Creating an annual budget is crucial to running a successful and profitable retail business. A budget helps you set both short and long term business goals and enables smart decision-making to achieve those goals. You’ll also be in a better position to proactively manage your finances, setting you up for profitability, sustainability, and exponential growth.
With a detailed and well-thought-out retail budget, you’ll be able to anticipate challenges ahead of time and be ready to meet them head on. Last but not least, staying on top of your established budget can help direct future expansion plans, sway investors, and increase your capacity to innovate in competitive markets.
Regardless of the size of your retail business, it’s important to create a budget and actively manage it throughout the year. Doing so gives you better control over your expenses and revenue. Here’s what you need to know about establishing an annual budget for your retail business.
Why Every Retailer Needs an Annual Budget
A detailed and structured retail budget can be a very useful tool for businesses of any size. Crafting one on an annual basis can help you:
1. Set Strategic Business Goals
You may have specific objectives in mind in terms of how you want your business to perform and the revenues you want to achieve. Budgets guide your decisions and help you stay on track to achieving your goals.
2. Effectively Manage Your Resources
Whether it’s your cash flow or your human capital expenditure, budgets can help set controls so that you’re always allocating your resources wisely to maximize efficiency.
3. Evaluate Company Performance
Periodically reviewing your budget vs. actual numbers can show you how well you’re doing. Measuring your profits against expenditures on a quarterly basis can help you determine whether your business is operating at peak efficiency.
Retail Budget Planning: A Step by Step Guide
Now, with the importance of a budget established, let’s look at practical steps you can take to create an effective retail budget.
1. Put Together Intel
At this stage, you’re gathering all the data you need to plan an effective budget.
The first step is to work out your sales numbers. Calculate total sales as well as sales from individual outlets. You’ll also want to make note of variations related to seasons and promotions. For instance, a marketing promotion during the holidays may lead to increased sales, but since these numbers are atypical, you ought to take note.
Recording these variances can help you more accurately forecast sales numbers for the following year. If you have multiple outlets, you also want to separately record the numbers from each so you can identify variations in expected revenue.
Expenses include your fixed and variable costs. Fixed costs are easily predicted because, as the name suggests, they don’t vary depending on how much you’re producing or selling. These include things like rent, payroll, leased equipment, utilities, subscriptions, contractual agreements, and loan payments.
increase and decrease in accord with how much a company produces and sells. Some variable costs include credit card processing fees, advertising, commissions, hourly wages, packaging supplies, shipping costs, and utility expenses.
Gross Profit Margin
Your gross profit margin is your net sales minus the Cost of Goods Sold (COGS) and is usually represented as a percentage of your sales revenue. Consistently high gross profit margins often translate to consistently high net incomes as well as solid cash flows.
2. Run a Pre-Budget Data Analysis
At this stage, you’re looking through all of your data to understand your performance better and identify areas for improvement and opportunity. For example, if one outlet is underperforming, determining why can help you decide how to take corrective measures.
Sit down with your outlet team to understand if there are issues on the ground that you didn’t consider. Look at online reviews of the store to understand customer perception. If it’s poor customer service, invest in training resources. Use the data to inform strategic decision-making so that you’re driving more profit and effectively allocating your resources in the following year.
3. Build Your Sales, Costs, and P&L Budgets
The next step is to create your sales, costing, and P&L budgets.
The sales budget is the first and most crucial budget you will make.
It’s a type of financial plan that helps you estimate the total sales revenue you will be generating within a specific period. The total sales revenue is how many units you expect to sell multiplied by the selling price per unit.
It’s essential to create your sales budget first because, without the sales numbers, you won’t be able to realistically prepare most other dependent budgets, such as your marketing or production budgets. It determines how you’re going to be spending and utilizing your money.
It’s easy to confuse a sales budget with a sales forecast as they can appear similar in function. While a sales budget is your expected revenue for the long-term (such as yearly), the sales forecast is created for shorter periods — weekly or monthly, for example. In this sense, your sales budget shows you what goals need to be achieved, while a sales forecast helps you stay on track.
It’s essential to get your sales numbers right. If your numbers aren’t accurate, you could lose out on revenue and incur losses.
When building your sales budget, one key component to take note of is your gross margin. The gross margin is your net sales minus the COGS. Knowing your gross margin vs. COGS will help establish a baseline for setting the margin on your product.
Cost Budgeting (Operating Costs)
Your cost budgeting or operating costs dictate how you will be spending money on your business. Typically, costs can be divided into five main areas:
- Facilities — Rent for the land, office buildings, furniture, fixtures, equipment, repairs and maintenance costs, utilities, insurance premiums for your facilities, property taxes, etc.
- Labor — Salaries, hourly wages, and payroll in general.
- Marketing — Promotional campaigns (in-store, online, or offline) and brand advertising. Also, include the cost of corporate swag and other promotional giveaways.
- Administrative — Software subscription fees, credit card processing fees, licensing fees, government fees, paper and other office supplies like stationery, legal and accountant fees, recurring fees such as service fees or maintenance fees, food, drink, and refreshments.
- Inventory — All expenses connected to your ordering, holding, and managing your inventory or stock levels. This would include things like ordering, shipping, storage, and handling costs.
A profit and loss (P&L) budget is also known as a P&L statement or income statement. This is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a quarter or fiscal year.
The main numbers you’ll need for your P&L budget are your:
- Sales revenue and gross profit numbers.
- Operating income, which is the revenue that’s left after deducting operational costs and what’s left after you’ve deducted your operational expenses from your total sales revenue.
- COGS, which is how much you’re expecting to spend on your inventory based on the margin you’ve set and your expected purchasing costs.
- Net income, also called net profit, is the profit you have once you’ve deducted all your costs and expenses.
4. Make a Cash-Flow Plan
A cash flow plan is a financial planning and forecasting tool that helps organizations track potential income, properly allocate their budgets, and plan for changes in income or expenses. For preparing your cash flow plan, you’ll need:
- Collections (incoming cash) — Collections are your expected revenue or sales as discussed in step 1.
- Expenses (outgoing cash) — Expenses would include your fixed and variable costs as discussed in step 1.
- Cash on hand — Ideally, look at cash on hand on a monthly and yearly basis. Cash on hand refers to how much cash you actually have in hand inclusive of revenue but minus expenses.
Budget Planning for Retail Success
Think of the budget as your success partner. Investing time and effort into creating a solid budget will help you focus business activities in the right direction, set realistic profit targets to work toward, and make sound financial decisions to achieve growth year-on-year.
Start developing your annual budget three to four months before the start of your financial year so that you have adequate time to gather data and develop detailed and accurate estimates. Review your budget every month or weekly for smaller businesses. Look for variations between estimates and actual results and determine why these variations occurred. Continuous monitoring and evaluation can help you refine and adjust your budget, so you’re managing your cash flow optimally for the rest of the year.