One of the most common financial oversights a company makes when beginning a manufacturing project is not anticipating the full scope of costs. A sound business case will take into account both the manufacturing cost of the project and the production costs of the operation, to ensure the manufacturing project can continue to move forward.
What is the difference between Manufacturing costs and Production costs? According to Investopedia, “Production costs reflect all of the expenses associated with a company conducting its business while manufacturing costs represent only the expenses necessary to make the product. “
Simple, right? In theory, yes, but the scope of the project and its future production cost needs can become very complex; failure to plan for these two different types of costs will stop a manufacturing operation in its tracks.
According to Enrique Reynoso, the Chief Financial Officer for NovaLink, avoiding the problem of not having enough finances to cover your manufacturing & production costs is done through having a solid business case.
“I think it is very important that before talking about funding needs, you should have a thorough plan for the project as supported by a solid business case. Within the business case will be the funding plan, so the business case is the most important thing for justifying the project.
A well thought-through business case basically covers the investment rationale, including the financial, operational, and market/end customer justification.
Very importantly, from a cost perspective, the business case will lay the groundwork for the project and determine whether it makes sense for the potential customer. You can break down the financial aspect into different buckets:
One, what is going to be the required initial investment to start up? And in that initial startup, the costs would include any capital investment that is necessary.
Second is working capital needs. One working capital component is materials. There is a need to buy materials for production trials, startup inventory, and replenishment inventory.
Third, initial startup and ongoing working capital required to keep the operation running: materials, operating expenses, and distribution costs either coming in or going out. These are the items the potential customer will have to consider in their business case, which will then determine what are the funding requirements. After putting together the business case, it may show that the company may not necessarily have the funds to cover the initial startup costs and the required working capital.
For example, the customer will want to keep a certain number of weeks of operating expenses to fund production until such time as the operation is in a steady state. The customer may not have that funding in place at the time, but the business case will help the potential customer determine what they need. We provide our potential customers with feedback on the business case inputs.
Here are some more links concerning manufacturing and production costs for your research: