When you create your production budget, you should use it as a control measure. This means as you enter in your expenses, you should look out for anything that's out of place or might warn of deeper financial problems.
But if you make mistakes when you create your budget, you might miss potential problems.
That's why we're revealing four red-flags you must look out for to ensure your production budget is an effective control tool instead of a problem itself...
Checklist: Look for these four red-flags when you create your production budget
Red-flag #1: If you don't get approval from your management about all purchasing decisions, you need to implement this step urgently. If you don't, you might create an unrealistic budget they can't actually use.
Red-flag #2: Don't forget to use the previous quarter's ending inventory for this quarter's beginning inventory. Get this wrong and you'll have too much inventory.
Red-flag #3: Don't make an error on the amount of units of inventory you have and need to order. You'll use this for more than one budget.
Red-flag #4: Don't forget you're working with units. Some managers freak out about the high number of units. You don't need to worry about this.
Now that you know which red-flag problems to avoid, here's how to create a production budget that avoids them…
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Use these six steps to create your production budget and avoid red-flag problems
Step 1: Check your inventory to determine how much you have from the previous quarter.
Step 2: Work out the correct unit amount.
Step 3: Workout your production goals for the quarter. These affect how much you want to produce and, therefore, how much inventory you need.
Step 4: Create the budget to represent these goals.
Step 5: Get your managers to approach the purchase amount in your budget.
Step 6: Make any recommended adjustments to the budget and circulate the completed version.
By following these six steps you can create a production budget without any of these red-flag problems.
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