Mitigate Risk by Making a Clear Purchase Plan: Actuals vs Planned
Updated: May 17, 2019
Purchasing is a critical challenge for almost all businesses. If stock rises too high relative to sales, this has a negative impact on profits. Buy too little, and you might miss out on bulk discounts, and shipping costs could be higher than necessary.
In an ideal world, we would know exactly how much to buy in order to serve our customers and maximise profits. In the world we inhabit, that's not the case. However, business planning can make it easier to find the right balance.
Understanding the relationship between planned and actual expenditure can help you find that balance and mitigate the risks involved in business operations.
What do we mean by planned vs actual?
Planned costs are expenses that have been budgeted for; namely, those connected with stock purchases.
Traditionally, businesses make comparisons between their purchase plan and end of year results, but when we talk about 'actuals', we are referring to something much more useful.
With business planning software, organisations can compare the actual cost of doing business in real time. Managers can use this data to calculate the variance of their business - a measure of how actual costs vary from planned costs.
Business planning is a crucial element to grow your business in a healthy way. As a company grows, so does customer demand, and meeting these levels of demand means spending more on resources or the production and procurement of stock. You’re probably familiar with the term “you have to spend money to make money”, but the finer details of how much to spend in order to maintain steady profit have to be defined by conscientious and well-informed financial business planning and decision-making.
Creating a strong purchase plan: Take all factors into account
Often, the reason for poor planned vs actual performance is having a bad purchase plan. This document is crucial to understanding how a business is performing, and it needs to take every cost into account.
Critically, a good purchase plan will accurately gauge customer demand. Without knowing your sales volume, you can't order the correct amount of stock. But this also needs to include room for growth, in which case, dynamic purchasing plans can help to model multiple business scenarios.
Procurement management is not only about fulfilling customer demand: businesses must consider their warehouse capacities, shipping arrangements, and staffing costs. A strong purchase plan allows you to ensure consistent stock availability (which translates into steady revenue) without overstocking (which can lead to financial loss). It will focus on the minute, important details of stock procurement and sales – such as the money made from the sales of the items and the exact times of the purchases, timing is crucial! – in order to produce accurate and intuitive cash flow forecasts and to help business planners know how and when to procure more stock.
How business planning software can help you strike the right balance
When you have a sound understanding of costs and demand, you are in a position to implement measures to raise sales and minimize costs. This is where business planning software can make a massive difference.
The real-time analysis made possible by business planning tools enables businesses to finely calibrate their supply chains. This way, they can precisely match customer orders with stock procurement. These tools can translate budgeted revenues, profits, and sales information into useful product volume figures.
Additionally, the data generated by these applications can feed into higher-quality decision making and risk management practices. With historical and real-time data at your fingertips, you can model scenarios such as discount promotions or increased procurement costs.
This combination of real-time analysis and risk analysis brings a new dimension to planning business operations, giving you the information needed to plan for success.