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Production Plan in Business Plan: A Comprehensive Guide to Success

Last Updated:  

July 5, 2024

In any business venture, a solid production plan is crucial for success. A production plan serves as a roadmap that outlines the steps, resources, and strategies required to manufacture products or deliver services efficiently. By carefully crafting a production plan within a business plan, entrepreneurs can ensure optimal utilisation of resources, timely delivery, cost efficiency, and customer satisfaction. In this article, we will delve into the intricacies of creating an effective production plan in a business plan , exploring its key components, strategies, and the importance of aligning it with overall business objectives .

Key Takeaways on Production Plans in Business Planning

• A production plan : a detailed outline that guides efficient product manufacturing or service delivery.
• Importance of a production plan : provides a roadmap for operations, optimises resource utilisation, and aligns with customer demand.
• Key components : demand forecasting, capacity planning, inventory management, resource allocation, and quality assurance.
• Strategies : lean manufacturing, JIT inventory, automation and technology integration, supplier relationship management, and continuous improvement.
• Benefits of a well-executed production plan : improved efficiency, reduced costs, enhanced product quality, and increased profitability.

What is a Production Plan?

A production Seamless Searches plan is a detailed outline that specifies the processes, resources, timelines, and strategies required to convert raw materials into finished goods or deliver services. It serves as a blueprint for the entire production cycle, guiding decision-making and resource allocation. The production plan considers factors such as demand forecasting, capacity planning, inventory management, and quality assurance to ensure efficient operations and optimal customer satisfaction.

Why is a Production Plan Important in a Business Plan?

The inclusion of a production plan in a business plan is vital for several reasons. First and foremost, it provides a clear roadmap for business operations, helping entrepreneurs and managers make informed decisions related to production processes. A well-developed production plan ensures that resources are utilised efficiently, minimising wastage and optimising productivity. This is particularly important for any startup platform aiming to streamline its production processes and achieve sustainable growth.

Additionally, a production plan allows businesses to align their production capabilities with customer demand. By forecasting market trends and analysing customer needs, businesses can develop a production plan that caters to current and future demands, thus avoiding overstocking or understocking situations.

Furthermore, a production plan helps businesses enhance their competitive advantage. By implementing strategies such as lean manufacturing and invoice automation , companies can streamline their production processes, reduce costs, improve product quality, and ultimately outperform competitors.

Key Components of a Production Plan

To create an effective production plan, it is crucial to consider several key components. These components work together to ensure efficient operations and successful fulfilment of customer demands. Let's explore each component in detail.

Demand Forecasting

Demand forecasting is a critical aspect of production planning. By analysing historical data, market trends, and customer behaviour, businesses can predict future demand for their products or services. Accurate demand forecasting allows companies to optimise inventory levels, plan production capacity, and ensure timely delivery to customers.

One approach to demand forecasting is quantitative analysis, which involves analysing historical sales data to identify patterns and make predictions. Another approach is qualitative analysis, which incorporates market research, customer surveys, and expert opinions to gauge demand fluctuations. By combining both methods, businesses can develop a robust demand forecast, minimising the risk of underproduction or overproduction. Utilising a free notion template for demand forecasting can further streamline this process, allowing businesses to organise and analyse both quantitative and qualitative data efficiently in one centralised location.

Capacity Planning

Capacity planning involves determining the optimal production capacity required to meet projected demand. This includes assessing the production capabilities of existing resources, such as machinery, equipment, and labour, and identifying any gaps that need to be addressed. By conducting a thorough capacity analysis, businesses can ensure that their production capacity aligns with customer demand, avoiding bottlenecks or excess capacity.

An effective capacity plan takes into account factors such as production cycle times, labour availability, equipment maintenance, and production lead times. It helps businesses allocate resources efficiently, minimise production delays, and maintain a consistent level of output to meet customer expectations.

Inventory Management

Efficient inventory management is crucial for a successful production plan. It involves balancing the cost of holding inventory with the risk of stockouts. By maintaining optimal inventory levels, businesses can reduce carrying costs while ensuring that sufficient stock is available to fulfil customer orders.

Inventory management techniques, such as the Economic Order Quantity (EOQ) model and Just-in-Time (JIT) inventory system, help businesses strike the right balance between inventory investment and customer demand. These methods consider factors such as order frequency, lead time, and carrying costs to optimise inventory levels and minimise the risk of excess or insufficient stock.

Resource Allocation

Resource allocation plays a pivotal role in a production plan. It involves assigning available resources, such as labour, materials, and equipment, to specific production tasks or projects. Effective resource allocation ensures that resources are utilised optimally, avoiding underutilisation or over-utilisation.

To allocate resources efficiently, businesses must consider factors such as skill requirements, resource availability, project timelines, and cost constraints. By conducting a thorough resource analysis and implementing resource allocation strategies, businesses can streamline production processes, minimise bottlenecks, and maximise productivity.

Quality Assurance

Maintaining high-quality standards is essential for any production plan. Quality assurance involves implementing measures to monitor and control the quality of products or services throughout the production process. By adhering to quality standards and conducting regular inspections, businesses can minimise defects, ensure customer satisfaction, and build a positive brand reputation.

Quality assurance techniques, such as Total Quality Management (TQM) and Six Sigma , help businesses identify and rectify any quality-related issues. These methodologies involve continuous monitoring, process improvement, and employee training to enhance product quality and overall operational efficiency.

In addition to the core components of a production plan, it's also important for businesses to consider the broader aspects of their business strategy, including marketing and advertising. Understanding the costs and returns of different marketing approaches is crucial for comprehensive business planning . For instance, direct response advertising costs can vary significantly, but they offer the advantage of measurable responses from potential customers. This type of advertising can be a valuable strategy for businesses looking to directly engage with their target audience and track the effectiveness of their marketing efforts.

Strategies for Developing an Effective Production Plan

Developing an effective production plan requires implementing various strategies and best practices. By incorporating these strategies into the production planning process, businesses can optimise operations and drive success. Let's explore some key strategies in detail.

Lean Manufacturing

Lean manufacturing is a systematic Seamless Searches approach aimed at eliminating waste and improving efficiency in production processes. It emphasises the concept of continuous improvement and focuses on creating value for the customer while minimising non-value-added activities.

By adopting lean manufacturing principles, such as just-in-time production, standardised work processes, and visual management, businesses can streamline operations, reduce lead times, and eliminate unnecessary costs. Lean manufacturing not only improves productivity but also enhances product quality and customer satisfaction.

Just-in-Time (JIT) Inventory

Just-in-Time (JIT) inventory is a strategy that aims to minimise inventory levels by receiving goods or materials just when they are needed for production. This strategy eliminates the need for excess inventory storage, reducing carrying costs and the risk of obsolete inventory.

By implementing a JIT inventory system, businesses can optimise cash flow, reduce storage space requirements, and improve overall supply chain efficiency. However, it requires robust coordination with suppliers, accurate demand forecasting, and efficient logistics management to ensure timely delivery of materials.

Automation and Technology Integration

Automation and technology integration play a crucial role in modern production planning, as well as mobile app development . By leveraging technology, businesses can streamline processes, enhance productivity, and reduce human error. Automation can be implemented in various aspects of production, including material handling, assembly, testing, and quality control.

Continuous Improvement

Continuous improvement is a fundamental principle of effective production planning. It involves regularly evaluating production processes, identifying areas for improvement, and implementing changes to enhance efficiency and quality.

By fostering a culture of continuous improvement, businesses can drive innovation, optimise resource utilisation, and stay ahead of competitors. Techniques such as Kaizen, Six Sigma, and value stream mapping can help businesses identify inefficiencies, eliminate waste, and streamline production workflows.

Frequently Asked Questions (FAQs)

What is the role of a production plan in business planning.

A1: A production plan plays a crucial role in business planning by providing a roadmap for efficient production processes. It helps align production capabilities with customer demand, optimise resource utilisation, and ensure timely delivery of products or services.

How does a production plan affect overall business profitability?

A2: A well-developed production plan can significantly impact business profitability. By optimising production processes, reducing costs, and enhancing product quality, businesses can improve their profit margins and gain a competitive edge in the market.

What are the common challenges faced in production planning?

A3: Production planning can present various challenges, such as inaccurate demand forecasting, capacity constraints, supply chain disruptions, and quality control issues. Overcoming these challenges requires robust planning, effective communication, and the implementation of appropriate strategies and technologies.

What is the difference between short-term and long-term production planning?

A4: Short-term production planning focuses on immediate production requirements, such as daily or weekly schedules. Long-term production planning, on the other hand, involves strategic decisions related to capacity expansion, technology investments, and market expansion, spanning months or even years.

How can a production plan be adjusted to accommodate changes in demand?

A5: To accommodate changes in demand, businesses can adopt flexible production strategies such as agile manufacturing or dynamic scheduling. These approaches allow for quick adjustments to production levels, resource allocation, and inventory management based on fluctuating customer demand.

In conclusion, a well-crafted production plan is essential for business success. By incorporating a production plan into a comprehensive business plan, entrepreneurs can optimise resource utilisation, meet customer demands, enhance product quality, and drive profitability. Through effective demand forecasting, capacity planning, inventory management, resource allocation, and quality assurance, businesses can streamline production processes and gain a competitive edge in the market.

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Production Company Business Plan Template

Written by Dave Lavinsky

Production Company Business Plan

Over the past 20+ years, we have helped over 500 entrepreneurs and business owners create business plans to start and grow their production companies.

If you’re unfamiliar with creating a production company business plan, you may think creating one will be a time-consuming and frustrating process. For most entrepreneurs it is, but for you, it won’t be since we’re here to help. We have the experience, resources, and knowledge to help you create a great business plan.

In this article, you will learn some background information on why business planning is important. Then, you will learn how to write a production company business plan step-by-step so you can create your plan today.

Download our Ultimate Business Plan Template here >

What is a Production Company Business Plan?

A business plan provides a snapshot of your production company as it stands today, and lays out your growth plan for the next five years. It explains your business goals and your strategies for reaching them. It also includes market research to support your plans.

Why You Need a Business Plan for a Production Company

If you’re looking to start a production company or grow your existing production company, you need a business plan. A business plan will help you raise funding, if needed, and plan out the growth of your production company to improve your chances of success. Your production company business plan is a living document that should be updated annually as your company grows and changes.

Sources of Funding for Production Companies

With regards to funding, the main sources of funding for a production company are personal savings, credit cards, bank loans, and angel investors. When it comes to bank loans, banks will want to review your business plan and gain confidence that you will be able to repay your loan and interest. To acquire this confidence, the loan officer will not only want to ensure that your financials are reasonable, but they will also want to see a professional plan. Such a plan will give them the confidence that you can successfully and professionally operate a business. Personal savings and bank loans are the most common funding paths for production companies.

Finish Your Business Plan Today!

How to write a business plan for a production company.

If you want to start a production company or expand your current one, you need a business plan. The guide below details the necessary information for how to write each essential component of your production company business plan.

Executive Summary

Your executive summary provides an introduction to your business plan, but it is normally the last section you write because it provides a summary of each key section of your plan.

The goal of your executive summary is to quickly engage the reader. Explain to them the kind of production company you are running and the status. For example, are you a startup, do you have a production company that you would like to grow, or are you operating a chain of production companies?

Next, provide an overview of each of the subsequent sections of your plan.

• Give a brief overview of the production industry.
• Discuss the type of production company you are operating.
• Detail your direct competitors. Give an overview of your target customers.
• Provide a snapshot of your marketing strategy. Identify the key members of your team.
• Offer an overview of your financial plan.

Company Overview

In your company overview, you will detail the type of production company you are operating.

For example, your production company might specialize in one of the following types of production companies:

• Feature Film Production Company : this type of production company handles all of the necessities that go with producing a major film – hiring on-screen and off-screen talent, writers, musicians, location scouts, a team for pre-production, post-production, legal, etc.
• Commercial Production Company: this type of production company can produce stock footage, short corporate videos, training videos, and creative projects such as music videos and short films
• Post Production Company: this type of production company handles video editing, special effects, color correction, sound mixing, and editing to eventually produce the final video.
• Niche Production Company: this type of production company focuses on one specific niche that it has perfected. They often combine the best of animation, commercial, and post-production companies.

In addition to explaining the type of production company you will operate, the company overview needs to provide background on the business.

Include answers to questions such as:

• When and why did you start the business?
• What milestones have you achieved to date? Milestones could include the number of clients served, the number of films with positive reviews, reaching X number of clients served, etc.
• Your legal business structure. Are you incorporated as an S-Corp? An LLC? A sole proprietorship? Explain your legal structure here.

Industry Analysis

In your industry or market analysis, you need to provide an overview of the production industry.

While this may seem unnecessary, it serves multiple purposes.

First, researching the production industry educates you. It helps you understand the market in which you are operating.

Secondly, market research can improve your marketing strategy, particularly if your analysis identifies market trends.

The third reason is to prove to readers that you are an expert in your industry. By conducting the research and presenting it in your plan, you achieve just that.

The following questions should be answered in the industry analysis section of your production company business plan:

• How big is the production industry (in dollars)?
• Is the market declining or increasing?
• Who are the key competitors in the market?
• Who are the key suppliers in the market?
• What trends are affecting the industry?
• What is the industry’s growth forecast over the next 5 – 10 years?
• What is the relevant market size? That is, how big is the potential target market for your production company? You can extrapolate such a figure by assessing the size of the market in the entire country and then applying that figure to your local population.

Customer Analysis

The customer analysis section of your production company business plan must detail the customers you serve and/or expect to serve.

The following are examples of customer segments: individuals, companies, filmmakers, studios.

As you can imagine, the customer segment(s) you choose will have a great impact on the type of production company you operate. Clearly, small businesses would respond to different marketing promotions than filmmakers, for example.

Try to break out your target customers in terms of their demographic and psychographic profiles. With regards to demographics, including a discussion of the ages, genders, locations, and income levels of the potential customers you seek to serve.

Psychographic profiles explain the wants and needs of your target customers. The more you can recognize and define these needs, the better you will do in attracting and retaining your customers.

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Competitive Analysis

Your competitive analysis should identify the indirect and direct competitors your business faces and then focus on the latter.

Direct competitors are other production companies.

Indirect competitors are other options that customers have to purchase from that aren’t directly competing with your product or service. This includes social media platforms, web developers, apps and even college or university students. You need to mention such competition as well.

For each such competitor, provide an overview of their business and document their strengths and weaknesses. Unless you once worked at your competitors’ businesses, it will be impossible to know everything about them. But you should be able to find out key things about them such as

• What types of clients do they serve?
• What type of production company are they?
• What is their pricing (premium, low, etc.)?
• What are they good at?
• What are their weaknesses?

With regards to the last two questions, think about your answers from the customers’ perspective. And don’t be afraid to ask your competitors’ customers what they like most and least about them.

The final part of your competitive analysis section is to document your areas of competitive advantage. For example:

• Will you provide concierge services or customized packages for your clients?
• Will you offer products or services that your competition doesn’t?
• Will you provide better customer service?
• Will you offer better pricing?

Think about ways you will outperform your competition and document them in this section of your plan.  

Marketing Plan

Traditionally, a marketing plan includes the four P’s: Product, Price, Place, and Promotion. For a production company business plan, your marketing strategy should include the following:

Product : In the product section, you should reiterate the type o f production company that you documented in your company overview. Then, detail the specific products or services you will be offering. For example, will you provide video editing, music editing, pre-production, or post-production services?

Price : Document the prices you will offer and how they compare to your competitors. Essentially in the product and price sub-sections of yo ur plan, yo u are presenting the products and/or services you offer and their prices.

Place : Place refers to the site of your production company. Document where your company is situated and mention how the site will impact your success. For example, is your production company located in New York or Los Angeles, a business district, a standalone office, or purely online? Discuss how your site might be the ideal location for your customers.

Promotions : The final part of your production company marketing plan is where you will document how you will drive potential customers to your location(s). The following are some promotional methods you might consider:

• Be part of filmmaker associations and networks
• Reach out to websites
• Distribute flyers
• Engage in email marketing
• Advertise on social media platforms
• Improve the SEO (search engine optimization) on your website for targeted keywords

Operations Plan

While the earlier sections of your business plan explained your goals, your operations plan describes how you will meet them. Your operations plan should have two distinct sections as follows.

Everyday short-term processes include all of the tasks involved in running your production company , including client communication and interaction, planning and producing production services, billing clients, etc.

Long-term goals are the milestones you hope to achieve. These could include the dates when you expect to book your Xth client, or when you hope to reach $X in revenue. It could also be when you expect to expand your production company to a new city.  

Management Team

To demonstrate your production company’s potential to succeed, a strong management team is essential. Highlight your key players’ backgrounds, emphasizing those skills and experiences that prove their ability to grow a company.

Ideally, you and/or your team members have direct experience in managing production companies. If so, highlight this experience and expertise. But also highlight any experience that you think will help your business succeed.

If your team is lacking, consider assembling an advisory board. An advisory board would include 2 to 8 individuals who would act as mentors to your business. They would help answer questions and provide strategic guidance. If needed, look for advisory board members with experience in managing a production company or successfully running a small filmmaking company.  

