

As a business owner, CEO, CFO or finance executive, you must be able, at all times, to forecast the cash balance at each accounting period and how much cash will be required in each period in order to meet obligations arising from business expenditures, purchase of inventory, incurring payroll and related expenses, acquisition of assets, loan and line of credit payments and other cash related transactions.  The sources of cash are from customer account collections (AR), borrowings from lines of credit, issuing of long-term debt, selling shares in the company, and from sale of assets.

Since there are many accounting transactions affecting cash every day, its balance will fluctuate during the accounting period and over a period of time you will notice an upward or downward movement of this balance as measured at the end of each period.  Similarly, if you rely on a bank line of credit to finance your operations, you may have a zero balance in your operating account and your line of credit balance will fluctuate.

Whether it’s the cash balance, the line of credit account balance, or any long term loans, you need to know and well in advance what these balances are going to be and whether or not you will have access to this cash and how much.  This is part of a prudent and disciplined planning and budgeting process, every responsible finance organization should employ.

Those who use traditional methods to forecast cash and other budgeted data, by using spreadsheets with their inherent limitations and likelihood of errors, or perhaps, upgrading to a purpose designed planning and budgeting solution that requires users to perform extensive programming and provide formulas, functions and links, have discovered that cash planning and forecasting is not trivial.

The fact is that many organizations are not able to forecast cash, credit line utilization, loan covenants compliance and other key finance ratios and operational KPIs despite the fact they have implemented expensive and seemingly powerful software solutions.

My blog entry titled: “Cash Flow Statement: One of your Most Trusted Tool” demonstrates how the finance organization can obtain a complete and accurate Statement of Cash Flows for all budgeted accounting periods, using the existing planning and budget data.

The second and third findings of the Protiviti survey provide clear evidence that many finance organizations are still struggling with achieving timely and meaningful financial analysis, using both planned and actual data.  This implies that spending money and effort on sophisticated systems may not be the right solution if these systems fail to provide the required output or the outcome expressed as highly desirable in these top three survey findings.

Several of the blog entries on this site are focused on the importance of periodically planning and budgeting and continuously analyzing both actual and budgeted data; good examples are: Why CFOs Need to Adopt Financial Analytics” and A Physical and Mental Health Predictor? A Budgeting Analogy.

I continue to marvel at the accomplishments of Centage Corporation with its Budget Maestro with Analytics product line and have written about this solution and referenced it throughout this blog. The conclusion those familiar with this product must come to after reading the Protiviti survey results is that the Budget Maestro product line delivers and overcomes two of the most common challenges that finance organizations face:

1.      Providing a clear, accurate and complete visibility into the “cash horizon”.

2.      Allowing the construction of a strategic plan driving a financial plan, year after year, and real time analysis into the future, present and past Analysis of Everything.

Having these top priority challenges conquered is no trivial feat. I am glad that a sensible and effective software solution that does just that actually exists.

Accurately Calculate the Total Cost of your Employees

How to best approach planning & budgeting of payroll and related expenses

A while ago there was a member question on the Proformative.com site about calculating total cost of employees.  This question has come up several times on this forum in recent years and clearly represents a challenge finance personnel and departmental managers face.

I personally remember struggling with calculating total employee costs at several companies I worked at or consulted to, especially when we had to fully absorb these costs in inventory, excluding non-production employees and those who were part time in production and part time in SG&A.

Some payroll systems I have worked with in the past could provide the straight time and overtime cost per employee in each accounting period, holiday and vacation time expense and bonus expense, but were not capable of clearly itemizing the additional expenses (known as payroll related expenses) in detail per employees.

These are expenses such as Social Security Tax (employer portion), Medicare (employer portion), Additional Medicare Tax (for certain employees over a certain earning threshold) and unemployment taxes (SUTA and FUTA).  To that you must add additional payroll related expenses such as 401K plan employer matching, health insurance portion covered by the employer and other expenses that must be tracked and budgeted for, such as cost of supplies per employee, cost of IT per employee, etc.

