UK Purchasing Budget

[NoCruncher]

Good Morning,



I am after some tips from any professional who may be able to assist.



Currently I am working with a client to establish a purchasing budget to rein in overspend in this area.



However the normal process would be to use expected product units to be sold in month and calculate cost i.e.:



1. List of all the products that each company expects to sell in that month e.g. Downlights

2. Estimated number of units to be sold e.g. 10000 Downlights

3. The selling price of units expected to be sold e.g. 10000 Downlights @ £50 each



This data would then be used to calculate weighted average selling prices which in turn will be used to determine expected product costs

However this client does not have any information nor has any plans to estimate number of units sold per month!!!

The alternative I can think of is to use opening stock and closing stock values and then use this in a formula linked with forecasted sales values and cost of goods sold. The gross profit margin is 30%.



An ideal formula would be:

Month 1 Month 2

Forecasted Sales Values

- Gross Profit Margin

= Cost Of Goods Sold

+ Average closing stock

- Opening Stock

= Purchases Required (a)

Purchases Cash Available Month 2 (30 days terms) (b)

Max Purchasing Allowable = (a) - (b)



Is this formula accurate for this purpose?



Thanks

 

[smallbushelp]

First off, it seems pointless to me to establish a budget for a client who isn't going to help with the process. How do I know that they're going to adhere to the budget once it was established?

But, if I were going to establish a purchasing budget for a client who refused to estimate future sales, I would analyze past sales. What does weighted average selling price tell you about future demand? It seems to me that you would want to analyze past sales quantities and determine if there is an increasing, decreasing or stable trend and use that to estimate future demand. Then try to get a fixed price from your vendor for the year. If they're unwilling to give a fixed price, then you can analyze past cost trends and try to estimate future price increases. That's the basis for a budget.

 

[NoCruncher]

HI Thanks for the reply.

I have the forecasted sales values but not units available as the client says too many products to provide sales value per unit. Rather worryingly he does not know or realise the importance of which products is sold the most in actual terms!!

Anyway I have the forecasted sales values for 12 months and historic data available in value terms.

Going forward the purchasing manager is compiling a live spreadsheet with MTD spend and linking to purchase orders placed.

I am looking to link this with cash flow budget and try to find a middle ground where purchasing can be reined in by available cash in month that purchases need to be actually paid for and not against sales as they currently are; this is an example of free rein by sales and purchasing i.e. if I purchased a million iPads from Apple I know i could sell them like hot apples if at right price however before placing the purchase order with Apple any reasonable being would check their bank coffers whether they had the funds available to pay for said iPads!!!!

 

[smallbushelp]

Gotcha. Your focus is more on cash flow than trying to determine how much should be purchased. Sounds like a good plan then.