Financial Plan

Your financial plan should include your 5-year financial statement broken out both monthly or quarterly for the first year and then annually. Your financial statements include your income statement, balance s heet, and cash flow statements.

Income Statement

An income statement is more commonly called a Profit and Loss statement or P&L. It shows your revenue and then subtracts your costs to show whether you turned a profit or not.

In developing your income statement, you need to devise assumptions. For example, will you book 5 films or videos per day, and/or offer production packages ? And will sales grow by 2% or 10% per year? As you can imagine, your choice of assumptions will greatly impact the financial forecasts for your business. As much as possible, conduct research to try to root your assumptions in reality.

Balance Sheets

Balance sheets show your assets and liabilities. While balance sheets can include much information, try to simplify them to the key items you need to know about. For instance, if you spend $50,000 on building out your production company, this will not give you immediate profits. Rather it is an asset that will hopefully help you generate profits for years to come. Likewise, if a lender writes you a check for $50,000, you don’t need to pay it back immediately. Rather, that is a liability you will pay back over time.

Cash Flow Statement

Your cash flow statement will help determine how much money you need to start or grow your business, and ensure you never run out of money. What most entrepreneurs and business owners don’t realize is that you can turn a profit but run out of money and go bankrupt.

When creating your Income Statement and Balance Sheets be sure to include several of the key costs needed in starting or growing a production company:

• Cost of equipment and production studio supplies
• Payroll or salaries paid to staff
• Business insurance
• Other start-up expenses (if you’re a new business) like legal expenses, permits, computer software, and equipment

Attach your full financial projections in the appendix of your plan along with any supporting documents that make your plan more compelling. For example, you might include your studio location lease or a list of production services you plan to offer.  

Writing a business plan for your production company is a worthwhile endeavor. If you follow the template above, by the time you are done, you will truly be an expert. You will understand the production industry, your competition, and your customers. You will develop a marketing strategy and will understand what it takes to launch and grow a successful production company.  

Don’t you wish there was a faster, easier way to finish your Production Company business plan?

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Since 1999, Growthink has developed business plans for thousands of companies who have gone on to achieve tremendous success.   Click here to hire someone to write a business plan for you from Growthink’s team.

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How Much Does it Cost to Start a Business?

8 min. read

Updated April 25, 2024

What will it cost to start your business? This is a key question for anyone thinking about starting out on their own. You’ll want to spend some time figuring this out so you know how much money you need to raise and whether you can afford to get your business off the ground.

Most importantly, you’ll want to figure out how much cash you’re going to need in the bank to keep your business afloat as you grow your sales during the early days of your business. 

Typical startup costs can vary depending on whether you’re operating a  brick-and-mortar store, online store, or service operation . However, a common theme is that launching a successful business requires preparation.

And while you may not know exactly what those expenses will be, you can and should begin researching and estimating what it will cost to start your business.

• How to determine your startup costs

Like when developing your  business plan , or  forecasting  your initial sales, it’s a mixture of  market research ,  testing , and informed guessing. Looking at your competitors is a good starting point. Once you feel your initial estimates are in the ballpark, you can start to get more specific by making these three simple lists.

1. Startup expenses

These are expenses that happen before you launch and start bringing in any revenue. Here are some examples:

• Permits and Licenses: Every business needs a license to operate, just like a driver needs one to drive. Costs vary depending on industry and location.
• Legal Fees: Getting your business structure set up (sole proprietorship, LLC, etc.) might involve consulting a lawyer and at least will involve the basic business formation fees.
• Insurance: Accidents happen, and insurance protects your business from unforeseen bumps.
• Marketing and Branding: The ways to spread the word about your product or service. They could involve creating a website, creating business cards, or promoting social media.
• Office Supplies : Pens, paperclips, that all-important stapler – the essentials to keep your business humming.
• Rent/Lease: If you need to rent space for your business before you start selling, include those expenses in your list as well.

2. Startup assets

Next, calculate the total you need to spend on assets to get your business off the ground. Assets are larger purchases that have long-term value. They’re typically significant items that you could resell later if you needed or wanted to.

Here are a few examples:

• Equipment:  Think ovens for a bakery, cameras for a photography business, or computers for a tech startup.
• Inventory:  If you’re selling products, you’ll need to stock up before opening your doors (or your online store).
• Furniture and Decorations:  Desks, chairs, that comfy couch in the waiting room – creating a functional and inviting workspace might involve some upfront investment.
• Vehicles: If your business requires a vehicle to deliver your product or service, be sure to account for that purchase here.

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Why separate assets and expenses?

There’s a reason that you should separate costs into assets and expenses. Expenses are deductible against income, so they reduce taxable income. Assets, on the other hand, are not deductible against income.

By initially separating the two, you potentially save yourself money on taxes. Additionally, by accurately accounting for expenses, you can avoid overstating your assets on the balance sheet. While typically having more assets is a better look, having assets that are useless or unfounded only bloats your books and potentially makes them inaccurate. 

Listing these out separately is good practice when  starting a business  and leads into the final piece to consider when determining startup costs. 

3. Operating Expenses

Finally, figure out what it’s going to cost to keep your doors open until sales can cover expenses. Create a list that estimates monthly expenses, such as:

• Payroll (including your own salary)
• Marketing and advertising
• Loan payments
• Insurance premiums
• Office supplies
• Professional services
• Travel costs
• Shipping and distribution

Then, based on your revenue forecasts , calculate how many months it will take before your sales can cover all those monthly expenses. Multiply that number of months by your monthly operating expenses to determine how much you’re going to need to cover operating expenses as your business starts.

This number is often called “ cash runway ” and is a critical number – you need enough cash to fund those early red ink months. This number is how much cash you need to have in your checking account when you open your doors for business.

Calculating how much startup cash you need

To figure out how much money you need to start your business, add the asset purchases, startup expenses, and operating expenses over your cash runway period. This is your total startup costs, and it’s better to overestimate than underestimate these costs.

It often makes sense to invest the time to build a slightly more detailed starting costs calculation. Assuming you start making some sales and those sales grow over time, your revenue will be able to help pay for some of your operating expenses. Ideally, your sales contribute more and more over time until you become profitable.

To do a more detailed calculation, you’ll want to invest the time in a detailed financial forecast where you can experiment with different scenarios. If you do this, you’ll be able to see how much it will cost to start your business with different revenue growth rates. You’ll also be able to experiment with different funding scenarios and what your business would look like with different types of loans.

• Funding Starting Costs

You can cover starting costs on your own, or through a combination of loans and investments.

Many entrepreneurs decide they want to raise more cash than they need so they’ll have money left over for contingencies. While that makes good sense when you can do it, it is difficult to explain that to investors. Outside investors don’t want to give you more money than you need, because it’s their money.

You may see experts who recommend having anywhere from six months to a year’s worth of expenses covered, with your starting cash. That’s nice in concept and would be great for peace of mind, but it’s rarely practical. And it interferes with your estimates and dilutes their value.

Of course, startup financing isn’t technically part of the starting costs estimate. But in the real world, to get started, you need to estimate the starting costs and determine what startup financing will be necessary to cover them. The type of financing you pursue may alter your startup or ongoing costs in a given period, so it’s important to consider this upfront.

Here are common financing options to consider:

• Investment : What you or someone else puts into the company. It ends up as paid-in capital in the  balance sheet . This is the classic concept of business investment, taking ownership in a company, risking money in the hope of gaining money later.
• Accounts payable : Debts that are outstanding or need to be paid after a certain time according to your balance sheet. Generally, this means credit-card debt. This number becomes the starting balance of your balance sheet.
• Current borrowing : Standard debt, borrowing from banks,  Small Business Administration , or other current borrowing.
• Other current liabilities : Additional liabilities that don’t have interest charges. This is where you put loans from founders, family members, or friends. We aren’t recommending interest-free loans for financing, by the way, but when they happen, this is where they go.
• Long-term liabilities : Long-term debt or long-term loans.
• Other considerations for estimating startup costs

Pre-launch versus normal operations

With our definition of starting costs, the launch date is the defining point. Rent and payroll expenses before launch are considered startup expenses. The same expenses after launch are considered operating or ongoing expenses.

Many companies also incur some payroll expenses before launch because they need to hire people to train before launch, develop their website, stock shelves, and so forth.

Further Reading: How to calculate the hourly cost of an employee

The same defining point affects assets as well. For example, amounts in inventory purchased before launch and available at launch are included in starting assets. Inventory purchased after launch will affect  cash flow , and the balance sheet; but isn’t considered part of the starting costs.

So, be sure to accurately define the cutoff for startup costs and operating expenses. Again, by outlining everything within specific categories, this transition should be simple and easy to keep track of.

Your launch month will likely be the start of your business’s fiscal year

The establishment of a standard fiscal year plays a role in your analysis. U.S. tax code allows most businesses to manage taxes based on a fiscal year, which can be any series of 12 months, not necessarily January through December.

It can be convenient to establish the fiscal year as starting the same month that the business launches. In this case, the startup costs and startup funding match the fiscal year—and they happen in the time before the launch and beginning of the first operational fiscal year. The pre-launch transactions are reported as a separate tax year, even if they occur in just a few months, or even one month. So the last month of the pre-launch period is also the last month of the fiscal year.

• Aim for long-term success by estimating startup costs

Make sure you’ve considered every aspect of your business and included related costs. You’ll have a better chance at securing loans, attracting investors, estimating profits, and understanding the cash runway of your business.

The more accurately you layout startup costs and make adjustments as you incur them, the more accurate vision you’ll have for the immediate future of your business. 

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

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What Are Production Costs?

Understanding production costs, special considerations.

• Production Costs FAQs
• Corporate Finance

Production Costs: What They Are and How to Calculate Them

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

• Accounting History and Terminology
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Production costs refer to all of the direct and indirect costs businesses face from manufacturing a product or providing a service. Production costs can include a variety of expenses, such as labor, raw materials , consumable manufacturing supplies, and general overhead .

Key Takeaways

• Production costs refer to the costs a company incurs from manufacturing a product or providing a service that generates revenue for the company.
• Production costs can include a variety of expenses , such as labor, raw materials, consumable manufacturing supplies, and general overhead. 
• Total product costs can be determined by adding together the total direct materials and labor costs as well as the total manufacturing overhead costs. 

Investopedia / Crea Taylor

Production costs, which are also known as product costs, are incurred by a business when it manufactures a product or provides a service. These costs include a variety of expenses. For example, manufacturers have production costs related to the raw materials and labor needed to create the product. Service industries incur production costs related to the labor required to implement the service and any costs of materials involved in delivering the service.

Taxes levied by the government or royalties owed by natural resource-extraction companies are also treated as production costs. Once a product is finished, the company records the product's value as an asset in its financial statements until the product is sold. Recording a finished product as an asset serves to fulfill the company's reporting requirements and inform shareholders .

To qualify as a production cost, an expense must be directly connected to generating revenue for the company.

Total product costs can be determined by adding together the total direct materials and labor costs as well as the total manufacturing overhead costs. Data like the cost of production per unit or the cost to produce one batch of product can help a business set an appropriate sales price for the finished item.

To arrive at the cost of production per unit, production costs are divided by the number of units manufactured in the period covered by those costs. To break even, the sales price must cover the cost per unit. Prices that are greater than the cost per unit result in profits, whereas prices that are less than the cost per unit result in losses.

Types of Production Costs

Production incurs both fixed costs and variable costs . For example, fixed costs for manufacturing an automobile would include equipment as well as workers' salaries. As the rate of production increases, fixed costs remain steady.

Variable costs increase or decrease as production volume changes. Utility expenses are a prime example of a variable cost, as more energy is generally needed as production scales up.

The marginal cost of production refers to the total cost to produce one additional unit. In economic theory, a firm will continue to expand the production of a good until its marginal cost of production is equal to its marginal product ( marginal revenue ). This, in turn, will tend to equal its selling price.

There may be options available to producers if the cost of production exceeds a product's sale price. The first thing they may consider doing is lowering their production costs . If this isn't feasible, they may need to reconsider their pricing structure and marketing strategy to determine if they can justify a price increase or if they can market the product to a new demographic. If neither of these options works, producers may have to suspend their operations or shut down permanently.

Here's a hypothetical example to show how this works using the price of oil. Let's say oil prices dropped to $45 a barrel. If production costs varied between $20 and $50 per barrel, then a cash-negative situation would occur for producers with steep production costs. These companies could choose to stop production until sale prices returned to profitable levels. 

How Are Production Costs Determined?

For an expense to qualify as a production cost it must be directly connected to generating revenue for the company. Manufacturers carry production costs related to the raw materials and labor needed to create their products. Service industries carry production costs related to the labor required to implement and deliver their service. Royalties owed by natural resource-extraction companies also are treated as production costs, as are taxes levied by the government.

How Are Production Costs Calculated?

Production incurs both direct costs and indirect costs. Direct costs for manufacturing an automobile, for example, would be materials like plastic and metal, as well as workers' salaries. Indirect costs would include overhead such as rent and utility expenses. Total product costs can be determined by adding together the total direct materials and labor costs as well as the total manufacturing overhead costs. To determine the product cost per unit of product, divide this sum by the number of units manufactured in the period covered by those costs.

How Does Production Costs Differ From Manufacturing Costs?

Production cost refers to all of the expenses associated with a company conducting its business while manufacturing cost represents only the expenses necessary to make the product. Whereas production costs include both direct and indirect costs of operating a business, manufacturing costs reflect only direct costs.

Corporate Finance Institute. " Cost of Production ."

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How to write a business plan for your production company.

Starting a production company is a great way to create and distribute content to a wide range of audiences.

It also allows for creative control over the production process, allowing for the production of unique and innovative content.

Don't start without having built a business plan though.

A business plan is essential for any new project, as it provides a roadmap to success and helps to identify potential risks. It also helps to ensure that resources are allocated appropriately and that the project is completed on time and within budget.

In short, a good business plan will help ensure the profitability of your production company .

What are the necessary elements for a business plan for a production company? How should it be organized? Which metrics should be part of the financial analysis? What's the fastest way to outline a comprehensive business plan?

Rest assured, the article you're reading will provide answers to all these questions.

One last thing: you can avoid starting your business plan from scratch.

Feel free to download our business plan for a production company and adapt it to your project.

Developing a business plan for a production company

Do you need to develop a business plan for your production company.

Yes, you need to develop a business plan for your production company.

Formulating a comprehensive business plan will allow to:

• learn about the production company market
• stay abreast of the industry's newest developments
• find key factors for success in a production company
• understand clients' project goals and creative vision to produce high-quality and captivating visual content
• come up with a unique value proposition for your production company
• study the competitive landscape
• find relevant competitive advantages for your media production firm
• find a business model that will lead to a positive bottom line
• define a bulletproof strategy to make the business grow
• evaluate risks associated with operating a production company, including production delays, equipment breakdowns, and legal compliance

Our team has created a business plan for a production company that is designed to make it easier for you to achieve all the elements listed.

How to organize a business plan for a production company?

Your business plan incorporates multiple metrics and valuable data. It should be arranged in a way that makes it simple to read and comprehend.

When we designed our business plan for a production company , we ensured it was properly organized.

The document consists of 5 sections (Opportunity, Project, Market Research, Strategy and Finances).

1. Market Opportunity

The first section is named "Market Opportunity".

In this section, you will find a comprehensive analysis of the production industry, including market trends, production methods, distribution channels, and emerging technologies, providing insights for entrepreneurs and professionals in establishing and managing successful production companies.

The data here is always kept current; we update it biannually.

2. Project Presentation

The second part is called "Project" and this is where you talk about your production company. In this section, you can outline the types of productions you specialize in (e.g., film, television, commercials), your portfolio of projects, production capabilities, creative team, and the unique value proposition that ensures high-quality productions tailored to client needs.

Also include a short description about yourself at the end of this section.

Discuss your experience in production, your range of production services, and how you plan to provide creative and professional production solutions to clients. Highlight your portfolio of successful projects, your talented team of professionals, and your dedication to delivering high-quality productions that captivate audiences and bring visions to life through your production company.

We put together language in our business plan. Adjust it to suit your idea as needed.

3. Market Research

The third part is the "Market Research" section.

This section describes the target audience for your production company.

It includes a comprehensive analysis of competitors in the production industry and emphasizes your company's unique production services and competitive advantages.

A tailored SWOT analysis is provided as well.

4. Strategy

In the "Strategy" section, you will find a detailed growth plan for your production company, outlining all the necessary steps and initiatives to ensure its high profitability.

Furthermore, there is a marketing strategy for a production company, a way to manage risks, and a completed Business Model Canvas included in this section.

5. Finances

Ultimately, the "Finances" section serves as a platform to present the financial aspects of your project.

How to elaborate an Executive Summary for a production company?

The Executive Summary gives a summarized glimpse into the business plan of your production company.

Don't go beyond 2 pages; concentrate on the crucial information.

This document is meant to make the reader curious to know more about your business plan.

In the Executive Summary of your production company, address the following queries: what services does your production company offer? who is your target market? who are your competitors in the industry? how do you differentiate from them? what is your budget?

How to do the market analysis for a production company?

Conducting a market study for your production company enables you to grasp external factors like customer demands for specific media content, competition within the entertainment industry, and emerging trends in production techniques.

