The Production Budget
JOHN ROLLINS, YALE UNIVERSITY PRESS
The Importance of Production Budgets
The typical university press spends much more on production than it does on any other type of expense. For this reason, it is important to budget production expenditures in order to estimate working capital needs and to project future effects on cash position and inventory levels. The production budget is a comprehensive plan that takes into account all manufacturing jobs that will be worked on during a given fiscal year and reveals the timing and amount of expenditure on these projects. Neither cost of sales in the operating budget nor cash and inventory in a proforma balance sheet can be projected until the production budget is completed.
Schedules and Title Budgets
There is no reliable shortcut to use in putting a production budget together. Constructing the budget requires accurate, detailed manufacturing estimates for each book on which money will be spent during the fiscal year. Such estimates are usually prepared in conjunction with the title projections or budgets, which should be completed before accepting or contracting for a new project, then revised as required throughout the publishing process. It is important that these manufacturing estimates contain detailed breakdowns by type of expense. This makes it easier to revise the budget later. It also helps when jobs overlap fiscal years, as they often do, and decisions must be made about how much expense is likely to be incurred in a given financial period. Production budget preparation also requires an accurate production schedule for each job.
Developing the Production Budget
The first step in forming the production budget is to review the production schedules and identify all projects that are expected to be worked on during the new fiscal year. Next, judgments must be made about which portion of each job will be completed during the budget period. It could be the entire job, just the typesetting, just the binding, or perhaps other parts of the manufacturing process. Once this has been done, the relevant production expenses for all jobs should be totaled to provide overall production expense and expense by type (i.e., plant, paper, printing, binding, etc.). Since it is likely that not all the titles in next year's or the following year's lists will be known at the budget preparation time, it is important to include in the budget a dollar allowance for the unknown titles.
The Components of Production Expense
Production expense consists of five different subcategories: plant, paper, printing, binding, and jackets and covers. Plant costs are the fixed costs of each manufacturing job. Paper, printing, binding, and jackets are referred to as running costs; with the exception of small fixed set-up fees, they vary directly with the size of a job run. The following list shows some types of expense that are categorized as either plant or running costs.
- Typesetting and Composition
- AAs and EAs
- Repros, Photostats, Stats, PMTs
- Stamping Dies
- Printer's Prep for Text, Line Arts, and Halftones
- Film or Flats Stripping
- Color Separations
- Art Creation or Fixing
- Freelance Design
- Dummying or Paste-Up
- Jacket or Cover Proofs and Comps
- Jacket Typesetting
- Photo Permission Fees
- Photo Research
- Jacket or Cover
- Press Make-Ready
- Presswork or Printing—Text
- Presswork or Printing—Jacket or Cover
- Folding and Gathering
- Cover Material (cloth, etc.)
- Headbands and Tailbands
- Ribbon Markers
- Inserts or Tip-Ins
- Slip Cases
- Jacket Wrapping
- Cartons and Cartoning
A press's total production expenditures will of course vary according to the number and the nature of the jobs it has underway.
Spreading the Production Expense over the Year
Finally, the budget must be spread by period within the fiscal year, that is, monthly, quarterly, etc. Spreading the manufacturing budget is necessary to identify the relative need for working capital in any one period. This is an absolute must if you are doing cash planning. Perhaps it is not so necessary if you have an unlimited and interestless cash draw from your university, but it is fundamental if you are responsible for managing your own cash and perhaps borrowing money at market rates from the bank or even your own university.
Cash and Accrual
It is very important to project production expenditures on both a cash and accrual basis. For example, if a major revision of your best-selling textbook comes into the warehouse a month before the end of your fiscal year in June, you will probably have received the invoices before year-end, but you may well not yet have paid them. At year-end, the invoices should be shown in inventory and accrued accounts payable, but they won't have an effect on cash until they are paid sometime in the new fiscal year. Of course, the opposite applies as well. Manufacturing invoices accrued at the end of last fiscal year will affect cash this year, but they will have no current effect on inventory. The difference between accrual and cash manufacturing expenses in a given financial period can be significant, and you should be aware of it.
When you are preparing the annual budget, it is also a good idea to put together an estimate of expected title subsidies for the year. Title subsidies are usually treated as offsets or subtractions from production expense, and they provide a welcome outside source of cash to help pay for production expenditures.
Comparing Budget to Actual
After the production budget has been prepared and incorporated into the annual operating budget, it will need to be formally administered and compared with actual expense on a regular basis. Actual aggregate production expense should be reported monthly and compared to expectations for the same period. This information should be seen regularly by the production and business managers. In addition to aggregate budget comparisons, individual project production expense should also be recorded and compared with title production budgets.
During the fiscal year it will become necessary to revise the production budget to adjust to changes in production schedules and in the make-up of the press's new list. This is especially true if cash planning is a matter of importance for your press. The process of preparing a revised production budget is the same as preparing the original budget. Many publishers revise their production budgets at least once during the fiscal year; some revise them on a quarterly basis.