How to Budget a Retail Business in 6 Steps

When you start a business, it is important to have financial plans in place. Implementing these strategies will help your company remain afloat and grow into a thriving enterprise that can sustain itself through profitability. Here are six steps for establishing sound fiscal policies.

The “retail budget template excel spreadsheet” is a tool that allows you to create a retail budget in an easy way. The sheet has 6 steps and includes formulas for calculating the gross profit margin and net profit margin.

Creating and keeping to a retail budget is critical to your store’s success. A well-organized retail budget can aid you in predicting sales variations, establishing purchasing budgets and amounts, comprehending prices, and avoiding overpaying. Be ready for the unexpected, which may cause your budget to shift or modify. The method entails some trial and error.

In this article, we’ll walk you through six phases for budgeting a retail business:

1. Collect data for precise forecasting

The first step in building a budget is to collect data from previous years to assist you understand your company via statistics. This step’s purpose is to utilize the data you’ve gathered to generate forecasts about your incoming income stream so you can create a budget that keeps you in the black. This is referred to as sales forecasting.

In order to gather data for retail, you’ll need to:

• Sales from all shops: In order to discover patterns and create forecasts about what sales could look like this year, you’ll need to know how much your store(s) earned in past years. If you have many locations, make sure that each store’s sales data is kept separate so that you can see each location’s distinct performance.
• Gross margin: You must know how much of your income remains after all related expenses, such as labor, inventory space, and wholesale pricing, have been deducted.
• Marketing calendar: To gain a complete view of your sales, you’ll need to know when you had sales and events that may have resulted in an increase in sales.
• Anomalous occurrences: To avoid overspending or underspending your budget, make a note of any unusual events that influenced your sales. A worldwide epidemic, for example, may result in many months of record low sales; you’d want to know about the event that caused the sales decrease when you’re looking at your statistics so you don’t overestimate your sales for the year.
• Fixed overhead expenses: The last piece of information you’ll need for this step is your prior year’s overhead costs, which include all expenditures related with operating your firm other than inventory costs, such as rent and utilities. In the cost budget part of this essay, we’ll go through all of the items that overhead expenses encompass.

Comparison of LFLs

In addition to taking a look at all the data above to make your sales forecast, you will want to look at Like-for-Like (LFL) comparison. “Comparison of LFLs” refers to the comparison of stores with similar characteristics, omitting any major outlying variables that could distort their numbers. It’s also sometimes referred to as same-store sales, comparable-store sales, or “comps”.

Comparison of LFLss could mean that you compare numbers between the same store at two different locations and exclude factors—like if one store carried a product that the other did not or if one store held a neighborhood event and the other had a normal day. Or, it could mean you compare stores that sell similar merchandise, excluding factors like sales days or other exclusive special events.

Making LFL sales comparisons enables you to look at current companies and isolate particular aspects to figure out why one shop is doing well and another is struggling. Use LFLs to help you plan your sales calendar, staffing strategy, and marketing campaign, as well as get insight into which budgeting strategy will provide the best results for your company.

2. Examine the information and look for opportunities

Use your data to hunt for possibilities after you’ve obtained it. Examine where you were successful last year and take notes on what worked. Examine periods when sales were sluggish or promotions were ineffective, and attempt to figure out what went wrong.

You should constantly be on the lookout for strategies to increase your profits. For instance, you had a lot of visitors over the holidays, and your sales were excellent from October through December. With this in mind, you may consider launching a loyalty program in October to maximize on foot traffic and then holding a promotion in November to offset your expenditure.

Use your data to estimate sales and demand, drive your marketing plan and budget, and get a deeper understanding of the causes behind your company’s success and failure.

Make a marketing schedule.

Marketing and promotional events are expensive and reduce your profit margins. Investing in these areas, on the other hand, is a terrific method to increase income and promote client loyalty. Create a sales and marketing schedule that will boost your sales using data from past years.

Let’s say you saw that during the Fourth of July weekend, when you were running a deal, you had very little traffic, but a spike the next weekend. With this in mind, you decide to reschedule your July sale to the weekend after July 4th in order to take advantage of the increased traffic.

Don’t worry; when we come to the cost budget part, we’ll look at how much you should spend on marketing.

3. Create a sales budget for your stores to use.

A sales budget is a breakdown of your yearly expected sales by month and day that aids in forecasting your total sales income for the year. Your sales budget is perhaps your most important budgeting strategy since it serves as the foundation for the rest of your budget lines and determines your first purchasing budget.