By conducting an extensive market analysis, a production company can understand client production needs, offer professional production services, optimize pricing strategies, and execute targeted marketing campaigns, ultimately leading to a larger client base, increased project contracts, and a prominent position in the production industry.

Here's what we've incorporated into the "Market Research" section of our business plan for a production company :

• fresh and updated data and statistics about production companies, including production industry revenue, film and TV production trends, and distribution methods
• a compilation of potential customer segments for a production company
• the competitor analysis
• the competitive advantages for a production company

The key points of the business plan for a production company

What's the business model of a production company, business model of a production company.

A production company's business model revolves around creating and producing various forms of media content such as films, television shows, commercials, or digital content. Revenue is generated through content production contracts, licensing deals, or advertising partnerships.

The business model focuses on identifying market demands, developing compelling content concepts, securing funding or investments, assembling talented production teams, managing production logistics, and distributing or monetizing content through various platforms.

Success depends on industry connections, delivering high-quality content, effective marketing and distribution strategies, fostering creative collaborations, and staying adaptable to evolving media consumption trends and technologies.

Business model ≠ Business plan

It's important to understand the distinction between "business plan" and "business model."

A business model defines how a company creates, delivers, and monetizes its offerings.

In a business plan, you make use of the Business Model Canvas as an easy-to-understand tool to depict how your business operates.

Rest assured, we provide a Business Model Canvas in our business plan for a production company .

How do you identify the market segments of a production company?

Market segmentation for your production company involves dividing your potential clients into different groups based on their media production needs, industries, and preferences.

These categories may include factors such as film production, commercial production, music video production, or clients seeking specific production services (e.g., scriptwriting, cinematography, editing).

By segmenting your market, you can offer specialized production services and solutions that cater to each segment's specific requirements. For example, you might provide film production services for independent filmmakers or production companies, offer commercial production services for businesses and advertising agencies looking to create compelling commercials or promotional videos, specialize in music video production and provide creative and visually stunning music videos for musicians and record labels, or focus on specific production services such as scriptwriting, cinematography, or editing.

Market segmentation allows you to effectively target your marketing efforts, communicate your expertise in media production, and deliver high-quality and captivating production experiences that meet the unique needs and preferences of each client segment.

In the business plan for a production company , you will find a detailed market segmentation that gives you insights into your potential customers.

How to conduct a competitor analysis for a production company?

Without surprise, you won't be the only production company in your market. There will be other companies offering film, video, or media production services to clients.

It is vital to study your competitors' strengths and weaknesses in detail when constructing your business plan.

Identify their weaknesses (such as inadequate production equipment, inconsistent project delivery, or poor client communication).

Why should you pay attention to these points? Because these weaknesses can impact the efficiency and effectiveness of production companies. By addressing these aspects, you can offer professional and reliable production services, provide state-of-the-art equipment and technology, and deliver excellent project management and client communication, positioning your production company as a trusted and preferred partner for creating high-quality and impactful audiovisual content.

It's what we call competitive advantages—invest in them to make your business unique.

Here are some examples of competitive advantages for an audiovisual production agency: creative and innovative content creation, professional equipment and editing, timely delivery.

How to draft a SWOT analysis for an audiovisual production agency?

A SWOT analysis can help identify the strengths, weaknesses, opportunities, and threats of starting a production company, allowing for informed decisions to be made.

As you can guess, there is indeed a completed and editable SWOT matrix in our business plan for a production company

The strengths for a production company

The "S" in SWOT denotes Strengths, which are the project's areas or aspects that provide a competitive advantage.

For a production company, strengths could include having experienced personnel, access to cutting-edge technology, strong financial resources, and a robust portfolio of past projects.

The weaknesses for a production company

When we mention the "W," we're referring to Weaknesses, which are the weak areas or aspects of the project that need to be improved.

For a production company, potential weaknesses include inadequate capital, lack of resources, insufficient marketing, and inadequate planning.

The opportunities for a production company

The "O" in SWOT symbolizes Opportunities, highlighting the potential advantages or positive factors that can benefit the project.

In the case of a production company, potential opportunities include creating web content, filming commercials, producing television shows, and creating music videos.

The threats for a production company

The "T" in SWOT symbolizes Threats, indicating the potential risks or unfavorable conditions that the project needs to mitigate.

How to outline a marketing strategy for an audiovisual production agency?

A marketing strategy is a vital component of a business plan as it specifies how a business will draw in customers and generate income.

Developing an effective marketing plan will help your production company gain visibility and appeal to clients seeking high-quality video and media production services.

Clients won't choose your audiovisual production agency without proper promotion; highlighting your creative capabilities and successful projects is necessary.

Have you considered marketing techniques to attract clients to your production company? Consider showcasing your portfolio of past projects, attending industry events or film festivals, and utilizing social media platforms to engage with potential clients and collaborators.

No need to worry if you're clueless about marketing and communication – it's not a big deal.

How to build a solid financial plan for an audiovisual production agency?

A successful business plan requires comprehensive financial data in order to accurately forecast future performance.

As part of your business plan, it will be necessary to forecast the revenue for your production company.

The presence of a relevant and credible revenue forecast is crucial to give your business plan a strong appeal to banks or investors.

Our financial plan for a production company is straightforward and equipped with automated checks, enabling you to validate and adjust your assumptions easily. This way, we make sure you're building solid financial projections.

Without a doubt, you'll need to come up with a basic budget for starting your production company. Don't forget any expense (we have listed them all in our financial plan !).

The break-even analysis is a crucial tool in your financial plan, providing insight into whether your production company will be profitable or not.

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November 22nd, 2023

How to Calculate Production Costs: A Comprehensive Guide

In the manufacturing industry, calculating production costs accurately is crucial for the success and profitability of a business. Understanding production costs allows companies to make informed decisions, set competitive prices, and identify areas for cost reduction. In this comprehensive guide, we will dive into the definition of production costs, examine their components, explain the steps to calculate them, analyze the results, and highlight common mistakes to avoid.

Understanding Production Costs

Definition of production costs.

Production costs refer to the expenses incurred by a company during the manufacturing process of a product. These costs include direct materials, direct labor, and manufacturing overhead. Indirect costs, such as utilities and facilities maintenance, also contribute to the overall production costs.

Direct materials are the raw materials or components that are directly used in the production of a product. These can include items like wood, metal, plastic, or any other material that is transformed into the final product.

Direct labor refers to the wages and benefits paid to the workers who are directly involved in the manufacturing process. This includes the time and effort spent by individuals in assembling, operating machinery, or performing any other tasks required to produce the product.

Manufacturing overhead encompasses all the other costs that are not directly tied to the materials or labor. These can include expenses like rent for the production facility, equipment maintenance, utilities, insurance, and other administrative costs.

Importance of Calculating Production Costs

The ability to accurately calculate production costs is essential for various reasons. Firstly, it helps businesses determine the cost effectiveness of their operations. By understanding the costs associated with production, companies can assess their profitability, identify areas where costs can be reduced, and improve their overall financial performance.

For example, by analyzing the production costs, a company may discover that a particular material is more expensive than alternatives in the market. This knowledge can prompt them to explore other suppliers or materials that can help reduce costs without compromising the quality of the final product.

Secondly, calculating production costs allows companies to set competitive prices for their products. By considering the expenses incurred during the manufacturing process, businesses can establish prices that not only cover their costs but also remain attractive to customers.

Understanding the production costs helps companies strike a balance between profitability and market competitiveness. By accurately assessing the costs, businesses can avoid underpricing their products, which would result in losses, or overpricing them, which could lead to a loss of customers to competitors.

Lastly, understanding production costs aids in the decision-making process. It assists in evaluating whether it is financially viable to introduce new products, make changes to the manufacturing process, or expand production capacity.

By analyzing the production costs, companies can determine the potential return on investment for new product development. They can also assess the feasibility of implementing process improvements or expanding production facilities, taking into account the additional costs involved and the potential increase in revenue.

In conclusion, production costs play a crucial role in the success of a company. By accurately calculating these costs, businesses can make informed decisions, improve profitability, and ensure competitiveness in the market.

Components of Production Costs

When it comes to understanding the intricacies of production costs, it is important to break it down into its various components. By doing so, businesses can gain a comprehensive understanding of the expenses involved in the manufacturing process. Let's delve deeper into the three key components of production costs: direct materials, direct labor, and manufacturing overhead.

Direct Materials

Direct materials encompass the tangible inputs used in the manufacturing process. These materials directly contribute to the final product and can include raw materials, parts, and components. Without these essential materials, the production process would come to a halt. Calculating direct material costs involves determining the quantity of materials used and multiplying it by their respective unit costs. This calculation ensures that businesses have a clear understanding of the expenses incurred in acquiring the necessary materials for production.

Direct Labor

Direct labor refers to the wages paid to employees directly involved in the production process. These individuals play a crucial role in transforming the raw materials into the finished product. Whether it's operating machinery, assembling components, or performing quality control checks, the efforts of the direct labor force are invaluable. To calculate direct labor costs, businesses multiply the total number of hours worked by the employees involved in production by their respective hourly wage rate. This calculation allows for an accurate assessment of the labor expenses incurred during the manufacturing process.

Manufacturing Overhead

Manufacturing overhead incorporates indirect costs that cannot be directly attributed to a specific product but are essential for the production process. These costs include utilities, maintenance, depreciation of equipment, factory rent, and other miscellaneous expenses. While these costs may not be directly tied to a single product, they are crucial for the overall functioning of the manufacturing facility. To calculate manufacturing overhead costs, a predetermined overhead rate is determined and applied to the estimated activity base for the manufacturing process. This calculation helps businesses allocate the indirect costs in a fair and accurate manner.

Understanding the components of production costs is vital for businesses aiming to optimize their manufacturing processes. By analyzing the direct materials, direct labor, and manufacturing overhead, companies can identify areas for cost reduction, improve efficiency, and make informed decisions to enhance their bottom line.

Steps to Calculate Production Costs

Calculating production costs is an essential task for any manufacturing business. By accurately determining the costs involved in the production process, companies can make informed decisions about pricing, profitability, and cost-saving measures. The process of calculating production costs involves several steps, including identifying direct materials costs, calculating direct labor costs, and determining manufacturing overhead costs. Let's explore each of these steps in detail.

Identifying Direct Materials Costs

Direct materials costs refer to the expenses incurred for the materials directly used in the manufacturing process. To identify these costs, start by gathering information on the quantity of materials used. This data can be obtained from production records, inventory data, or purchase records. It is crucial to have accurate and up-to-date information on the quantity of each material used.

Once you have the quantity data, the next step is to multiply the quantity of each material used by its unit cost. This will give you the total cost of direct materials. It is important to consider any additional costs associated with the materials, such as shipping or handling fees, to ensure an accurate calculation.

By identifying direct materials costs, businesses can have a clear understanding of the expenses incurred for the raw materials used in their production process. This information can help in negotiating better deals with suppliers, optimizing inventory management, and making informed decisions regarding material sourcing.

Calculating Direct Labor Costs

Direct labor costs are the expenses associated with the employees directly involved in the production process. Calculating these costs requires determining the total number of hours worked by each employee and multiplying it by their respective hourly wage rates.

To gather the necessary data for calculating direct labor costs, businesses can rely on employee time cards or work logs. These records should accurately reflect the hours worked by each employee on production-related tasks. It is important to consider any overtime hours or additional compensation rates when calculating direct labor costs.

Once you have the total number of hours worked by each employee, multiply it by their respective hourly wage rates. Sum up the direct labor costs for all employees to arrive at the total direct labor cost. This figure represents the expenses incurred for the labor directly involved in the production process.

Calculating direct labor costs provides businesses with insights into the labor expenses associated with their production process. This information can be used to evaluate labor productivity, identify areas for improvement, and make informed decisions regarding workforce management.

Determining Manufacturing Overhead Costs

Manufacturing overhead costs are the expenses that cannot be directly attributed to specific units of production but are necessary for the overall manufacturing process. Determining these costs requires establishing a predetermined overhead rate based on the estimated activity level for the production process.

The predetermined overhead rate is calculated by dividing the estimated total manufacturing overhead costs by the estimated activity level. The activity level can be measured in various ways, such as direct labor hours, machine hours, or production units. It is essential to choose an appropriate activity level that accurately reflects the manufacturing process.

Once the predetermined overhead rate is established, it is applied to the actual activity level to determine the manufacturing overhead costs. This calculation helps in allocating the overhead expenses to the units of production. It is important to periodically review and adjust the predetermined overhead rate to ensure accuracy.

Comparing the calculated manufacturing overhead costs with the actual overhead expenses is crucial to ensure accuracy in cost calculations. Any significant variances should be investigated to identify the reasons behind them and take corrective actions if necessary.

By determining manufacturing overhead costs, businesses can have a comprehensive understanding of the indirect expenses associated with their production process. This information can be used to evaluate cost efficiency, identify areas for cost reduction, and make informed decisions regarding overhead allocation.

Analyzing Production Cost Results

Interpreting your production cost calculations.

Once the production costs are calculated, it is essential to interpret the results to gain valuable insights. Analyze the cost breakdown of direct materials, direct labor, and manufacturing overhead to identify areas of potential cost reduction. This analysis will help optimize processes, reduce waste, and improve overall efficiency.

Strategies for Reducing Production Costs

Reducing production costs requires a proactive approach and strategic decision-making. Some effective strategies include optimizing inventory management, streamlining the production process, negotiating better prices with suppliers, investing in automation, and continuously improving efficiencies. By implementing these strategies, businesses can enhance their cost competitiveness and increase their profitability.

Common Mistakes in Calculating Production Costs

Overlooking indirect costs.

One common mistake in calculating production costs is overlooking indirect costs. These costs, such as utilities, maintenance, and depreciation, are often not allocated properly. Failing to include these expenses in the calculations can lead to inaccuracies and distortion of the true production cost.

Misclassifying Expenses

Another common mistake is misclassifying expenses. It is important to correctly categorize expenses as either direct or indirect costs to ensure accurate calculations. Misclassifying expenses can result in incorrect cost allocations and a skewed understanding of the production costs.

In conclusion, understanding and accurately calculating production costs are vital for the success of manufacturing businesses. By grasping the definition of production costs, identifying their components, following the steps to calculate them, and avoiding common mistakes, companies can make informed decisions, set competitive prices, and optimize their operations. Remember, the per-unit product cost can be obtained by dividing the total production cost by the number of units manufactured. With this comprehensive guide, you are now equipped to navigate the complex world of production cost calculations.

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Production Company Business Plan Template

Written by Dave Lavinsky

Production Company Business Plan

You’ve come to the right place to create your Production Company business plan.

We have helped over 1,000 entrepreneurs and business owners create business plans and many have used them to start or grow their production companies.

Below is a template to help you create each section of your Production Company business plan.

Executive Summary

Business overview.

ABQ Reels Video Production is a startup production company located in Albuquerque, New Mexico. The company is founded by Mark Johnson, an entertainment industry veteran who has over 25 years of experience working in video production. Now that Mark has experienced managing a production business, he is ready to start his own company, ABQ Reels Video Production. Mark is confident that his video production skills, combined with his understanding of business management, will enable him to run a profitable production company of his own. Mark is recruiting a team of highly qualified professionals to help manage the day-to-day complexities of video production – sales and marketing, client relationship management, budgeting, financial reporting, and project management.

ABQ Reels Video Production will provide a full suite of production services for small scale video projects in the Albuquerque area. ABQ Reels Video will be the go-to production studio in Albuquerque for its tailored approach and client-first focus. The company will be the ultimate choice for customer service while ensuring the highest quality standards for production in the area.

Product Offering

The following are the services that ABQ Reels Video Production will provide:

• Content Development
• Sourcing & Hiring Film Crew
• Planning & Logistics
• Post-Production Services

Customer Focus

ABQ Reels Video Production will target businesses and individuals in Albuquerque that are looking for video production services for small-scale projects, commercials, and social media. No matter the customer, ABQ Reels Video Production will deliver the best communication, service, and customized production tailored to fit each project’s needs.

Management Team

ABQ Reels Video Production will be owned and operated by Mark Johnson. Mark is a graduate of New Mexico University with a degree in Film Production. He has over 25 years of experience working in video production, and over ten years as a production manager. Mark will be the company’s Chief Executive Officer and Production Manager. He will oversee the production process, production equipment, and production staff’s activities.

Mark has recruited a business management expert, Emily Martinez, to be the company’s Chief Operating Officer and help oversee the production business operations. Emily will handle the day-to-day operations, including budgeting, client relationships, and logistics.

Mark and Emily have recruited an experienced marketing director, Steve Smith, to become a member of the ABQ Reels Video Production management team. Steve is a graduate of the University of California with a bachelor’s degree in marketing. Mark and Emily rely on Steve’s expertise to execute the company’s marketing plan and advertising strategies.

Success Factors

ABQ Reels Video Production will be able to achieve success by offering the following competitive advantages:

• Skilled team of production experts and project management professionals who will oversee each project from start to finish and ensure the customers’ needs are met.
• ABQ Reels Video Production is able to provide production services for a wide range of purposes using the latest production technology.
• The company is able to leverage the expertise of its leadership team to provide customers with the best possible production services from knowledgeable industry veterans.