These payroll and related expenses can be calculated in a spreadsheet, knowing the various rates at the time of calculation and adding up all the expenses per employee, per department and so on.  What makes it difficult is the fact that some expenses go away during the calendar year and then start over in the beginning of the following calendar year.  Social Security tax and FUTA are good examples, and knowing the annual cap one can program this into the same spreadsheet and cause these expense to disappear once the annual cap has been reached.

Another challenge faces companies whose fiscal year end is not December 31st.  These companies must devise a clever way to track payroll expenses during their fiscal year while accounting for them (for reporting and compliance purposes) using the calendar year.  This is also possible using a spreadsheet, but like many other complex spreadsheets, it becomes exceedingly more difficult to maintain and audit for errors and omissions as the number of employees increases.

As in all complex spreadsheets, these spreadsheets will require careful placement of many formulas and functions, possibly even macros and other complex VBA code.  What makes it more challenging is the addition and deletion of employees during each calendar year, anticipated pay raises and bonuses based on projected performance and certain other changes, which make the maintenance of these worksheets very difficult.  In fact, without proper change management control and internal audit, these spreadsheets are more than likely to contain errors and omissions, some of which may be material.

It is the general consensus of many accounting and finance professionals that spreadsheets are not the right tool to use in a very complex environment with many linked worksheets, linked workbooks and consolidations, and having to endlessly maintain records in many of these worksheets. Payroll planning and budgeting is a good example where spreadsheets should not be used.

While I was thinking about this challenge I remembered how easy it was for me to maintain employees and payroll costs in a planning and budgeting solution with a dedicated Personnel Module.  The application is Budget Maestro, published by Centage Corporation where the Personnel Module is an integral piece of the application and can be deployed either standalone or in combination with any module within the system.

Budget Maestro’s Personnel Expense Module overcomes all the problems and challenges listed above.  It is driven by built-in business rules and payroll taxing authorities’ existing rates.  Regardless of your fiscal year-end date it knows precisely when to stop charging Social Security Tax expense, FUTA and any other payroll related expense that has a peculiar behavior during the payroll year.  This is in addition to applying the correct tax expense in each tax category, as posted to each applicable GL account in each planning period.

As employees’ salary or hourly rates increase (or decrease) during the planning period (a year, 18 months, 24 months or whatever your plan’s length is), the correct payroll tax expenses are properly posted in the right period.

With the unique feature of posting expenses to the planning period via a system of automated journal entries, payroll expenses become an integral component of the planning and budgeting process, which means they are completely and accurately reflected in all financial statements and reports automatically generated for each planning and budgeting period.

What I like about Budget Maestro’s Personnel Module is that you can plan in as much detail as you like (down to the individual employee in each business unit) or on a higher level in certain areas of the business.  This is very useful in manufacturing operations where you can have multiple employees in a certain department (e.g., fabrication), having similar pay rates and starting in the same planning period.

For example, you may add five fabrication employees in May of 2015 at a base rate of $18.50 per hour, then six more in the following period, and so on.  You don’t need to list each of these employees individually; just the position type with the number of employees, their start date, rate and any anticipated increases or decreases. The system will use the data you provided and using its built-in business rules will expense everything properly in the right planning GL accounts and in all the relevant planning periods.  Future period financial statements and all other reports will automatically reflect that.

I find a remarkable capability of the Personnel Module in not having to place any formulas, functions, macros and links anywhere in the program, which is also true for all the other Budget Maestro planning modules (revenue, fixed assets, debt, etc.).

Another great thing about the Personnel Module is that it is 100% included in the licensing fee of the Budget Maestro application.  Use it standalone or in combination with other modules as your needs dictate, or add your personnel planning data into an already existing plan.With the Budget Maestro Personnel Expense Module you will always have a complete view of your payroll and related expenses with clear and accurate reports, making your employees total cost part of the overall budget.