There are a lot of reasons that you should take annual business budget planning seriously.
The budgeting process:
- Highlights areas that you might be overspending
- Shows you a snapshot of how your business is performing
- Allows you to make informed decisions for your retail company
- Gives you targets to reference during the year
In general, budget planning gives you a deeper understanding of how your company operates. The better you understand your retail business, the more opportunity you have for growth.
Step 1: Define Your Components
The first step is realizing what you have. Regarding your budget, this means knowing what you’re spending money on and where you’re making money. Every place that money is spent or made is called a “component.”
These components might fall into categories like real estate, utilities, business trips, gifts, everyday supplies, technology, personnel, and marketing. In general, most of the components are going to be expenses.
Pro tip: This step should take you the longest. The more time you spend here, the more comprehensive the plan becomes.
Step 2: Define Your Fixed Costs
With this list of components, it’s time to start plugging in your fixed costs. Fixed costs, also called overhead, are expenses that don’t change with units of sales. It’s also the costs that you can predict easily in advance. Examples of fixed costs include rent, leased equipment, and salaries for administrative employees.
When in doubt, remember that fixed costs don’t fluctuate depending on how many items you produce and sell. For instance, your rent will still be the same whether you sell one unit or a million units. You’ll put these costs next to the associated components on your budget.
Step 3: Define Your Variable and Semi-Variable Costs
Next, you should define your variable and semi-variable costs. This category has some more flexibility over the fixed costs.
Variable costs will change depending on different factors, which makes them a little harder to predict. For retail, this could be inventory, materials, packaging, shipping, and other production-related costs in your business. Also, if you have contractors or hourly employees, their pay would fall into this category.
Not sure if it’s a variable cost? If it’s not a fixed cost, then by definition, it’s a semi-variable or variable cost. These costs can often be associated with a unit cost of production. This step should complete your budget as far as expenses are concerned. Though there is one more category you should consider, which brings us to step 4.
Step 4: Define Your COVID-19 Costs
For 2021, you’ll have to find out what your COVID-19 or other business contingency costs are. This category can be better classified as “unpredictable costs.” It will help your company plan for unpredictability in the future, and it gives your budget the versatility that helps you succeed.
At any rate, it’s important to capture these costs in your budget. A good reference point is the additional costs incurred from this year’s events such as lockdown, move towards eCommerce, etc. Even though you consider this a one-time event, you can’t ignore it on your budget.
Step 5: Predict Your Future Sales
To complete the components on your budget, you need to fill in the blanks for your sales. Remember, a budget consists of money in and money out – this is the “money in” section.
Completion of this step will tell you your company’s predicted profit. This is also the step where most people run into trouble.
How are you supposed to predict your future sales? You’re going to use your previous trends and combine them with your future predictions. If you made a certain amount of money last year and expanded your inventory by a certain percent, it’s fair to assume that you’ll make a certain percent more next year.
Your considerations should also include macro trends and how these shifts may positively or adversely impact your market. For example, changes in the local populations, economic conditions, and health of the global supply chains are all factors that can impact your future sales.
Sure, there isn’t a precise way to predict your future sales. As long as the figures are close enough, you’ll be okay. As you revisit your budget plan and adjust it, you can fill in the blanks for how much money you made.
If you want to play it safe, you can input your monthly figures from the current calendar year to predict the next year.
Pro tip: Start with a yearly sales figure that you want to reach. If you want to make a million dollars next year, then start there. Calculate how much you’ll have to make each month to hit that figure.
Step 6: Analysis
As you’re going through the steps, you’re going to notice things that stand out or things that you didn’t know. Who knew you were spending so much each month on electricity and heat for your business. Maybe there’s an opportunity to use a green system and save money here.
This step is all about looking at your numbers closely and making decisions. Since the numbers are already in your budget, you can play around and see how much money you can save a year if you make a particular change.
This step also allows you to see future potentials. Maybe you’re not investing enough in marketing to get the omnichannel customer engagement you’re looking into. Perhaps you can move to a much larger shop since you have room in your budget to increase your rent and utilities. Is next year the year to expand your business?
If this is your first annual company budget plan, you should walk away with some ideas of what to change next year. If you have a good template that you’re using, you can mock up numbers and see how that changes your entire year.
Some Vital Business Tips for Your Budget Planning
You might still have some questions. This section is all about professional tips to make budget planning easier for your retail company.
Tip 1: Review Your Budget Quarterly
The most important tip for budget planning is always to review your budget. Compare your actual spending and earnings to your initial budget plan every quarter. This will tell you if you’re on track, if you missed anything significant in your plan, or if you need to make changes in your company.
If your actual figures are drastically different from your plan, then it’s time to revisit the document and make some changes.
Tip 2: Adopt the Plan Company-Wide
A budget doesn’t do any good if people don’t follow it. After completing your budget plan, you should discuss and present it to the rest of the teams. Answer their questions and make sure everyone is on the same page.
It will also excite the rest of the company to see the future track that they’re on. It gives everyone a sense of responsibility by knowing what to expect next year and their targeted goals. It also helps your team work together.
Tip 3: Give Every Dollar a “Job”
As you’re filling out your budget, you’ll encounter gaps between your expenses and earnings. If you’re making a profit, where does that money go?
By allocating a “job” for the money you make, you can make big business decisions. In other words, you can decide that your $1,000 profit in January is going towards a more extensive inventory for February. Your massive profit you predict for March will be used to give yourself a bonus and start a new marketing campaign.
The act of trying to allocate resources like this works wonders for your business. It helps you understand the direction you want to take the company and its targetable goals. Keep in mind that since future sales are just a prediction, your profit might not line up with what you expect. Therefore, the “jobs” you give your profits need to be just as flexible.
Tip 4: The First Plan Won’t Be Perfect
Some people will get discouraged after the first review of their budget plan. They realize that the actual numbers are very different from the planned numbers. This means that it’s time to revisit the original document and update it.
Your first annual budget planning document won’t be perfect. However, the more you adjust it, the closer to perfect it becomes.
Tip 5: Your Budget Plan Doesn’t Judge
As people put together a budget plan, they might be tempted to lie about some numbers. By claiming lower expenses and higher expected sales, your predicted profit will be higher.
This does nothing but hurt you.
Remember, your budget plan isn’t going to judge you. It would be best if you filled it in with actual values. Building a budget plan on fake numbers will not make your profits higher. All you’ll have is a significant gap between predicted and actual values after your first quarterly review.
Tip 6: Challenge Yourself After Budget Planning
After putting together the plan, hold yourself accountable for hitting the numbers. Don’t treat the budget as a piece of paper that you can ignore until March – keep it in the back of your mind whenever you make a business decision.
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