Financial Highlights

ABQ Reels Video Production is seeking $800,000 in debt financing to launch its production business. The funding will be dedicated towards securing the production facility and purchasing production equipment and supplies. Funding will also be dedicated towards three months of overhead costs to include payroll of the staff and marketing expenses. The breakout of the funding is below:

• Facility build-out: $340,000
• Production equipment, supplies, and materials: $280,000
• Three months of overhead expenses (payroll, utilities): $160,000
• Marketing costs: $10,000
• Working capital: $10,000

The following graph below outlines the pro forma financial projections for ABQ Reels Video Production.

Company Overview

Who is abq reels video production.

ABQ Reels Video Production is a newly established production company in Albuquerque, New Mexico. The company will provide a full suite of production services for small scale video projects in the Albuquerque area. ABQ Reels will be the go-to production studio in Albuquerque for its tailored approach and client-first focus.

The company will be the ultimate choice for customer service while providing the highest quality standards for production in the area. ABQ Reels Video Production will be able to guarantee the highest quality standards for all of its productions thanks to the latest and most innovative production equipment and oversight from industry veterans. The company’s team of highly qualified professionals experienced in production and project management will oversee each project from start to finish.

ABQ Reels Video Production History

ABQ Reels Video Production is owned and operated by Mark Johnson, an entertainment industry veteran who has over 25 years of experience working in video production. Now that Mark has experienced managing a production business, he is ready to start his own company, ABQ Reels Video Production. Mark is confident that his video production skills, combined with his understanding of business management, will enable him to run a profitable production company of his own. Mark is recruiting a team of highly qualified professionals to help manage the day-to-day complexities of video production – sales and marketing, client relationship management, budgeting, financial reporting, and project management.

Since incorporation, ABQ Reels Video Production has achieved the following milestones:

• Registered ABQ Reels Video Production, LLC to transact business in the state of New Mexico
• Has identified the ideal facility for lease to set up the business operations
• Reached out to numerous contacts to include former colleagues, employees, and production assistants to start putting a skilled core team together
• Began recruiting a staff of accountants, production assistants, and sales personnel to work at ABQ Reels Video Production

ABQ Reels Video Production Services

Industry analysis.

The production industry in the U.S. is a $26B market with approximately 6.3K businesses and over 46K employees nationwide. The outlook for the production market is positive with demand expected to remain steady over the next several years.

The production industry can be categorized by type of production. Some of the most common types of production companies are film production, TV production, commercial production, and post-production. Production companies perform a wide range of services including scripting, casting, hiring, planning, and logistics. Some production companies handle large-scale projects like major motion pictures, while others specialize in small-scale projects like commercials.

Some of the most significant demand drivers are the growing popularity of streaming content, consumer preferences for viewing on smartphones, and social media influence. All of these factors have contributed to increased demand for content, which leads to increased demand for production services.

Customer Analysis

Demographic profile of target market.

ABQ Reels Video Production will target businesses and individuals in Albuquerque that are looking for video production services for small-scale projects such as video for commercials and social media.

The precise demographics for Albuquerque, New Mexico are:

Customer Segmentation

ABQ Reels Video will primarily target the following customer profiles:

• Small Businesses in Albuquerque in need of commercial production services
• Mid-Sized Businesses in Albuquerque in need of commercial production services
• Individuals and groups of people in Albuquerque who need video production services for small personal or professional projects

Competitive Analysis

Direct and indirect competitors.

ABQ Reels Video Production will face competition from other companies with similar business profiles. A description of each competitor company is below.

VIEWR 1st Video Production

VIEWR 1st Video Production is one of the largest commercial production companies in Albuquerque, New Mexico. The company provides a variety of production services including content development, logistics, and film crew recruitment. VIEWR 1st Video Production specializes in creating commercials for local businesses to use in their advertising campaigns. VIEWR 1st Video Production aims to deliver high quality production through the latest production equipment and experienced crew. VIEWR 1st Video Production’s team of production professionals are well-known in the area for their outstanding commercial work.

Albuquerque’s Best Productions

Albuquerque’s Best Productions is a small production company established in 2005 that caters to local businesses and residents in Albuquerque, New Mexico and surrounding areas. Albuquerque’s Best Productions provides pre-to-post-production services for projects of various sizes and purposes. The company also provides tours of the production facility to local residents, businesses, and schools for a nominal fee. The owners of Albuquerque’s Best Production are former production assistants of some of the biggest production companies in the nation so they understand the production process from start to finish.

SPESHAL EFFEX

SPESHAL EFFEX is a trusted Albuquerque, New Mexico-based production company that provides superior production services to clients in Albuquerque and the surrounding areas. Established in 2018, the company is able to provide a wide variety of production services using its state-of-the-art production equipment. SPESHAL EFFEX serves local business owners, students, and individuals on small-to-large scale video projects. The company prides itself on being the number one choice for innovative special effects used in all of its videos.

Competitive Advantage

ABQ Reels Video Production will be able to offer the following advantages over their competition:

Marketing Plan

Brand & value proposition.

ABQ Reels Video Production will offer the unique value proposition to its clientele:

• The company is able to leverage the expertise of its leadership team to provide customers with the best possible production process from knowledgeable industry veterans and project management professionals.

Promotions Strategy

The promotions strategy for ABQ Reels Video Production is as follows:

Social Media Marketing

The company’s marketing director will create accounts on social media platforms such as LinkedIn, Twitter, Instagram, Facebook, TikTok, and YouTube. He will ensure ABQ Reels Video Production maintains an active social media presence with regular updates and fun content to get customers excited about production.

Professional Associations and Networking

ABQ Reels Video Production will become a member of professional associations such as the American Production Company Association, Albuquerque Video Production Society, and the New Mexico Video Production Association. The leadership team will focus their networking efforts on expanding the company’s vendor and client network.

Print Advertising

ABQ Reels Video Production will invest in professionally designed print ads to display in programs or flyers at industry networking events. The company will also send direct mailers to local businesses who are in the target market.

Website/SEO Marketing

ABQ Reels Video Production will utilize the in-house marketing director that designed the print ads to also design the company website. The website will be well organized, informative, and list all the services that ABQ Reels Video is able to provide. The website will also list information on the company’s events and client success stories.

The marketing director will also manage ABQ Reels Video’s website presence with SEO marketing tactics so that when someone types in a search engine “Albuquerque production company” or “video production near me”, ABQ Reels Video Production will be listed at the top of the search results.

The pricing of ABQ Reels Video Production will be moderate and on par with competitors so customers feel they receive value when purchasing the company’s production services.

Operations Plan

The following will be the operations plan for ABQ Reels Video Production.

Operation Functions:

• Mark Johnson will be the CEO and Production Manager of the company. He will oversee the production staff, production process, and the production equipment. Mark has spent the past year recruiting the following staff:
• Emily Martinez – Chief Operating Officer who will manage the budgeting, vendor and customer relationships, and day-to-day logistics.
• John Miller – Accountant/Bookkeeper will provide all accounting, tax payments, and monthly financial reporting.
• Steve Smith – Marketing Director who will oversee all marketing strategies for the company and manage the website, social media, and outreach.

Milestones:

ABQ Reels Video Production will have the following milestones complete in the next six months.

12/1/2022 – Finalize lease on the facility

12/15/2022 – Finalize personnel and staff employment contracts for the ABQ Reels Video Production management team

1/1/2023 – Begin build-out of the facility, purchase equipment, and set up for production

1/15/2023 – Begin networking at industry events and implement the marketing plan

2/15/2032 – Finalize contracts for initial production assistants, sales personnel, and office staff

3/15/2023 – ABQ Reels Video Production officially opens for business and starts taking on projects

Financial Plan

Key revenue & costs.

The revenue drivers for ABQ Reels Video Production are the fees charged to customers in exchange for the company’s production services. When it comes to pricing, the studio will monitor production costs, average prices charged by competitors, and market demand to ensure its prices will generate a healthy profit margin.

The cost drivers will be the overhead costs required in order to staff a production company. The expenses will be the payroll cost, utilities, equipment and supplies, and marketing materials.

Funding Requirements and Use of Funds

Key assumptions.

The following outlines the key assumptions required in order to achieve the revenue and cost numbers in the financials and in order to pay off the startup business loan.

• Average number of minutes produced per month: 12,000
• Average fees per month: $36,000
• Overhead costs per year: $840,000

Financial Projections

Income statement.

Balance Sheet

Cash Flow Statement

Production Company Business Plan FAQs

What is a production company business plan.

A production company business plan is a plan to start and/or grow your production company business. Among other things, it outlines your business concept, identifies your target customers, presents your marketing plan and details your financial projections.

You can easily complete your production company business plan using our Production Company Business Plan Template here .

What are the Main Types of Production Companies?

There are a number of different kinds of music companies , some examples include: Feature Film Production, Commercial Production, Post Production, and Niche Production Company.

How Do You Get Funding for Your Production Company Business Plan?

Production companies are often funded through small business loans. Personal savings, credit card financing and angel investors are also popular forms of funding. This is true for a business plan for a film production company  or a film production company business plan.

What are the Steps To Start a Production Company?

Starting a production company  can be an exciting endeavor. Having a clear roadmap of the steps to start a business will help you stay focused on your goals and get started faster.

1. Develop A Video Production Business Plan - The first step in starting a business is to create a detailed video production company business plan that outlines all aspects of the venture. This should include potential market size and target customers, the services or products you will offer, pricing strategies and a detailed financial forecast.  

2. Choose Your Legal Structure - It's important to select an appropriate legal entity for your production company . This could be a limited liability company (LLC), corporation, partnership, or sole proprietorship. Each type has its own benefits and drawbacks so it’s important to do research and choose wisely so that your production company  is in compliance with local laws.

3. Register Your Production Company   - Once you have chosen a legal structure, the next step is to register your production company  with the government or state where you’re operating from. This includes obtaining licenses and permits as required by federal, state, and local laws. 

4. Identify Financing Options - It’s likely that you’ll need some capital to start your production company , so take some time to identify what financing options are available such as bank loans, investor funding, grants, or crowdfunding platforms. 

5. Choose a Location - Whether you plan on operating out of a physical location or not, you should always have an idea of where you’ll be based should it become necessary in the future as well as what kind of space would be suitable for your operations. 

6. Hire Employees - There are several ways to find qualified employees including job boards like LinkedIn or Indeed as well as hiring agencies if needed – depending on what type of employees you need it might also be more effective to reach out directly through networking events. 

7. Acquire Necessary Production Company Equipment & Supplies - In order to start your production company , you'll need to purchase all of the necessary equipment and supplies to run a successful operation. 

8. Market & Promote Your Business - Once you have all the necessary pieces in place, it’s time to start promoting and marketing your production company . This includes creating a website, utilizing social media platforms like Facebook or Twitter, and having an effective Search Engine Optimization (SEO) strategy. You should also consider traditional marketing techniques such as radio or print advertising.

Average Cost of Production

The per-unit cost incurred by a business to produce a product or offer a service

What is Average Cost of Production?

Average cost of production refers to the per-unit cost incurred by a business to produce a product or offer a service. Production costs may include things such as labor, raw materials, or consumable supplies. In economics, the cost of production is defined as the expenditures incurred to obtain the factors of production such as labor, land, and capital, that are needed in the production process of a product.

For example, the production costs for a motor vehicle tire may include expenses such as rubber, labor needed to produce the product, and various manufacturing supplies. In the service industry, the costs of production may entail the material costs of delivering the service, as well as the labor costs paid to employees tasked with providing the service.

Types of Costs of Production

There are various types of costs of production that businesses may incur in the course of manufacturing a product or offering a service. They include the following:

1. Fixed costs

Fixed costs are expenses that do not change with the amount of output produced. This means that the costs remain unchanged even when there is zero production or when the business has reached its maximum production capacity. For example, a restaurant business must pay its monthly, quarterly, or yearly rent regardless of the number of customers it serves. Other examples of fixed costs include salaries and equipment leases.

Fixed costs tend to be time-limited, and they are only fixed in relation to the production for a certain period. In the long term, the costs of producing a product are variable and will change from one period to another.

2. Variable costs

Variable costs are costs that change with the changes in the level of production. That is, they rise as the production volume increases and decrease as the production volume decreases. If the production volume is zero, then no variable costs are incurred. Examples of variable costs include sales commissions , utility costs, raw materials, and direct labor costs.

For example, in a clothing manufacturing facility, the variable costs may include raw materials used in the production process and direct labor costs. If the raw materials and direct labor costs incurred in the production of shirts are $9 per unit and the company produces 1000 units, then the total variable costs are $9,000.

3. Total cost

Total cost encompasses both variable and fixed costs. It takes into account all the costs incurred in the production process or when offering a service. For example, assume that a textile company incurs a production cost of $9 per shirt, and it produced 1,000 units during the last month. The company also pays a rent of $1,500 per month. The total cost includes the variable cost of $9,000 ($9 x 1,000) and a fixed cost of $1,500 per month, bringing the total cost to $10,500.

4. Average cost

The average cost refers to the total cost of production divided by the number of units produced. It can also be obtained by summing the average variable costs and the average fixed costs. Management uses average costs to make decisions about pricing its products for maximum revenue or profit.

The goal of the company should be to minimize the average cost per unit so that it can increase the profit margin without increasing costs.

5. Marginal cost

Marginal cost is the cost of producing one additional unit of output. It shows the increase in total cost coming from the production of one more product unit. Since fixed costs remain constant regardless of any increase in output, marginal cost is mainly affected by changes in variable costs. The management of a company relies on marginal costing to make decisions on resource allocation, looking to allocate production resources in a way that is optimally profitable.

For example, if the company wants to increase production capacity, it will compare the marginal cost vis-à-vis the marginal revenue that will be realized by producing one more unit of output. Marginal costs vary with the volume of output being produced. They are affected by various factors, such as price discrimination , externalities, information asymmetry, and transaction costs.

How to Calculate Average Cost

The first step when calculating the cost involved in making a product is to determine the fixed costs. The next step is to determine the variable costs incurred in the production process. Then, add the fixed costs and variable costs, and divide the total cost by the number of items produced to get the average cost per unit.

For the company to make a profit, the selling price must be higher than the cost per unit. Setting a price that is below the cost per unit will result in losses. It is, therefore, critically important that the company be able to accurately assess all of its costs.

Additional Resources

Thank you for reading CFI’s guide on the Cost of Production. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

• Free Accounting Fundamentals Course
• Asymmetric Information
• Cost Structure
• Variable Overhead
• See all accounting resources

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Plan Projections

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Home > Financial Projections > Cost Structure in a Business Plan

Cost Structure in a Business Plan

What is cost structure.

Financial projections need to take account of the cost structure of a business. Cost structure simply refers to the split between variable costs and fixed costs, but can have a significant impact on whether a new start up business is successful or not.

Fixed and Variable Costs

First a few definitions. A variable cost is a cost which changes in direct proportion to any production or selling activity, examples include, direct materials and labor used in manufacture, product cost, and sales commissions. On the other hand, a fixed cost is a cost which will occur whether or not a business has any production or selling activity. Fixed costs are a function of the passage of time, examples include rent, salaries, and insurance.

Low Fixed Cost Structure or High Fixed Cost Structure?

Although the cost structure of a business is to some extent fixed by the nature of the business and the type of industry in which it operates, decisions can be taken to directly influence the split between fixed and variable costs. It is important to understand that a business can have the same sales, total costs and therefore profit, but a completely different costs structure, as seen in the diagrams below.

Both businesses have the same sales, total costs, and profit, however, the first business has a high fixed cost structure compared to the low fixed cost structure of the second business.

Business Plan Cost Structure and Break Even

Consider as an example the two start up businesses shown in the table below. The financial projections of the first business show a high fixed cost structure. the business plans to start by investing heavily in production facilities, machinery and equipment to manufacture and distribute its own product. The consequence of this decision is high fixed costs but lower variable costs.

The second business proposes a lean start up. It plans to have the manufacture and distribution outsourced to a third party, its needs smaller premises and less investment in machinery and equipment and therefore has lower fixed costs but correspondingly higher variable costs, as payments need to be made to the third parties for manufacture and distribution.

Effect of Cost Structure on Break Even Calculations

In each case, the number of units sold (6,000), selling price (12,00), total costs (65,000), and profits (7,000) are identical. Using this information and the break even formula, the break even point can be calculated for each of the start up businesses.

The break even formula is:

and the break even units are given by the formula:

The results of the calculations using the formulas are summarized in the table below.

We can see that even though everything else is the same, the financial structure of the business has resulted in a completely different break even position.

For the low fixed cost structure business, only 3,083 units need to be sold at 12.00 to reach break even as shown in the diagram below.

In contrast for the high fixed cost business 5,028 units need to be sold to reach break even as indicated in the diagram below.

In order to break even, the high fixed cost business needs to sell 1,945 (63%) more units than the low fixed cost business.

