Question

how excess capacity impacts the planning process of financial forecasting.

Answer 1

Impact of capacity planning on financial forecasting:

Capacity is defined as the maximum rate at which a firm can produce or process inputs. In other words it is defined as the volume of output per elapsed time & also the production capability of a facility.

Capacity planning is nothing but the process that is used to determine the capacity that is needed to manufacture greater product or production of a new product. There are number of factors that can impact the capacity of a facility. This includes number of workers, ability of workers, number of machines, waste, scrap, defects, errors, productivity, suppliers, government regulations, maintenance etc. However this is relevant in both long & short term.

However capacity planning is considered to have increased emphasis due to the financial benefits of the efficient use of capacity plans with MRP & other information systems. Improper capacity planning can result in detoriating performances, unnecessary increase in WIP & also frustrate the sales personnel. On the other hand, excess capacity is considered to be costly & unnecessary. Also the inability to properly manage the capacity can be a barrier in achieving the firm’s performance. Hence capacity planning has an impact on the financial forecasting. As we know that financial forecasting is nothing but estimating the required financial resources for various organizational requirements, improper capacity planning can have an impact on the financial forecasting. If suppose there is shortage in production then there can be shortage in the resources allocated which can affect the sales, the brand name of the company etc. This has already been mntioned. Similarly excess capacity planning can result in excess cost which could have been allocated for some other purposes.

Hence it is always better for the organization to carefully plan on their production & other activities.