The information provided above is used to create a sales budget. It will assist you in setting reasonable and achievable sales targets that will encourage, rather than frustrate, your employees, reduce overpaying, and put you on the road to success.

When preparing your sales budget, you may use a variety of techniques, such as boosting your margins, keeping to a budget, or maximizing your promotions.

In addition to the data you obtained, there are two important factors to consider when determining your sales budget:

Estimated Growth

Your Estimated Growth refers to the estimated percent you predict your sales revenue will grow or shrink compared to the previous year. In retail, you typically use the Estimated Growth to create your sales estimates and set your overall budget.

For example, you might predict that in 2022, the economy will be looking up, so set your Estimated Growth at 5% (meaning you expect a 5% increase in sales from last year). So then, to set your budget for Jan. 1 of 2022, you would look at the sales from Jan. 1, 2021, increase that number by 5%, and that would be your sales prediction.

Historically, the retail business has grown at a pace of 3.5 percent to 5% every year, depending on the year. However, as the world has changed, this yardstick has become much more difficult to depend on. For example, while the pandemic was just getting started in 2020, retail growth slowed to a halt as the globe shut down. The average annual growth rate in 2021, on the other hand, is up to 7.2 percent.

As you are making your Estimated Growths, consider global, regional, and local events that might disrupt the retail market and move you away from the typical 3.5%-5% benchmark. And remember, it is still a very volatile market, so stick to safe predictions and avoid overspending to save yourself any headaches.

Make careful to account for factors like sale days and weekends when generating your sales budget so that you don’t distort your budget by setting your figures too high or too low.

Budgeting with a Margin

You decide your profit margins when you set your sales targets. The overall range you should aim for is determined by the products you offer and the sort of retailing you perform. More information on calculating and establishing the correct margins for your company may be found in our article on gross margins.

The sort of items you offer and the industry in which you operate will determine your gross margin.

When it comes to budgeting, how much you expect to spend in your company, your overhead expenses, the amount of sales and promotions you run, and your pricing strategy all play a role in limiting your margins. Remember that the more sales you make and the more money you spend on your company, the smaller your profit margin will be.

Make sure you understand how much of a profit margin you need to make your firm successful. Then, when required, tweak your budgeting strategy to reach that margin.

You may use this method to compute your gross profit using your gross margin percentage:

Gross Profit = Gross Margin x Sales Revenue ( percent )

4. Create a cost budget to obtain the most bang for your buck.

A cost budget details how much money you intend to spend on your company over the course of the year. As a store, your inventory will be a substantial expenditure, but you’ll also need to budget for other important aspects of your company.

The amount of money you have to spend on your company is ultimately decided by the amount of money you intend to generate that year. To figure how how much you can spend in total, use your sales budget and gross income projections.

If you’re starting a new business, check out our article on startup expenses for an estimate of how much it will cost to get your company up and running. Also, accounting software such as QuickBooks Online may assist you in keeping track of all your spending and balancing your accounts.

Let’s take a closer look at those areas and make a list of the exact items you should budget for in your retail company. We also offer a cost budget template that splits these categories down and is completely free to use:

Facilities

Rent, utility bills, internet, cleaning, phone, and improvements are all included.

Your facilities should contribute for 10%–12% of your total income. Consider reducing or renegotiating your lease conditions if you believe your rent is too costly. Make sure your retail procedures include energy-saving initiatives (e.g., using energy-efficient bulbs, turning the lights off at close, and keeping the windows closed for climate control). This will assist you in lowering facility expenditures.

While there are certain things you can do to keep your facility costs down, this is essentially a set fee that you should be aware of before signing a lease deal.

Labor

Payroll, recruiting and training, refreshments and other supplies, clothing, and bonus system are all included.

Labor expenditures should typically be between 10% and 15% of yearly sales. This proportion may help you determine if your shop is overstaffed or understaffed, as well as establish fair and competitive hourly rates and compensation.

Reduced staff turnover is one method for lowering labor expenditures. Training takes time, effort, and money, and an experienced employee is much more valuable than someone who is still learning the ropes. Try to increase employee retention by rewarding your employees and making your company a pleasant place to work.

Marketing

Advertising, sales, promotional materials, customer loyalty programs, branding, and shopping bags are all examples of this.