The conclusion is that when producing financial projections for a start up business, in order to reduce the break even point to an acceptable level, the cost structure should aim to keep the fixed costs as low as possible.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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Breaking Down Production Costs: A Guide for Small Businesses

Unlock smarter pricing and profitability with our guide to understanding all your production costs—simplified. 💡📈

Introduction

If you're serious about running a sustainable and profitable business, having a thorough grasp of your production costs is non-negotiable. In this guide, we'll simplify the complexities of direct, indirect, and overhead costs for you, demonstrating why understanding these elements is vital for your business's success.

1. What Are Production Costs?

Production costs are the expenses you incur to create a product or deliver a service. These costs directly affect your pricing strategy, profitability, and even your business's scalability. Think of them as the ingredients needed to make the perfect cake—or in your case, the perfect product or service.

2. Types of Production Costs

Direct costs.

Direct costs are those expenses that are directly tied to the production of your goods or services—think raw materials and labor. For instance, if you run a bakery, the cost of flour, sugar, and labor are your direct costs. Get this wrong, and you could either be overcharging your customers or, worse, losing money on every sale.

Indirect Costs

Unlike direct costs, indirect costs are not directly linked to production. These include utilities, rent, and maintenance. Let's say you have a co-working space where you rent out desks. The electricity bill for the entire floor is an indirect cost that needs to be allocated to each rentable desk to determine its profitability.

Overhead Costs

Overhead costs are a subset of indirect costs that keep your business running but don't directly contribute to earnings—like administrative expenses, marketing, and sales. There is a difference between manufacturing and administrative overhead. Manufacturing overhead includes costs like factory upkeep, while administrative overhead involves costs like office supplies for the management team.

3. Calculating Production Costs

Navigating the costs of production doesn't have to be daunting. By systematically breaking down the various components, you can arrive at a clear understanding of your total expenses. Here's a step-by-step guide to help you calculate production costs with illustrative examples:

• Identify Direct Costs These are costs that go directly into the production of your goods or services. For instance, if you own a bakery, the flour and sugar needed to make cakes would be direct costs.

Example : In a bakery, $50 for flour and $20 for sugar for one batch of cakes.

• Identify Indirect Costs :These are ongoing expenses that support your business but are not directly related to the production of individual products.

Example : The monthly electricity bill of $300 for running your bakery's ovens and lighting.

• Identify Overhead Costs : These are additional expenses necessary for the overall operation of your business, like administrative salaries, marketing, and utilities.

Example : $1,000 for marketing and $500 for administrative salaries in a month.

• Allocate Costs :Here, you'll distribute your indirect and overhead costs over your total number of products to get a cost-per-item. Different businesses use different allocation methods.

Example : If your bakery produces 1,000 cakes a month, and the total indirect and overhead costs are $1,800, then each cake carries an additional cost of $1.80.

• Total Up :This is where you sum up all the costs—direct, indirect, and overhead—to arrive at the total production cost per item.

Example : For each cake, add the cost of flour ($50), sugar ($20), indirect costs ($1.80), and overhead costs ($1.80) to get a total cost of $73.60.

By following these steps, you'll gain a better understanding of your production costs, which in turn will help you set appropriate pricing and make more informed business decisions.

To provide a clearer illustration, let's look at the production cost for making a batch of cakes in a bakery.

ItemCostFlour$50Sugar$20Electricity (Indirect Cost)$0.30Administrative Salary (Overhead)$0.50Marketing (Overhead)$1.00Total Cost per Cake$73.60

By breaking down the costs, you can see where your money is going and how each type of expense contributes to the total cost of producing a batch of cakes. This itemized list makes it easier to understand your production costs, helping you make more informed decisions for your business.

4. Bill of Materials: Your Production Recipe

Think of a Bill of Materials (BOM) as the recipe for your product. This comprehensive list outlines all the materials, ingredients, and other resources you need to create a product.

In our bakery example, the BOM would list out the exact type and amount of flour, sugar, and any other ingredients you'd need. A well-crafted BOM is essential for accurately allocating direct, indirect, and overhead costs, enabling you to pinpoint the total production cost per batch.

Cake Bill of Materials (BOM)

ItemMaterial/IngredientQuantityUnit Cost ($)Total Cost ($)FlourAll-Purpose10 lbs5.0050.00SugarGranulated4 lbs5.0020.00ElectricityUtilityPer batch0.300.30Administrative SalaryOverheadPer batch0.500.50MarketingOverheadPer batch1.001.00Total Cost per Batch72.80

This BOM outlines the costs involved in producing a single batch of cakes. While it focuses mainly on direct material costs, it also accounts for a simplified view of indirect and overhead costs to give a holistic understanding of production costs.

By understanding your Bill of Materials, you can identify areas for cost reduction, more efficient sourcing of materials, or optimization of production processes.

5. Cake Production Cost: A Complete Example

Ready to see how it all comes together? Let's walk through a real-life example of how to calculate the total cost of making a cake. We'll break down each type of cost—materials, labor, and those extra overhead expenses—to show you just how they all add up. This way, you'll know exactly where your money's going and maybe even find a few ways to save.

Direct Material Costs (BOM)

ItemMaterial/ComponentQuantityUnit Cost ($)Total Cost ($)FlourAll-purpose2 cups0.501.00SugarGranulated1 cup0.400.40EggsLarge30.200.60ButterUnsalted1 stick0.800.80Total Direct Material Cost2.80

Direct Labor Costs

TaskLabor TypeTime (hrs)Hourly Rate ($)Total Cost ($)MixingBaker0.515.007.50BakingBaker1.015.0015.00DecorationDecorator0.512.006.00Total Direct Labor Cost28.50

Indirect Costs (Overhead)

Overhead TypeAllocation MethodCost ($)RentPer cake2.00UtilitiesPer cake1.00Equipment DepreciationPer cake0.50Total Indirect Cost

Final Calculation: Complete Cost Breakdown

Cost ComponentCost ($)Total Direct Material Cost2.80Total Direct Labor Cost28.50Total Indirect Costs3.50Total Production Cost34.80

By adding up these components, you'll find that the total production cost for a single cake is $34.80.

This detailed breakdown helps you fully understand where your production costs are going, an essential part of running a successful cake-making business.

6. Importance of Understanding Production Costs

While it may seem straightforward, the significance of fully grasping your production costs can't be overstated. This isn't just a matter of setting the right price for your product; it's an essential foundation for your entire business strategy. Here's why:

• Pricing Strategy First and foremost, understanding production costs is crucial for setting a price that not only covers these costs but also leaves room for profit. Price too low, and you could be operating at a loss; price too high, and you might drive away potential customers.
• Budgeting and Financial Planning By breaking down each element of your production costs, you can create a more accurate and flexible budget. This aids in financial planning and helps you to allocate resources more effectively. In the long term, this can lead to greater profitability and less financial stress.
• Competitive Edge Knowing the nitty-gritty of your production costs also gives you a competitive advantage. It allows you to identify areas for cost-saving, whether that's in sourcing cheaper materials without sacrificing quality or streamlining your production process. These savings can either boost your bottom line or be passed onto the customer, making your products more attractive in a competitive market.
• Decision-Making With a deep understanding of production costs, you're better equipped to make informed decisions. Whether it's deciding to introduce a new product line, scale production, or even exit a market, you'll be making choices based on solid financial understanding rather than guesswork.

So, as you can see, getting a handle on production costs isn't just a numbers game—it's a pivotal part of your broader business strategy.

7. Production Costs and Break-even Analysis

The concept of a "break-even point" might sound like jargon, but it's a critical milestone that every business, big or small, aims to reach. Simply put, the break-even point is the moment when your total revenue equals your total costs—meaning you're not losing money, but you're not making any either. Here's why understanding your production costs is pivotal for this key business metric.

• The Role of Production Costs in Break-even Analysis Knowing the specifics of your production costs is the first step to accurately calculating your break-even point. The idea is to find out how many units of your product you must sell to cover all your costs. The more accurately you've calculated your production costs, the more precise your break-even point will be.
• Why Break-even Analysis Matters Reaching the break-even point is essentially the first sign of business sustainability. From there on, each additional unit sold is pure profit. But if you don’t know your production costs, you can't accurately determine when you'll start making a profit. That makes break-even analysis not just a nice-to-know, but a must-know for business owners.
• Dynamic Monitoring Your break-even point isn't set in stone. As production costs change due to fluctuating material prices, labor rates, or overhead costs, so will your break-even point. Continuous monitoring and updating of your production costs will allow you to adjust your break-even calculations, helping you stay on track toward profitability.
• Decision Making and Strategy An accurate break-even analysis can inform various strategic decisions, such as setting sales targets, pricing strategies, and marketing campaigns. It's an invaluable tool for evaluating the financial viability of new projects or product lines, helping you decide whether to go ahead or reconsider.
• Limitations and Considerations While break-even analysis is a helpful tool, it's important to remember that it simplifies a complex reality. For example, it assumes that all units are sold at the same price and that costs are constant, which may not always be the case. However, knowing your production costs makes these calculations more reliable, even if they are approximations.

In summary, understanding your production costs plays a fundamental role in calculating your break-even point, which is integral to strategic planning and long-term business sustainability.

Getting a handle on your direct, indirect, and overhead costs is more than just smart—it's essential for your business to thrive. It influences your prices, your profits, and even your future plans. So take the time to get it right, and you'll be setting yourself up for success.

Stressed about juggling all those production costs? Let Cashflow's simple, cloud-based accounting tools do the heavy lifting. Our user-friendly Production Order feature keeps tabs on all your costs, so you can put your energy into growing your business instead. Give Cashflow a try and make your life easier!

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Calculating the Production Budget (Formula & Example Included)

Manufacturers can’t just produce as many widgets as they want. There are financial constraints, of course, but there is also demand to think about. Making more than the market will support is going to lead to extra costs in production and warehouse that can bust the bank. That’s why a production budget is essential.

But what is a production budget and what should be included in one? We’ll answer those questions and then show you how to make a production budget so you’re always producing what your customers want. We’ll explain the formula for a production budget and even provide an example so you’ll fully understand the concept.

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Capacity Planning Template

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What Is a Production Budget?

A production budget is a document that calculates the number of units of a product will be manufactured to meet the estimated sales demand. Manufacturers make a production budget quarterly, though sometimes they will also be produced on a monthly basis.

A production budget doesn’t involve inventory costs. It is merely a budget of units of a specific product that needs to be produced over a time period. In order to produce the right amount of product units, manufacturers need to forecast their future sales figures and also include the number of units needed for them to sell in order to make a profit after labor and material costs. A production budget is a component of the production plan , which is a more thorough document that describes other aspects of production such as scheduling and costs.

There is usually an overstock that is placed in inventory in case of extra sales or to have a jump on the next quarter’s production. The production budget is usually made for a push manufacturing system, in which businesses produce products based on demand planning, and used in material requirements planning.

Once you have calculated the production budget you have to make a production plan. Project management software can help. ProjectManager is award-winning project management software that can help you plan production cycles on kanban boards, which are visual workflow tools. Our customizable feature lets you add as many steps in your production as needed. You can attach important files, set priority, track costs and add tags to make tasks easier to find and managers can spot roadblocks and clear them before they delay work. Kanban boards also make order fulfillment more accurate for your customers. Get started with ProjectManager today for free.

What Should Be Included In a Production Budget?

In order to have a more accurate production budget there are many factors to consider. You want to have an accurate forecast of future sales as well as your starting and ending inventory. Here is what should be included in a production budget with a short explanation.

Beginning Inventory

Your beginning inventory is the number of units you have left over from the previous production period. Another way to say that is it’s the ending inventory for the previous budgetary period, which is a month, quarter, year or some other time period in which you are manufacturing these units. You can use our free inventory template for Excel to track inventory items.

Sales Forecast

The sales forecast is done before the production budget. It is an estimate of the amount of units the manufacturer needs to see over a period. This forecast includes the anticipated demand for the product from customers, but also the number of units that must be sold to produce a profit for the company.

Ending Inventory

As explained above, the ending inventory is what you have left over from the previous production period. This will then be the beginning inventory for the next budgetary period. It’s always a wise inventory management decision to hold some extra inventory in stock that can be added to the ending inventory, which is called safety stock.

There are other things that are often included in a production inventory. For example, the production required, which is the amount of product that you’re going to make during a period of time after the beginning inventory, ending inventory and sales forecast have been taken into account. You’ll also want to specify the time frame, which is the time interval used to calculate the production budget.

How to Make a Production Budget

Making a production budget is an essential part of the manufacturing process . When it’s done the business manager will know the number of units to produce over a specific period of time. Before that, of course, you have to make a production budget, which you can do by following these five steps.

1. Establish the Time Frame Your Production Budget Will Cover

You first need to choose the product that will go into production and the time period for that production. The time period will depend on such factors as the characteristics of the product being produced and the forecast for the number of units that are expected to be sold. In general, when making a production budget for a shorter period of time you’ll have a more accurate forecast than when covering a longer period.

2. Make a Sales Forecast for That Period

By forecasting the sales over a period of time you can anticipate the number of units that you’ll have to make to meet customer demand and stay profitable. To have a more accurate forecast of sales use previous sales records and research current market trends. Your sales forecast can also include the estimated profit, as noted above, which you can figure out by subtracting the total cost of production from the total sales figures.

3. Measure Your Production Capacity

Now you’ll want to measure the actual amount of units you’ll produce over the timeframe for your production budget. Looking at previous production capacity and getting an average production capacity based on that data will help you make a more accurate estimate and a realistic production schedule . You can also multiply the number of workstations capacity by the available time in a work shift.

4. Check Your Beginning Inventory

You’ll need to know the amount of inventory you have on hand at the beginning of the time period in which you’ll be going into production. The right amount of inventory will depend on the product you’re making and the overall strategy of the company. Having a large inventory can help you if there is a sudden increase in demand, but it can hurt if demand decreases and you have to warehouse those unsold products, which might never sell or do so for a reduced price.

5. Calculate the Required Production

When you’ve determined the beginning and the ending inventory over the time period of production for the product you’re manufacturing, as well as forecast sales numbers, you now have the data necessary to figure out your production budget. There’s a production budget formula that you can follow, which we’ll get to in the next section.

Free Capacity Planning Template

Once you’ve defined your production budget, you’ll need to carefully manage your resources and track your costs. This free capacity planning template for Excel will help you do just that. Calculate your resource utilization, track costs and meet consistently meet demand.

Production Budget Formula

The production budget formula can be determined by multiplying the cost of manufacturing and selling a unit to the estimated number of units you sell. That is subtracted by the total cost of manufacturing and selling those units from the money you expect to get from the sale of those units. Another way to figure this out is by following the formula below.

Required Production = Sales Forecast Expected Units + Desired Ending Inventory – Beginning Inventory

Production Budget Example

To get a fuller understanding of what a production budget is, let’s look at a production budget example to see how the formula works in a real-life situation. Imagine Acme Manufacturing is a producer of widgets that are used in the manufacturing of automobiles. Acme wants to create a production budget for its first quarter of the year.

Amce does a beginning inventory and it figures out that there are 1,000 widgets in stock. With historical data it determines that the company usually sells about 10,000 widgets in the first quarter. But there could be an increase in demand, according to market research, therefore, Acme wants to have an additional 2,000 widgets on hand at the end of the quarter. Therefore, the product budget would be as follows.

Required Production Units = 10,000 + 2,000 – 1,000 = 11,000 Widgets

Now Acme knows that it needs to produce 11,000 widgets for the first quarter after considering its forecasted sales, current inventory and planned inventory.

How to Track Your Production Process with ProjectManager

Of course, once you have your production budget you’ll need to go into production and there’s a lot that could go wrong during that production cycle. That’s why project management software is so useful, it can help you track your work to make sure you’re staying on schedule. ProjectManager is award-winning project management software that tracks costs, time and resources in real time to help managers make more insightful decisions. Here are just two features that can help you get a high-level overview of production and your labor costs.

Track Your Production With Real-Time Dashboards

To make sure you’re keeping to the production budget you need to monitor the production line. Our real-time dashboard gives you a high-level view of production, automatically capturing production metrics such as time, cost and workload and then displaying them on easy-to-read graphs and charts. Unlike lightweight alternatives, our live dashboard doesn’t require lengthy setup time. Just toggle over. It’s ready when you need it.

Monitor Your Labor Costs With Secure Timesheets

If your labor costs spike due to delays in production, then your production budget is going to be useless. You need to stay on track and one way to monitor that is by keeping track of your labor costs. Our secure timesheets are easy to use, automatically adding tasks or copying over those from the week before if they’re the same. Managers can see how many hours each team member has been working on their tasks to make sure they’re keeping to the schedule.

That’s just two ways to monitor your production line. There are also customizable reports , such as status reports and reports on timesheets, variance and more. You can also use resource management features to set availability of your work force and balance their workload by keeping an eye on the color-coded workload chart that makes it easy to see who’s overallocated and reallocate resources right from the chart.

ProjectManager is online project management software that connects everyone on the project team in real time. They can collaborate from the office, the factory floor or anywhere in between, sharing files, commenting at the task level and more. Join teams from Avis, Nestle and Siemens who use our software to succeed. Get started with ProjectManager today for free.

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Production Costs: Definition & Formula

Operating a small business can come with lots of exciting opportunities. You have goals to provide the best possible product or service to your customers. But creating a product or service comes with certain costs. 

