Budgeting and Forecasting For Better Maintenance Planning

With rising costs and supply chain issues putting increasing pressure on businesses in all sectors, and the UK perilously close to officially entering a recession, budgeting and forecasting is probably more important than it has ever been. But what is involved, and how does it affect maintenance teams?

Budgeting is a plan to help control income and expenses while achieving financial goals. Understanding your profits, expenses, and savings allows you to adapt to changing circumstances and take advantage of opportunities when they arise. Budgeting is just one aspect of the financial planning process that can help you better understand your maintenance team's spending, as well as make any necessary adjustments.

PREPARING BUDGETS

Typically, annual budgets are prepared based on the previous 12 months' financial performance. Once created, the budget is passed through the hands of the executive team to ensure it meets the company's financial reporting requirements and meets the company's overall financial goals.

Here are three things maintenance teams should do to prepare a budget for the upcoming year:

1. Firstly, review the historical data (generally the previous 12-24 months) to predict future results of costs, cash flow, and gross profits.

2. List and review the maintenance budget considerations such as operating expenses, planned and capital expenditures, cost of scheduled maintenance, expenditures for unplanned repairs or equipment failures, cost of contractors, and cost of software licenses.

3. Review the 'must-haves' to keep operations running smoothly. These include assets, parts, operating strategy, and maintenance strategy. From here, determine which attributes are not necessary must-haves to keep operations running. These things can be cut to save on costs for the upcoming budget.

"Using historical data, knowing the age of your equipment, and understanding the succession planning of your workforce is very important for your budget planning," said Jason Afara, a former maintenance manager in food manufacturing, now a Manager of Solutions Engineering at Fiix.

Maintenance teams often face unpredicted financial challenges, such as unexpected equipment failure or downtime, and more recently, the threat of slowdowns due to pandemics or a global recession. Sticking to a budget can help maintenance managers make better business decisions and keep operations running smoothly.

Here are some tips to follow when you are creating a maintenance budget:

• Start budget planning early, at least three months before, so you can set your maintenance strategy for the new quarter. The average preparation time for a budget generally takes three to six months.

• Remember that your budget's projected timeframe should be between one and five years.

• Have a clear understanding of your revenue and work with cross functional teams to understand the different types of revenue, their value, and when they are expected to occur.

• Know your fixed costs and variable costs well. Fixed costs include employee salaries, rent, utilities, insurance, property taxes, and more. While variable costs include: supplies, contractors, parts, repairs, travel, services, maintenance, etc.

• Have a clear understanding of your maintenance budget. Use a maintenance budget template to break down all expenses into functional areas and maintenance types by month. A maintenance budget template helps you track your spending on emergency materials, routine maintenance, and capital projects. It also tracks your target versus actual spending, so you know which areas to pay closer attention to.

• Use a maintenance budget checklist to determine that every consideration has been met.

• Always make your financial forecast a part of your budget.

WHAT IS FORECASTING?

Financial forecasting is the process of predicting future events that will impact business results. There are two main types of forecasts: periodic (which looks at the rest of the current financial year) and rolling (which typically looks at the next five quarters or more). Forecasting can help maintenance and finance teams better plan out key performance metrics and update them based on forecasted numbers.

"Most maintenance teams have historically carried out periodic reviews of their finances in terms of forecasting the future. Covid-19 changed a lot of forecasting attitudes, and now the periodic approach is used alongside rolling forecasts," added Jason.

PREPARING FORECASTS

When preparing forecasts, the maintenance team must work closely with their financial team to ensure their budgets are periodically updated. This way, the team has a clear understanding of business performance vs budget.

Here are some key steps to prepare your forecast with your finance team:

• Prepare a report on your actuals and input them into a forecasting template.

• Plan a timeline for your forecast (periodic or rolling).

• Determine the historical trends based on your financial data (in other words, your actuals).

• Apply these historical trends to your current numbers to determine your forecasted results.

The last step is crucial for financial predictions if you can determine potential variables that could change your forecasted predictions (like an acquisition or merger, potentially a catastrophic disaster, or even a recession). You need to try and account for these types of scenarios as closely as possible in your numbers if they are determined to be a risk.

Although maintenance managers don't necessarily need to be leading the financial predictions of a business, they do have an involvement in setting the maintenance budget and being active in the predictions of changes to the business.

"The supply chain challenges for maintenance teams in the last three years is something no one would have forecasted before Covid-19," continued Jason.

To help keep you on track, here are some key tips to keep in mind when you are creating a forecast for your maintenance team:

• Keep it simple: Stick to the steps outlined above, and don't go beyond that. Work with your finance team to determine the best maintenance budget for your team.

• Don't get caught up in the details: It's easy to start reviewing historical financial data and get lost in the nitty-gritty of expenditures. The best solution is to stick to your actuals, and clearly map out your must-haves from your nice-to-haves when you create your budget and forecast.

• Try to predict the future, but don't let it consume you: With the added stress of predicting what may or may not come, sometimes teams find themselves overcutting or undercutting their maintenance budgets. Predict and forecast with your finance team, but give yourself some buffer room. Although the indicators for a recession are there, map out the worst and best-case scenarios in your forecasts to present to the executive team.

OTHER CONSIDERATIONS

Drawing up budgets and forecasts is just the starting point. Once established, they need to be monitored, updated and reviewed to track and inform the maintenance team's progress and activities.

So the following steps should all be taken once the budgets and forecasts are in place.

• Establish a budgeting process: Once your budget is established, you need to work with the finance team on a process for updating it. Determine how frequently you would like to update the budget, as well as what factors or metrics should be factored into it.

• Set up a calendar for updating your forecast and budgets: There are many different ways of tracking when you are making updates to your forecasts and budgets: You could set up milestones on an Excel spreadsheet, create recurring appointments in Google Calendar or iCalendar (which syncs across all devices), use an app such as Gantt Chart Maker, or even set it up on your computerised maintenance management system (CMMS).

• Build reports: Work with your finance team and provide reports regularly so that they can be shared with the broader team.

• Create a checklist of metrics you'll use while tracking progress against previous forecasts: If necessary, modify this checklist based on any changes made since last year's updated forecast was created (i.e., if there has been any significant change in demand for various types of services).

• Have a good relationship with your vendors: Continue to develop a great relationship with your vendors and good reporting on your expenses.

Budgeting and forecasting are two important aspects of financial planning that can help you better understand your current financial situation and ensure that any necessary adjustments can be made to meet your financial goals in the future.