Your marketing expenditures, unlike your labor and facility costs, are primarily controlled by you and how much you need, desire, or can spend. Retailers often spend between 3% and 5% of their entire sales on marketing campaigns. Retailers spend an average of 4.4 percent of total sales on marketing across the board, with bigger companies paying even more.

Keep in mind that your marketing budget is mostly determined by your margin budget. To prevent overpaying, use your margin as a guide, and be sure to invest carefully and use clever marketing methods to maximize your returns.

Expenses for administration

Travel charges, credit card fees, licensing and government fees, POS software, other software or online app subscriptions, and security are all included in this category.

Expenses for administration are another area of your budgeting scheme that is not entirely fixed and is determined by how much you want to and can spend. In terms of how you can minimize costs in this area, consider using less expensive software or doing something manually. You can also cut travel expenses by doing your buying online.

Inventory

This includes the following: COGS, cost of goods sold, transportation, manufacturing, storage, and inventory management are all terms used to describe the cost of goods sold.

All of the expenses related with your inventory and manufacturing are referred to as COGS (Costs of Goods Sold). How much you spend on inventory is a tricky subject that is mostly determined by previous year’s statistics, your industry, the cost of your items, and the level of risk you are ready to accept.

Typically, your COGS is calculated as part of your margin budget, and your margin is used to decide how much you may spend on items. Additionally, while deciding how much inventory to buy, keep your sales projections in mind.

The last thing you want is to buy too much or too little inventory. Inaccurate purchasing not only increases storage expenses and causes stale inventory, but it also frustrates consumers who desire new things or an item that has previously sold out.

Over-buying is always preferable than under-buying.

Benchmarks for Retail Budgeting

ten percent to twelve percent of store facilities 10%–15% of the labor force 3%–5% of the time is spent on marketing. Expenses for administration: 4%–5% Inventory varies by industry and cost of goods sold.

5. Create Your P&L Sheet to Provide a Full Picture

A P&L statement, also known as a Profit and Loss or an income statement, is an account statement that shows all of a company’s revenues and expenses for a certain period. In other words, it is a combination of both the sales and costs budgets that, when combined, shows you how much total revenue you can expect given your projected profits and losses.

In retail, you typically break your P&L sheets up by Quarters, with Q1 being January through March, Q2 with April to June, Q3 being July to September, and Q4 with October through December. The exact dates fluctuate annually, so check the exact fiscal quarter dates when creating your P&Ls.

When creating your projected P&L sheet, these are the line items that you should include. We also have a template here that is free to use.

• Revenue: This is the amount of money you expect to make depending on your sales budget.
• COGS: Based on your margin budget and expected purchase strategy, this is how much you expect to spend on your inventory.
• Operating Expenses: This category comprises labor, administrative, and facility costs, as well as any other costs spent by your company.
• Depreciation: This accounts for any declines in the value of your gains due to market fluctuations.
• Common Expenses: This refers to any expenses shared among multiple stores (for example, a customer loyalty program subscription that multiple locations utilize) and should be divided evenly among the stores on their P&L sheets.
• After you’ve deducted all expenditures from your overall income, you’ll have a net profit.

6. Create a cash flow plan to help you stay on track.

A cash flow prediction is the last stage in generating a budget for your retail firm. Cash Flows show you how much money you have at any one moment depending on your outgoing, arriving, and on-hand cash, as well as how well you’re keeping to your budget.

Your cash flow will be divided into four sections:

• Cash Outflow: How much money have you spent?
• Net Cash is the difference between your present revenue and your outgoing revenue.
• Month-End Cash: How much cash you have on hand plus your net cash at the end of the month.
• Sum Annual Cash: This is a running total of how much money you have from month to month.

You may use our cash flow template to establish your own cash flow budget.

You can simply monitor and compare weekly, monthly, and quarterly objectives and evaluate how well you are going toward your budgeting goals with all of these budgets at your disposal. However, keep in mind that although these budgets provide a solid foundation for remaining on track, they are also live documents. You’ll have to alter and evaluate your budget when circumstances change—economic slump (or upturn), growing prices, inflation. Allow your budgets to be flexible and adjust as your circumstances change.

Conclusion

Making a budget for your retail company can help you embark on the road to profitability. You may avoid overspending, overbuying merchandise, and frustrating your staff by establishing a realistic strategy that accounts for all of your costs. To help you develop a budget that works for your company, follow our six-step plan.

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The “how to prepare budget for a company example” is a guide on how to budget your retail business. This blog post will teach you the 6 steps that should be taken in order to successfully budget your company.

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