One of the biggest considerations is the production costs. Understanding how these costs can affect your bottom line is critical for business success. So how do production costs really work? We put together this guide to break down everything that you need to know. We also included a formula for your calculations to help stay on track. 

Keep reading to find out everything about production costs and how they can affect your business. 

KEY TAKEAWAYS

• Production costs are the total amount of your fixed and variable costs .
• Production costs can include a wide variety of expenses. These can include raw materials, labor, general overhead, and supplies.
• To find the total product costs, you can add together any labor costs and total direct materials.

What Are Production Costs? 

When you produce a product or service, production costs are any expenses incurred along the way. It’s all going to depend on the type of product or service and the industry that you’re in. 

Some of the most common production costs can include: 

• Raw materials 
• Equipment 
• Supplies 
• Overhead 

Typically, production costs can get associated with a business that has high inventory levels, such as a manufacturer. That said, these costs still affect many different types of businesses. For example, service-based businesses, retailers, and distributors monitor how much production costs.

Production costs are important to understand since they’re connected with generating revenue. Plus, they can also account for most business expenses.

But for a production cost to get labeled as an expense, it must get incurred when producing the product or service. Think about it in terms of manufacturing businesses, for example. Production might include things like rent, direct labor costs, raw materials, and machinery. 

But on the flip side, a software company might have different production costs. These could be things such as web hosting, third-party applications, and software licenses. 

Increasing your production costs means that you’re going to see a decrease in your cash on hand. This is why these types of production cost expenses will impact cash flow and the overall pricing structure. 

It’s also important to recognize that simply reducing production costs won’t necessarily generate more profit. There’s always a need to have certain raw materials and labor to ensure your product or service is high-quality. 

Balancing all of these demands, like production costs and projected revenue, is a critical element of any business’s success. 

Different Types of Production Costs 

It was mentioned above, but the type of business you operate and the industry you’re in can impact production costs. That said, there are typically five primary types of costs to know and understand. 

1. Fixed Costs 

Fixed costs, as the name suggests, are always going to remain the same. They can also get referred to as indirect costs or overhead. And they always stay the same regardless of the number of products or services you produce. 

Types of expenses like rent, business equipment, and monthly salaries are good examples of fixed costs. 

2. Variable Costs 

Variable costs will have price fluctuations depending on if there are changes in production. If production volume increases, variable costs will also increase. If production volume decreases, the costs will decrease. Keep an eye on things like operating costs and energy prices.

A variable cost could be packaging, shipping, or raw materials. 

3. Total Cost 

When you add together both the variable costs and fixed costs they’re going to equal the total cost. Essentially, this is the total cost incurred for production including any changes to production volume. 

4. Average Cost

To determine the average cost, you simply divide the total cost of production by the total unit of output. It can also get referred to as the unit cost. Basically, it’s how much it costs you to produce a single product or service, or the cost per unit. 

Understanding average cost is an effective way to help determine the final selling price with details from the balance sheet. 

5. Marginal Cost

When you produce an additional unit, you’re going to see an incremental increase in your total cost. This is the marginal product cost and they’re most often related to variable costs. 

Marginal costs will help find the ideal and most optimum level of production for your product or service. 

How Do You Calculate Production Costs? 

The good news is that calculating your production costs is relatively simple. All you need to do is add any of your fixed costs and variable costs together. To calculate the cost of production expenses, you can use this formula:

Keep in mind that any fixed or variable costs you include must get incurred while producing your product or service. Just add the total fixed costs from a specific period of time to the total variable costs over the same period.

You’re also able to use the following formula to determine the specific production costs per unit:

Once you find out your production costs using the first formula outlined above, you can divide it by the total number of units produced during the same period. This formula can be a great way to find out how much it costs to produce a single unit, which can allow you to break down your production costs further. 

Summary 

Understanding how business production costs work is a critical part of any type of company. It’s going to impact everything from the suppliers you use to the type of product or service you produce. Plus, they’re going to help determine the final price point that you offer your product or service to your customers. 

Production costs might vary depending on your type of business and the industry that you’re in. But you can typically find five common types. These include fixed costs , variable costs, total costs, average costs, and marginal costs. 

Doing proper calculations will help with decision-making and increase business sales. You can find new opportunities and areas for improvement so you can operate at an optimal level.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.

Frequently Asked Questions

Let’s say a furniture company has a demand for patio sets. Fixed costs might include equipment, warehouse rent, labor, and utilities. Variable costs could be packaging, raw materials, and freight. You would add these costs together to determine the total cost and find average and marginal costs. 

Cost of production is the expenses you incur while producing your product or service. Price relates to how much your customers are going to pay for your finished product or service.

You can look into using different suppliers to source your materials at a lower rate. Or, you could explore ways to make your production processes more efficient. Price increases aren’t always necessary if you have concerns over production costs.

To keep things simple, production costs are expenses incurred when producing your product or service. Manufacturing costs, on the other hand, relate to only the expenses that are required to make your product or service.

You can determine production costs by adding together any labor costs and direct material costs. It’s important to also consider any of your manufacturing overhead costs. These direct costs can include everything from labor, raw materials, and supplies. 

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What Are Production Costs and How to Calculate?

Understanding and managing production costs is important for businesses to know their profitability. It also helps make important financial decisions. In this article we will learn about production cost and how to calculate hem to grow our business.

• What are Production Costs?

Production costs are the expenses generated by a business when creating the goods or services it sells. These costs include many elements. It includes raw materials , labor, equipment, and overhead expenses like rent and utilities. In simpler terms, they are all the expenditures necessary to turn inputs into a final product.

Production costs helps businesses calculate the price at which they can sell their products to make a profit. Companies can improve their operations and increase profits by managing these costs.

• Understanding Production Costs

Production costs are a fundamental aspect of running any business that creates goods or provides services. Let's try to understand better what production costs are and why they matter.

Key Features of Production Costs:

1. raw materials.

These are the basic ingredients or components used to make a product. For a car manufacturer, it's steel and rubber.

This includes the wages paid to employees who work on making the product. In a car factory, it's the assembly line workers.

3. Overhead

These are all the other costs not directly tied to making a single product. Rent for the production building, electricity, insurance, and even the boss's salary fall into this category.

4. Variable vs. Fixed Costs

Variable costs change with the level of production. Fixed costs stay the same no matter how much you produce (like rent for the production unit).

5. Direct vs. Indirect Costs

Direct costs trace to a specific product. Indirect costs support overall production but are not linked to a single item.

6. Total Production Costs

This is the sum of all the costs involved in making a product, including raw materials, labor, overhead, and any other related expenses. It's a critical factor in setting product prices and assessing profitability.

• Importance of Cost Production

Understanding the importance of the cost of production is important for businesses to make informed decisions and succeed in the market. Here are some key points highlighting its significance:

• Knowing production costs helps in setting competitive prices. It also helps attract customers while ensuring profitability.
• It allows businesses to calculate profits by minimizing production costs from revenue.
• Identifying cost areas helps in improving resource distribution, reducing wastage, and improving efficiency.
• A clear understanding of production costs helps in creating realistic budgets and financial plans.
• Businesses can make informed choices. These are scaling production, launching new products, or discontinuing unprofitable ones.
• Types of Production Costs

Production costs are the expenses generated when creating goods or services. Understanding the many types of costs of production is important for managing a business. Let's explore these types in detail:

1. Fixed Costs

Fixed costs remain the same for any level of production. These expenses include: a. Rent b. Insurance c. Salaries of permanent employees d. Equipment depreciation

Businesses have to pay fixed costs regularly, even if they produce nothing. These costs are important for a business to function. These are not influenced by production fluctuations.

2. Variable Costs

Many costs fluctuate in direct proportion to production levels. For example, the cost of raw materials, labor for manufacturing, and packaging materials are variable costs.

When production increases, variable costs rise, and when production decreases, these costs decrease. Variable costs are directly tied to the volume of goods or services produced.

3. Semi-Variable Costs

Semi-variable costs, also known as mixed costs, have both fixed and variable components. These expenses partially depend on production levels.

For eg, a salesperson's salary may include a fixed part and a commission based on sales volume. Semi-variable costs can be a bit tricky to distribute accurately. They have elements of both fixed and variable costs.

4. Direct Costs

Direct costs are expenses associated with producing a specific product or service. We trace and attribute these costs to a particular item. For example, the cost of materials and labor used to make a smartphone is a direct cost of the smartphone's production.

5. Indirect Costs (Overhead Costs)

Indirect costs are expenses necessary for overall business operations. Although it cannot be directly linked to a specific product or service. Rent for the production facility and administrative salaries are part of indirect costs. We distribute these costs across multiple products or services using a predetermined method.

6. Operating Costs

Operating costs include all costs involved in day-to-day business operations. These include both direct and indirect costs.

These are rent, utilities, labor, materials, and maintenance expenses. Calculating operating costs helps businesses understand the overall financial health of their operations.

• Factors Affecting Cost of Production

The cost of production is a critical factor for businesses. It's influenced by many factors that can impact a business's bottom line. Understanding these factors is important for managing production costs effectively. Let's delve into the key factors that affect the cost of production formula:

1. Input Costs

Input costs are the expenses associated with the materials, labor, and equipment. It's required to produce goods or services. When the prices of raw materials, energy, or labor increase, it raises the marginal cost of production. Businesses must watch and manage input costs to remain competitive.

2. Technology and Automation

The level of technology and automation used in production can affect costs. Investing in modern machinery and automation can reduce labor costs and improve efficiency. It ultimately lowers the cost of production. However, companies must balance initial technology investments against long-term savings.

3. Economies of Scale

Economies of scale occur when production levels increase. It results in lower average production costs. As a business produces more units, it can spread fixed costs across a larger volume. It makes each unit cheaper to produce. Scaling up production can be an effective strategy for cost reduction.

4. Location and Geography

Geographic factors play a role in production costs. Access to resources, transportation costs, and local regulations can change by location. Businesses must choose their production locations carefully to improve cost efficiency.

5. Regulations and Compliance

Regulatory requirements, environmental standards, and compliance costs can significantly impact production expenses. Businesses need to invest in compliance measures. It can include safety equipment, environmental protection, and quality control processes. All of this adds to the cost of production.

6. Market Demand

Market demand influences production costs. When demand is high, businesses may need to produce more quickly. It potentially increases labor or equipment costs. Conversely, low demand can lead to excess inventory and storage expenses.

7. Supplier Relationships

The relationships with suppliers can impact production costs. Strong supplier partnerships can result in better deals on raw materials and components. Businesses that negotiate favorable terms with suppliers can reduce input costs.

8. Exchange Rates

Currency exchange rates can impact the cost of imported materials and equipment. Fluctuations in exchange rates can lead to price volatility, impacting production costs.

9. Innovation and Research

Investment in R&D and innovation can lead to the development of more cost-effective production methods . New technologies and processes can simplify operations and reduce costs over time.

10. External Factors

Natural disasters, economic crises, or supply chain disruptions can increase production costs. Businesses need contingency plans to address these unforeseen challenges.

• How to Calculate Production Cost?

Determining what is cost of production helps businesses to know the expenses associated with manufacturing goods or providing services. It helps in setting competitive prices and managing profitability. Let's break down the steps for calculating production costs in straightforward terms:

1. Identify Direct Costs

Direct costs are expenses tied to the production process. These include raw materials, labor, and manufacturing supplies. To calculate direct costs, sum up the expenses generated to obtain and process the materials. Also, include the wages of those directly working on production lines.

2. Compute Indirect Costs

Indirect costs are necessary expenses not tied to production but important for operations. Examples are rent, utilities, administrative salaries, and equipment depreciation. Calculate indirect costs by adding up all overhead expenses. It's generated during the production period.

3. Determine Variable Costs

Many costs fluctuate with the level of production. These can include expenses like electricity, shipping, and commissions. Compute variable costs by assessing how much they vary with different production levels. The more the production, the more the variable costs.

4. Include Fixed Costs

Fixed costs are constant expenses that don't change with production levels. These include rent on a factory building, equipment depreciation, or insurance. To find fixed costs, sum up all consistent expenses associated with production, regardless of the output volume.

5. Calculate Total Production Cost

Total production cost is the sum of direct, indirect, variable, and fixed costs. It represents the full expense generated to manufacture a quantity of products or provide services. Add up all the costs obtained from the previous steps to determine the total production cost.

6. Determine Cost per Unit

To find the cost per uni t, divide the total production cost by the number of units produced during a specific period. Cost per unit = Total production cost / Number of units produced

7. Review and Adjust

Regularly review your product costs calculations for accuracy. Identify opportunities to implement cost-saving measures. Make necessary adjustments if there are changes in materials prices, labor rates, or other cost factors.

8. Use Cost Information Wisely

Total product costs information is valuable. To set competitive prices, distribute resources wisely, and evaluate profitability. Use this data for pricing, supplier negotiations, and cost-effective production.

• How Are Production Costs Decided?

Production costs play an important role in shaping a business's financial landscape. Understanding how to determine these costs is important for effective cost management. Let's explore the factors that influence the decision-making process behind the cost of production:

• The choice of raw materials and supplies significantly impacts production costs. Opting for cost-effective yet high-quality materials can lower expenses.
• Labor costs are a major component of production expenses. Factors such as wages, skill levels, and workforce efficiency influence these costs.
• We consider manufacturing overhead costs, including rent, utilities, and administrative expenses.
• The volume of production often affects costs. Producing in larger quantities may lead to cost savings due to economies of scale.
• The use of advanced technology and efficient equipment can simplify production processes. It reduces labor and time costs.
• What Is the Difference Between Production Costs and Manufacturing Costs?

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Manufacturing (Production) Budget Template for Excel

Creating a manufacturing budget can feel overwhelming, but it doesn't have to be! We've developed an easy-to-use Excel template to help small businesses get a clear picture of their production costs. With this template, you can plan out each expense, from raw materials to shipping, and even see the total cost for producing a specific number of items each month. It’s all about making the budgeting process simpler and more manageable for you!

Written by:

Dr. Moina Rauf

Dr. Moina Rauf, fluent in English and Dutch, is a distinguished writer and editor with a PhD in Economics and a Bachelor’s degree in English Literature and Economics. With extensive experience in both academia and industry, she excels in elucidating complex concepts about business management, human resources policies, legal documentation, employee leaves, appointments, contracts, and workplace culture. Her proficiency in analyzing and simplifying intricate documents ensures comprehensive understanding for her audience. Published in academic journals, Dr. Rauf’s authority in her field is well-established.

Manufacturing budgeting is a critical aspect of managing a successful production operation. It involves planning and controlling financial resources to ensure efficient production processes, cost management, and profitability. This blog will delve into the key components of a manufacturing budget, providing insights and best practices for creating and managing your budget effectively.

The term “manufacturing budget” refers to a detailed financial plan that outlines the expected costs and revenues associated with the production process in a manufacturing company. This budget serves as a roadmap for managing expenses, forecasting revenues, and ensuring that the production activities align with the company’s financial goals.

To simplify the budgeting process for small businesses, we have developed an Excel template that can provide a comprehensive overview of manufacturing costs per product. One part of the  template allows you to accurately plan the product price and calculate associated manufacturing costs (raw materials, packaging, shipping, and labor expenses) by allocating percentage to each expense based on the product price. And the other part of template gives you an overview on how much it will cost to manufacture X number of items on a given month.

The template gives monthly calculation for a complete year to easily compare the changes in manufacturing costs over the months. You can adjust the scenario correction values to get detailed month-wise metrics for variable costs, overhead costs, net sales, and sales projections to support informed decision-making. Furthermore, automatic calculations and a dynamic graph gives a clear picture and data visualization of the finances.

This template is available in Excel, Google Sheets, and ODS format and allows you to choose the platform that best suits your needs.

In the following section, all key terms of the budget template are thoroughly explained to help you make the most of the template. By understanding these components, you will know exactly where and how to enter your data to ensure everything is correctly placed. This will make it easier for you to use the template and plan your company’s finances.

• Key Components of a Manufacturing Budget

Understanding the key components of a manufacturing budget is essential for managing the financial aspects of production operations. This guide will explain what these costs are in general for a manufacturing unit:

Sales and costs

Sales and Costs in a manufacturing unit encompass all the expenses and revenues related to the production and sale of goods. The key elements include:

• Product Group: These are the different categories of products that the manufacturing unit produces. Each product group may have distinct costs associated with it.
• Average Price Per Unit: This is the selling price of each unit of product. It helps in estimating the revenue generated from sales.
• % of Net Sales for Raw Materials: This percentage represents the portion of sales revenue allocated to purchasing raw materials necessary for production.
• % of Net Sales for Packaging: This is the percentage of sales revenue set aside for packaging the products. Packaging costs can include materials like boxes, labels, and protective wraps.
• % of Net Sales for Shipping Costs: This percentage covers the expenses related to distributing the finished products to customers, including transportation and logistics.
• % of Net Sales for Variable Manufacturing Salaries: This represents the portion of sales revenue used to pay the wages of workers directly involved in the manufacturing process, which may vary with production levels.

Number of items sold

The Number of Items Sold represents the sales volume, which is the total quantity of products sold over a specific period, typically broken down by month. This data is crucial for revenue estimation and production planning.

