We know and have felt by now the effects of supply chain issues due to the pandemic. If you are in real estate, construction or manufacturing you may have seen an immediate difference between your 2019 revenue vs 2020 and 2021 revenues. How do you project costs and create budgets for 2023 based on the parabolas you’re seeing in supply and demand over the last few years?
This article shares ideas for budgeting and building in costs for project delays or canceled projects in the pipeline due to supply chain issues. You can also look for ways to reduce expenses or change up your depreciation method if projected revenue is down for 2022.
The first step to reacting to supply chain issues is to focus on budget adjustments. Where do we begin?
Start by working toward a more diversified supplier base. This includes running the numbers and coming up with two to three alternative budgets, one aiming high and one aiming low. The goal is to find a middle ground where a more flexible, cost-efficient set of suppliers can be quickly substituted for suppliers whose costs or lead times far exceed projected budgets.
Work with your suppliers to negotiate better deals and estimate cost savings on larger orders from your suppliers.
If you’re already stockpiling, you may need to add that into your future budgeting or material costs up front. This may also include building in a warehousing fee into your bid to cover those costs.
The second tier to your budgeting schedule should include project costing. Building in costs for project delays or canceled projects in the pipeline is recommended, especially with continued supply chain disruptions.
There are expenses which you may not expect to see a return on, for example, when a project is delayed or canceled.
Three tips we can suggest include:
- Having a backup plan for delayed or canceled projects due to supply chain issues
- Communicating openly as often as possible to ensure further expenses are not incurred a few hours, days or weeks after a project is already canceled and
- Taking a second look at past projects and expenses to identify cost savings
If you find you are frequently exceeding project costs or falling significantly below projected estimates, it may be time to re-evaluate your project costing, target projects and/or clients.
A Note About Change Orders: Change orders can lead to revenue loss if not analyzed with a fine-toothed comb. Make sure you are choosing subcontractors and materials that are most cost-efficient for you and the client. It is also of the utmost importance to do your research and ensure you are using the right methods and materials for the job to decrease your chances of additional losses due to change orders.
Factory Overhead Costs
Make sure your budget projections include new factory overhead costs. But also look for ways to reduce factory overhead costs to align with less revenue. For example, you may have allocated more resources to your HR department in 2021 compared with past years. You may have hired three new machinists in a pinch and allocated an additional 25% of each of their yearly salaries to a recruiting firm in order to acquire these highly specialized employees.
There are costs you may not realize should be included in your budget, but here are a few factory overhead costs you could anticipate, reduce or eliminate:
- Office supplies – hand sanitizer, bathroom soap, paper towels, lunch room supplies
- Extra payments to cleaning personnel (windows, bathrooms, restocking)
- Building maintenance costs
- Salaries for maintenance personnel
- Rent increases
- Equipment replacement as the end of their lifecycle is anticipated
Talk to your CPA if you have questions or need an additional set of eyes on your factory overhead cost projections.
Building and Equipment Depreciation
When there is a significant change in the pattern of the future economic benefits from an asset, then the method of tax basis depreciation or the useful life of book basis depreciation could be changed for the current year to reduce as many unpredictable fluctuations in business income as possible.
In a nutshell, if revenue is still looking good for 2022 despite supply chain issues, you may want to accelerate current year tax basis depreciation on certain assets, taking advantage of current tax laws. If revenue is not looking as good, talk to your CPA about changing your method of depreciation.
Some asset purchases such as a fleet of vehicles depreciate faster within the first few years of use. Hold off on this purchase, if you can, when revenue is down. Or choose a different depreciation method for this asset that offers the most benefits for offsetting income.
If you have accelerated depreciation of real property via a cost segregation study, look for ways to leverage that depreciation by perhaps investing in building upgrades or new equipment.
If you are feeling the effects of supply chain setbacks, you’re not alone. Contact your Manufacturing or Construction & Real Estate advisory team here at Anglin Reichmann Armstrong for additional solutions.