Projected sales

Projected Sales are the estimated revenue from selling the manufactured goods. This forecast is based on historical sales data, market trends, and current economic conditions. Projected sales help in planning for future production and financial performance.

Scenario correction

Scenario Correction involves adjusting projected sales based on different market scenarios, such as economic changes, new competitors, or shifts in consumer demand. By applying correction factors, businesses can simulate various conditions and plan accordingly.

Net Sales are the total revenue from sales after accounting for adjustments from scenario corrections. This figure provides a more accurate reflection of expected revenue, considering potential market fluctuations.

Cost breakdown

A detailed Cost Breakdown includes various components:

• Raw Materials: These are the basic materials used to produce goods. Costs include the purchase price, transportation, and any other expenses necessary to acquire the raw materials.
• Packaging: These costs cover the materials and labor required to package the finished products. Effective packaging protects the product and can enhance its market appeal.
• Shipping Cost: Shipping costs include all expenses related to transporting the finished goods from the manufacturing unit to the customers. This can involve freight charges, fuel costs, and handling fees.
• Variable Manufacturing Salaries: These are the wages paid to workers who are directly involved in the production process. The cost varies depending on the level of production activity.

Total manufacturing costs

Total Manufacturing Costs aggregate all the individual costs related to manufacturing, providing a comprehensive view of the expenses involved in the production process. This includes raw materials, direct labor, and overhead costs, giving a complete picture of production expenses.

Variable manufacturing costs

Variable Manufacturing Costs are those that fluctuate with the level of production. These include raw materials and direct labor costs. As production increases or decreases, these costs will vary accordingly.

Overhead costs

Overhead Costs are the fixed expenses that do not change with the level of production. These include costs such as rent, utilities, insurance, and salaries of administrative staff. Overhead costs are essential for maintaining the operations of the manufacturing unit but do not directly tie to the production volume.

• The Template

• Step-by-Step Template Instructions

In this manufacturing budget template, each sheet is intricately linked to provide a comprehensive financial overview. This structured and interconnected approach ensures that all cost components are accurately calculated and integrated, providing a comprehensive financial overview. Regular updates and reviews of this budget help in adapting to changing market conditions and maintaining financial health.

The template is available in various formats, including Excel (.xlsx), Google Sheets, OpenDocument Spreadsheet (.ods), and Excel Template (.xltx) to ensure compatibility with a wide range of spreadsheet applications. 

This guide will walk you through the essential elements of the template, from sales projections and cost allocations to scenario corrections and cost breakdowns.

By following the step-by-step instructions, you will be able to accurately estimate costs, forecast revenues, and make informed financial decisions:

Company information and graph

The first step is to enter the basic company information, such as the company name, the fiscal year, and the currency used. For example, ABC Manufacturing might set its fiscal year as 2030 and use USD as the currency.

The graph at the top of the template provides a visual illustration of key financial metrics related to the production costs of various product groups. It aggregates data from the “Sales and Cost” section of the budget template, specifically utilizing columns such as the average price per unit, percentage of net sales allocated to raw materials, packaging, shipping costs, and variable manufacturing salaries. Each product group has a set of bars representing these different cost categories.

The graph allows for a quick comparison of cost distribution across various products, showcasing the allocation of net sales to various cost components. It highlights the differences in how each product group allocates its budget to raw materials, packaging, shipping, and labor costs. This visual summary helps assess the efficiency of budget allocation and identifies areas where costs are concentrated, facilitating better financial planning and decision-making.

The graph is automatically updated as the data in the “Sales and Cost” section is modified. When changes are made to the average price per unit, percentages of net sales for various costs, or other relevant metrics, the graph dynamically adjusts to reflect the updated figures. This ensures that the visual representation of financial metrics remains accurate and current, providing real-time insights into the cost structure and financial health of the manufacturing operation.

Sales and cost

Starting with the “Sales and Costs” section, you’ll list the different products your company manufactures, specifying the average price per unit, and the percentages of net sales allocated to raw materials, packaging, shipping, and variable manufacturing salaries. For instance, Product 1 might have an average price per unit of $150, with 10% of product’s sale price allocated to raw materials, 15% to packaging, 8% to shipping, and 4% to variable manufacturing salaries. These percentages are crucial as they directly influence subsequent cost calculations in other sections.

Next, in the “Number of Items Sold” section, you project the monthly and annual sales volumes for each product group. For example, in January, for Product 1, you might project sales of 150 units in January, 140 in February, and so on, totaling 2,578 units for the year. This data is essential for estimating revenues and calculating monthly costs.

The “Projected Sales” section then uses this sales volume data. For January, if 150 units of Product 1 are sold at $150 each, the projected sales revenue would be $22,500. This process is repeated for each month, providing a total projected sales revenue for the year. For Product 1, the total might be $386,700. 

These projections form the basis for financial planning and are adjusted in the “Scenario Correction” section. Here, you apply correction factors to account for market variability. For instance, a 2% correction factor in January adjusts the projected sales from $22,500 to $22,950.

Moving to the “Net Sales” section, these adjusted figures are entered to provide a more realistic revenue forecast. For example, after applying corrections, Product 1’s net sales might total $394,311 for the year. This section ensures your financial plan remains flexible and responsive to market changes.

Detailed cost breakdown

The “Cost Breakdown” section details the specific costs associated with each product on a monthly basis throughout the entire year. These costs include raw materials, packaging, shipping, and variable manufacturing salaries. The data provided below is for illustrative purposes only.

For raw materials, the cost is calculated by multiplying the number of items sold by the average price per unit and the percentage allocated to raw materials. For example, for Product 1 in January, the raw material cost is calculated as follows:

• 150 units x $150 x 10% = $2,250

Similarly, packaging costs are calculated by multiplying the number of items sold by the average price per unit and the percentage allocated to packaging. For Product 1 in January, the packaging cost is calculated as:

• 150 units x $150 x 15% = $3,375

These calculations are consistently applied across other cost categories, such as shipping and variable manufacturing salaries, ensuring a comprehensive monthly cost analysis for each product throughout the year.

Total costs

These individual costs as calculated in the detailed cost breakdown are then aggregated in the “Total Manufacturing Costs”, providing a comprehensive overview of monthly and annual expenses. For instance, if the raw material, packaging, shipping, and salary costs for Product 1 in January are $2,250, $3,375, $1,800, and $900 respectively, the total manufacturing cost for January would be $8,325.

In addition to manufacturing costs, this sheet also presents a detailed breakdown of Variable and Overhead costs. These costs are itemized on a month-by-month basis, giving a clear and thorough picture of the financial outlays. Each category—variable costs and overhead costs—is presented in the same precise manner as the manufacturing costs to provide a transparent and comprehensive financial analysis.

• Best Practices for Creating a Manufacturing Budget
• Use reliable data sources for forecasting sales and estimating costs.
• Continuously update the budget to reflect changes in market conditions, production processes, and other factors.
• Break down costs into detailed categories to identify areas for cost savings and efficiency improvements.
• Engage different departments in the budgeting process to ensure comprehensive planning and accurate budgeting.

A well-crafted manufacturing budget is a cornerstone of effective production management and financial stability in manufacturing operations. By offering a detailed financial blueprint, it enables companies to forecast revenues accurately, manage expenses efficiently, and align production activities with their strategic financial objectives.

The benefits of a robust manufacturing budget are multifaceted. Enhanced financial planning helps anticipate future financial needs and challenges, enabling proactive management. Optimized resource allocation ensures that funds are directed towards the most critical areas by breaking down costs and revenues in detail. Continuous monitoring and adjustment of the budget in response to market changes lead to more efficient production processes.

Moreover, a detailed budget provides the necessary data to make informed decisions about production levels, pricing strategies, and cost-saving measures. This informed decision-making process supports sustainable profitability and growth, ensuring long-term success for the manufacturing business.

By understanding and implementing best practices in manufacturing budgeting, companies can navigate financial complexities, remain adaptable to market fluctuations, and maintain a competitive edge. Utilizing the free manufacturing budget template can greatly assist in organizing and managing financial details, making it easier to achieve your company’s goals. In essence, mastering the art of budgeting in manufacturing is key to unlocking the full potential of your production operations and achieving lasting financial health.

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Production Costs

Introduction

It is essential for a business owner to know the cost of production. The process of figuring out the cost of production plays a vital role in building and managing a profitable business. When a business owner knows the cost involved in each step of production, the owner can optimise the processes involved in production, schedule delivery realistically, and plan other business activities to run the business much more efficiently.

What is Production Cost?

The total price paid for the resources used to manufacture a product or create a service, such as raw materials, labour, and others, is called the production cost. The product/service created is to be sold to consumers.

In the case of mining companies, the royalties owed are also treated as part of the production cost. Even the tax liabilities belong to this category.

Accountants from the business management side keep track of the production processes and the costs involved to price the goods and services properly so that they can achieve an appropriate margin.

Illustration

Consider a fruit juice manufacturing company. The company notes the prices of fruits, sugar, preservatives, packaging, labour, and distribution required to produce fruit juice. If there is an increase in the price of one of these factors, the juice manufacturer will have to increase the price of fruit juice to maintain the margin.

Further About Production Costs

If an expense is to be labelled as production cost, it must be directly involved with generating revenue for the company. While product companies consider raw materials and labour involved for calculating production cost, service companies consider the labour involved and the cost of delivering the service for calculating the production cost.

Also, production costs comprise direct and indirect costs. The former is the cost involved to buy raw materials and labour cost; the latter involves other overheads, such as rent, utility expenses, and administrative sales. The production cost per unit can be determined by summing up the total raw material costs, labour costs, and manufacturing overhead, and dividing the result by the number of units manufactured.

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Tech Accelerator

Crowdstrike outage explained: what caused it and what’s next, a crowdstrike update caused a massive it outage, crashing millions of windows systems. critical services and business operations were disrupted, revealing tech reliance risks..

• Sean Michael Kerner

What might be considered the largest IT outage in history was triggered by a botched software update from security vendor CrowdStrike, affecting millions of Windows systems around the world. Insurers estimate the outage will cost U.S. Fortune 500 companies $5.4 billion.

The outage occurred July 19, 2024, with millions of Windows systems failing and showing the infamous blue screen of death ( BSOD ).

CrowdStrike -- the company at the core of the outage -- is an endpoint security vendor whose primary technology is the Falcon platform, which helps protect systems against potential threats in a bid to minimize cybersecurity risks.

In many respects, the outage was a real manifestation of fears that computing users had at the end of the last century with the Y2K bug. With Y2K, the fear was that a bug in software systems would trigger widespread technology failures. While the CrowdStrike failure was not Y2K, it was a software issue that did, in fact, trigger massive disruption on a scale that has not been seen before.

What caused the outage?

The CrowdStrike Falcon platform is widely used by organizations of all sizes across many industries. It is the pervasiveness of CrowdStrike's technology and its integration into so many mission-critical operations and industries that amplified the effect.

The outage was not a Microsoft Windows flaw directly, but rather a flaw in CrowdStrike Falcon that triggered the issue.

Falcon hooks into the Microsoft Windows OS as a Windows kernel process. The process has high privileges, giving Falcon the ability to monitor operations in real time across the OS. There was a logic flaw in Falcon sensor version 7.11 and above, causing it to crash. Due to CrowdStrike Falcon's tight integration into the Microsoft Windows kernel, it resulted in a Windows system crash and BSOD.

The flaw in CrowdStrike Falcon was inside of a sensor configuration update. The sensor is regularly updated -- sometimes multiple times daily -- to provide users with mitigation and threat protection.

The flawed update was contained in a file that CrowdStrike refers to as "channel files," which specifically provide configuration updates for behavioral protections. Channel file 291 is an update that was supposed to help improve how Falcon evaluates named pipe execution on Microsoft Windows. Named pipes are a common type of communication mechanism for interprocess communications on Microsoft Windows.

With channel file 291, CrowdStrike inadvertently introduced a logic error, causing the Falcon sensor to crash and, subsequently, Windows systems in which it was integrated.

The flaw isn't in all versions of channel file 291. The problematic version is channel file 291 (C-00000291*.sys) with timestamp 2024-07-19 0409 UTC. Channel file 291 timestamped 2024-07-19 0527 UTC or later does not have the logic flaw. By that time, CrowdStrike had noticed its error and reverted the change. But, for many of its users, that reversion came too late as they had already updated, leading to BSOD and inoperable systems.

What services were affected?

Microsoft estimated that approximately 8.5 million Windows devices were directly affected by the CrowdStrike logic error flaw. That's less than 1% of Microsoft's global Windows install base.

But, despite the small percentage of the overall Windows install base, the systems affected were those running critical operations. Services affected include the following.

Airlines and airports

The outage grounded thousands of flights worldwide, leading to significant delays and cancellations of more than 10,000 flights around the world. In the United States, affected airlines included Delta, United and American Airlines. These airlines were forced to cancel hundreds of flights until systems were restored. Globally, multiple airlines and airports were affected, including KLM, Porter Airlines, Toronto Pearson International Airport, Zurich Airport and Amsterdam Schiphol Airport.

Public transit

Public transit in multiple cities was affected, including Chicago, Cincinnati, Minneapolis, New York City and Washington, D.C.

Hospitals and healthcare clinics around the world faced significant disruptions in appointment systems , leading to delays and cancellations. Some states also reported 911 emergency services being affected, including Alaska, Indiana and New Hampshire.

Financial services

Online banking systems and financial institutions around the world were affected by the outage. Multiple payment platforms were directly affected, and there were individuals who did not get their paychecks when expected.

Media and broadcasting

Multiple media and broadcast outlets around the world, including British broadcaster Sky News, were taken off the air by the outage.

Analysis of the CrowdStrike outage

In this podcast, TechTarget Security editors Rob Wright, Alex Culafi and Arielle Waldman assess last week's CrowdStrike outage and the organization's response.

Why Apple and Linux were not affected

CrowdStrike's software doesn't just run on Microsoft Windows; it also runs on Apple's macOS and the Linux OS .

But the July outage only affected Microsoft Windows. The root cause of the outage was a faulty sensor configuration update that specifically affected Windows systems. The channel file 291 update was never issued to macOS or Linux systems as the update deals with named pipe execution that only occurs on the Microsoft Windows OS.

The way that the Falcon sensor integrates as a Windows kernel process is also not the same in macOS or Linux. Those OSes have different integration points to limit potential risk.

However, there was a reported incident in June from Linux vendor Red Hat, where the Falcon sensor -- running as an eBPF program in Linux -- triggered a kernel panic. In Linux, a kernel panic is a type of crash, though typically not as dramatic as BSOD. That issue was resolved without Red Hat reporting any major incidents.

The dangers of putting all your eggs in one IT basket

Discover the possible consequences of relying on a concentrated and interconnected pool of vendors for all your infrastructure needs.

What happens when the IT infrastructure is too big to fail?

CrowdStrike chaos shows risks of concentrated big IT

CrowdStrike disaster exposes a hard truth about IT

How long will it take businesses to recover from this outage?

CrowdStrike itself was able to identify and deploy a fix for the issue in 79 minutes. While CrowdStrike quickly identified and deployed a fix for the issue, the recovery process for businesses is complex and time-consuming. Among the issues is that, once the problematic update was installed, the underlying Windows OS would trigger BSOD, rendering the system inoperative using the normal boot process.

IT administrators had to manually boot affected systems into Safe Mode or the Windows Recovery Environment to delete the problematic channel file 291 and restore normal operations. That process is labor-intensive, especially for organizations with many affected devices. In some cases, the process also required physical access to each machine, adding further time and effort to the process.

Some businesses were able to apply the fix within a few days. However, the process was not straightforward for all, particularly those with extensive IT infrastructure and encrypted drives. The use of the Microsoft Windows BitLocker encryption technology by some organizations made it significantly more time-consuming to recover as BitLocker recovery keys were required.

It is estimated that it could potentially take months for some organizations to entirely recover all affected systems from the outage.

The latest news on CrowdStrike's recovery efforts

BitLocker workaround may offer aid for CrowdStrike customers

CrowdStrike: 97% of Windows sensors back online after outage

CrowdStrike outage underscores software testing dilemmas

Hackers take advantage of outage

While the outage was not due to a cyberattack, threat actors have taken advantage of the incident .

According to a blog post from CrowdStrike, the security vendor has received reports of the following malicious activity:

• Phishing emails sent to customers posing as CrowdStrike support.
• Fake phone calls impersonating CrowdStrike staff.
• Selling scripts claiming to automate recovery from the botched update.
• Posing as independent researchers saying the outage was due to a cyberattack and offering remediation insights.

CISA urges individuals and organizations to only follow instructions from legitimate sources and avoid opening suspicious emails and links.

How can businesses be better prepared for tech outages?

The CrowdStrike Windows outage highlighted the vulnerabilities of modern society's heavy reliance on technology. While system backups and automated processes are essential, having manual procedures in place can significantly enhance business continuity during tech outages.

But there are a few things businesses can do to be better prepared for tech outages, including the following.

Test all updates before deploying to production

It has been a best practice for years to allow automated updates to ensure systems are always up to date. However, the CrowdStrike issue laid bare the underlying risk with that approach. For mission-critical systems, testing updates before deployment or having some form of staging environment before pushing updates to production might help to mitigate some risk.

Develop and document manual workarounds

Manual workarounds ensure critical business processes can continue even when technology fails. This approach was common before the digital age and, in the event of outage, can serve as a fallback. Documenting and practicing manual procedures can help mitigate the effect of outages, ensuring businesses can still operate and serve their customers, even during an outage.

Perform disaster recovery and business continuity planning

Outages happen for any number of different reasons. Having extensive disaster recovery and business continuity practices and plans in place is critical. Part of that effort should include the use of redundant systems and infrastructure to minimize downtime and ensure critical functions can switch to backup systems when needed.

Sean Michael Kerner is an IT consultant, technology enthusiast and tinkerer. He has pulled Token Ring, configured NetWare and been known to compile his own Linux kernel. He consults with industry and media organizations on technology issues.

For more information about the CrowdStrike outage, read the following articles:

Is today's CrowdStrike outage a sign of the new normal?

CrowdStrike chaos casts a long shadow on cybersecurity

Dig Deeper on Business software

CrowdStrike update chaos explained: What you need to know

An explanation of the CrowdStrike outage

Scam CrowdStrike domains growing in volume

CrowdStrike says most Falcon sensors now up and running

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Safran reports its first-half 2024 results

Paris, July 31, 2024

H1 2024 adjusted data

• Revenue: €13,047 million (+19%)
• Recurring operating income: €1,974 million (+41%), 15.1% of sales
• Free cash flow: €1,463 million

H1 2024 consolidated data

• Revenue: €13,204 million
• Recurring operating income: €1,968 million

The Board of Directors of Safran (Euronext Paris: SAF), under the Chairmanship of Ross McInnes, at their meeting in Paris on July 30, 2024, adopted and authorized the publication of Safran’s financial statements and adjusted income statement for the six-month period ended June 30, 2024.

• All figures in this press release represent adjusted data, except where noted. Please refer to the definitions and reconciliation between first-half 2024 consolidated income statement and adjusted income statement. Please refer to the definitions contained in the footnotes and in the Notes on page 10 of this press statement.
• Organic variations exclude changes in scope and currency impacts for the period.

CEO Olivier Andriès said: “ Safran has made a strong start to the year with operating margin exceeding 15% of sales. This result is due primarily to the growth of aftermarket activity for engines and aircraft equipment, but also through reaching operating breakeven in aircraft interiors activities, with a substantial year-over-year improvement. Going forward, our primary objective is to manage continuously supplier performance in order to meet our customer commitments, particularly regarding new engine deliveries, and to mitigate any associated impacts. We are very confident in our ability to achieve our 2024 financial guidance, particularly for the operating result, with some pressure on cash flow notably related to the timing of advance payments. ”

Half-year 2024 results

H1 2024 revenue stood at €13,047 million, up by 19.2% compared to H1 2023 ( +18.7% on an organic basis). Change in scope was €48 million 1 . Currency impact was €6 million, with an average €/$ spot rate of 1.08 in H1 2024 (1.08 in H1 2023). €/$ hedge rate in H1 2024 stood at 1.12 (1.13 in H1 2023).

As for organic revenue per division: 

• Propulsion was up by 14.0%.  Supported by strong air traffic momentum, civil aftermarket (in $) increased by 29.9% (32.3% in Q2 2024). This growth is attributable to CFM56 spare parts sales but also to CFM rate per flight hour (RPFH) contracts, notably for LEAP (with no profit recognition). High-thrust engine activities also grew thanks to both spare parts and RPFH contracts.  664 LEAP engines were delivered compared to 785 in H1 2023 down (15)% (297 units in Q2 2024 down (29.1)%), due to persisting issues within the supply chain.   Military engine revenues decreased year-over-year reflecting planned lower M88 deliveries partially offset by a higher level of services. Finally, helicopter engine revenue growth was led by OE, thanks to higher turbine deliveries (notably Arrius and Arriel). Services saw a moderate increase, primarily driven by MRO activities and per flight hour contracts. Ongoing supply chain constraints affected both OE deliveries and spare parts.  
• Equipment & Defense saw a solid 23.1% increase supported by all businesses, notably defense and landing systems activities. Fueled by the continuous increase in air traffic and the widebody market recovery, aftermarket services were up by 18%, with growth across all activities, notably in landing systems and nacelles as well as for defense including sighting and navigation systems.  OE sales registered a 27% increase with higher volumes in nacelles (G700 entry into service, A320neo), landing gears (787, A320neo), electrical systems (787, A320neo) as well as in Avionics (FADEC for LEAP) and despite supply chain constraints. In defense activities, the substantial growth was primarily led by guidance systems, optronics and onboard systems.  
• Aircraft Interiors was up by 26.6% (albeit 14% below 2019 level), a significant growth demonstrating the appetite of airlines for cabin retrofit.  Aftermarket activities were particularly dynamic in both Cabin (mainly spare parts) and Seats (notably with Asian and US airlines), driven by the recovery of the widebody market and the positive momentum in air traffic.  OE sales growth is primarily attributed to Seats with the strong growth of Business class seat deliveries (750 units in H1 2024 vs 436 in H1 2023). 

1 Divestment of Cargo & Catering in May 2023. Acquisition of Thales Aeronautical Electrical Systems activities in October 2023 and Air Liquide aeronautical oxygen and nitrogen activities in February 2024.

Research & Development

Total R&D, including R&D sold to customers, reached €936 million, compared with €862 million in H1 2023.

Self-funded R&D expenses before tax credits were up 12% at €646 million in H1 2024 including:

• Development expenses at €313 million (€313 million in H1 2023);
• Research & Technology (R&T) self-funded expenses at €333 million (€262 million in H1 2023) mainly geared towards decarbonization through the RISE (Revolutionary Innovation for Sustainable Engines) technology development program.

The impact on recurring operating income of expensed R&D was €547 million (€473 million in H1 2023), with both higher capitalized R&D and related amortization, and representing 4.2% of sales (4.3% of sales in H1 2023).

Recurring operating income

In H1 2024, recurring operating income reached €1,974 million , representing a substantial increase of +41% (+39% organic). This robust performance was due to growth in services across the board and to OE ramp-up in Equipment & Defense and Aircraft Interiors. It includes scope changes of €(1) million and a favorable currency impact of €35 million.

Operating margin stood at 15.1% of sales, up 230bps (12.8% in H1 2023).

Per division:

• Propulsion recurring operating income reached €1,285 million, up by +22% (+21% organic). Operating margin stood at 19.9%, up by 1.4pt, supported by strong civil aftermarket activity benefitting from higher spare parts sales for CFM56. The anticipated decrease in M88 engine deliveries had an unfavorable impact on recurring operating income. Helicopter engines recurring operating income remained steady in H1 2024.
• Equipment & Defense recurring operating income stood at €657 million, +41% (+35% organic). At 12.7% of sales, operating margin increased by 1.3pt. The strong recurring operating income upswing was mainly attributable to higher OE volumes, in particular for Defense activities and to a lesser extent nacelles as well as growth in services notably landing gear and carbon brakes. OE for Aerosystems had a positive contribution thanks to Fluid and Fuel systems.
• Aircraft Interiors posted a positive recurring operating income of €10 million, representing a substantial improvement of €110 million from H1 2023. Cabin’s performance was supported by a good level of activity in services and to a lesser extent in OE deliveries. Seats strongly improved in H1 2024 notably thanks to the contribution from services and higher volume. Ongoing efforts in the industrialization process continued to yield positive results in OE activities. Additionally, Safran Passenger Innovations made a positive contribution to recurring operating income, largely due to in-flight entertainment (IFE) products.

In H1 2024, one-off items were €(24) million mainly impairment charges for one program and restructuration costs.

Net income was up by 37% at €1,432 million in H1 2024 (basic EPS of €3.37 and diluted EPS of €3.27), compared with €1,043 million in H1 2023 (basic EPS of €2.48 and diluted EPS of €2.40).

This includes:

• Financial expense of €(34) million, including positive financial interest of €84 million (returns on cash investments exceed cost of debt) and €(119) million exchange revaluation of positions in the balance sheet;
• Tax expense of €(435) million (22.7% apparent tax rate).

The reconciliation between H1 2024 consolidated income statement and adjusted income statement is provided and commented in the Notes on page 11.

Free cash flow

Free cash flow of €1,463 million was driven by the increase in cash flow from operations unfavorably impacted by working capital change and higher capital expenditures of €(757) million (€(600) million in H1 2023) directed notably towards OE and MRO production capacity and low carbon initiatives.

The negative impact of the working capital change (€(140) million) reflects inventory level build-up (OE deliveries lower than expected across the board notably LEAP), partly offset by customer advance payments (Rafale).

Net debt and financing

As of June 30, 2024, Safran’s balance sheet exhibits a €895 million net cash position (vs. net cash of €374 million as at December 31, 2023), as a result of a strong free cash flow generation, partially offset by dividend payment (of which €911 million to shareholders of the parent company) and €560 million of share repurchases.

Cash and cash equivalent stood at €5,699 million, down from €6,676 million at the end of December 2023.

On February 9, 2024, Safran reimbursed with cash-in-hand the $505 million matured last tranche of USPP notes issued in 2012. On April 11, 2024, Safran also reimbursed with cash-in-hand the €200 million Euro Private Placement issued in 2014.

On April 19, 2024, Safran extended by 1 more year the maturity of its revolving credit facility of €2 billion to May 4, 2029. As of June 30, 2024, the credit line remains undrawn.

On June 28, Safran proceeded with the early redemption of its bonds convertible into shares initially due 15 May 2027. In that respect, Safran delivered 9,314,153 existing treasury shares to bondholders who preferably exercised their conversion rights (ie. 98% of the bonds) and eventually paid back in cash €20 million. This soft call had a net debt positive impact of €961 million and no dilution impact on existing shareholders.

Currency hedges

The hedge book amounts to $54.4 billion in June 2024, compared to $51.7 billion in March 2024.

• 2024 is hedged: targeted hedge rate is $1.12, for an estimated net exposure of $12.0 billion.
• 2025 to 2027 are hedged: targeted hedge rate between $1.12 and $1.14, for an estimated net annual exposure of $13.0 billion.
• 2028 is partially hedged: $9.3 billion hedged out of an estimated net exposure of $13.0 billion.

Share buyback

In H1 2024, Safran completed the purchase of c.2.9 million shares (€560 million worth of shares) to finalize the hedging of the potential dilution related to the 2028 OCEANEs and for long term incentive plans.

On June 28, 2024, Safran announced the launch of the €1.0 billion share buyback for cancellation to be carried out in 2024 and 2025. In that respect, the Group entered into an agreement for a first tranche for a maximum amount of €250 million to be completed no later than September 13, 2024.

Portfolio management

• In June 2024, Safran was informed by the Italian government of its decision ultimately to approve the sale to Safran of Microtecnica S.r.l (the Italian assets).
• In the United Kingdom, the Secretary of State in the Cabinet Office has reviewed the notification made under the National Security and Investment Act and has informed Safran that he will take no further action in relation to the proposed acquisition. This constitutes an unconditional clearance.
• The completion of Collins Aerospace’s actuation and flight control business acquisition still remains subject to obtaining other regulatory approvals, particularly with regard to merger control, and customary closing conditions.
• Safran signed on July 16, 2024 an agreement for the acquisition of Preligens shares, a leader in artificial intelligence (AI) for aerospace and defense, for an enterprise value of €220 million. The company develops complex algorithms and software to analyze and automatically detect and identify objects of military interest notably using commercial and government satellite images. Completion of this proposed acquisition remains subject to foreign investment approval. The closing is expected in the third quarter of 2024.

Full-year 2024 outlook confirmed

Safran expects to achieve for full-year 2024 (at constant scope of consolidation, adjusted data):

• Revenue around €27.4 billion ;
• Recurring operating income close to €4.0 billion ;
• Free cash flow around €3.0 billion , subject to schedule of some advance payments.

This outlook is based notably, but not exclusively, on the following assumptions, of which 2 are updated:

• LEAP engine deliveries: flat to 5% compared to 2023 (previously up by 10-15% );
• Civil aftermarket revenue (in USD): up mid-twenties (previously up by around 20% );
• €/$ spot rate of 1.10;
• €/$ hedge rate of 1.12.

The main risk factor remains the supply chain production capabilities.

• Q3 2024 revenue : October 25, 2024
• Capital Markets Day in Paris : December 5, 2024
• FY 2024 results : February 14, 2025
• Q1 2025 revenue : April 25, 2025
• Annual General Meeting : May 22, 2025
• H1 2025 results : July 31, 2025

Safran will host today a webcast for analysts and investors at 8.30am CET.

• If you only want to follow the webcast and listen the conference call , please register using the following link: https://edge.media-server.com/mmc/p/in9539aj   Use this same link for the replay which will be available 2 hours after the event concludes and remains accessible for 90 days.
• If you want to participate in the Q&A session at the end of the conference , please pre-register using the link below in order to receive by email the connection details (dial-in numbers and personal passcode): https://register.vevent.com/register/BI5fb55ce148a746a589fb9aa019a06aef

Registration links are also available on Safran’s website under the Finance home page as well as in the "Publications and Results" and "Calendar" sub-sections.

Press release, consolidated financial statements and presentation are available on Safran’s website at www.safran-group.com (Finance section).

Key figures

1. adjusted income statement, balance sheet and cash flow.

2. Segment breakdown

2 Retrofit is included in OE

3. Number of products delivered on major aerospace programs

4. Research & Development

Adjusted data: To reflect the Group’s actual economic performance and enable it to be monitored and benchmarked against competitors, Safran prepares an adjusted income statement in addition to its consolidated financial statements.

Readers are reminded that Safran:

• is the result of the May 11, 2005 merger of Sagem SA and Snecma, accounted for in accordance with IFRS 3, “Business Combinations” in its consolidated financial statements;
• recognizes, as of July 1, 2005, all changes in the fair value of its foreign currency derivatives in “Financial income (loss)”, in accordance with the provisions of IFRS 9 applicable to transactions not qualifying for hedge accounting (see Note 2.f, “Translation of foreign currency transactions and foreign currency derivatives”).

Safran’s consolidated income statement has been adjusted for the impact of:

• the impact of purchase price allocations for business combinations, particularly amortization and depreciation charged against intangible assets and property, plant and equipment recognized or remeasured at the time of the transaction and amortized or depreciated over extended periods due to the length of the Group’s business cycles, and the impact of remeasuring inventories, as well as
• gains on remeasuring any previously held equity interests in the event of step acquisitions or asset contributions to joint ventures;
• revenue net of purchases denominated in foreign currencies is measured using the effective hedged rate, i.e., including the costs of the hedging strategy,
• all mark-to-market changes on instruments hedging future cash flows are neutralized.

The resulting changes in deferred tax have also been adjusted.

H1 2024 reconciliation between consolidated income statement and adjusted consolidated income statement:

FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements relating to Safran, which do not refer to historical facts but refer to expectations based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those included in such statements. These statements or disclosures may discuss goals, intentions and expectations as to future trends, synergies, value accretions, plans, events, results of operations or financial condition, or state other information relating to Safran, based on current beliefs of management as well as assumptions made by, and information currently available to, management. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “plan,” “could,” “would,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “possible,” “potential,” “predict,” “project” or other similar words, phrases or expressions. Many of these risks and uncertainties relate to factors that are beyond Safran’s control. Therefore, investors and shareholders should not place undue reliance on such statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: uncertainties related in particular to the economic, financial, competitive, tax or regulatory environment; the risks that the new businesses will not be integrated successfully or that the combined company will not realize estimated cost savings and synergies; Safran’s ability to successfully implement and complete its plans and strategies and to meet its targets; the benefits from Safran’s plans and strategies being less than anticipated; the risks described in the Universal Registration Document (URD). The foregoing list of factors is not exhaustive. Forward-looking statements speak only as of the date they are made. Safran does not assume any obligation to update any public information or forward-looking statement in this document to reflect events or circumstances after the date of this document, except as may be required by applicable laws.

USE OF NON-GAAP FINANCIAL INFORMATION

This document contains supplemental non-GAAP financial information. Readers are cautioned that these measures are unaudited and not directly reflected in the Group’s financial statements as prepared under International Financial Reporting Standards and should not be considered as a substitute for GAAP financial measures. In addition, such non-GAAP financial measures may not be comparable to similarly titled information from other companies.

Catherine Malek

[email protected]

Armelle Gary

+33 1 40 60 82 46

Florent Defretin

+33 1 40 60 27 30

Aurélie Lefebvre

+33 1 40 60 82 19

Safran is an international high-technology group, operating in the aviation (propulsion, equipment and interiors), defense and space markets. Its core purpose is to contribute to a safer, more sustainable world, where air transport is more environmentally friendly, comfortable and accessible. Safran has a global presence, with 92 000 employees and sales of 23.2 billion euros in 2023, and holds, alone or in partnership, world or regional leadership positions in its core markets. Safran undertakes research and development programs to maintain the environmental priorities of its R&T and Innovation roadmap.

Safran is listed on the Euronext Paris stock exchange and is part of the CAC 40 and Euro Stoxx 50 indices

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