Retail Dogma

RETAIL BUDGETING PROCESS

Step-by-Step Outline

This is an outline to the retail budgeting process

You will learn about:

  • Retail Budgeting Steps
  • Importance of Budgeting & Planning
  • Retail Budgeting Missteps
  • Mastering Retail Budgeting

INTRODUCTION TO RETAIL BUDGETING

Retail budgeting process is a multi-step activity done on a yearly basis to plan for one year ahead. The ultimate goal when you budget for a retail store is to generate a realistic final P&L budget for the business that lays out the expected revenues and costs associated with the business, and the final net profit figure for next year.

It is also an essential step to perform before starting a retail business to check the feasibility of your operations before committing or investing in it.

As we go through the process you will get to know why this activity is so important and why mastering it makes a big difference.

Retail Budgeting Importance

The budgeting process is a key planning activity for any business, and should be mastered by the manager in order to avoid any discrepancies or surprises throughout the year.

Having an accurate sales budget will lead to having an accurate retail buying budget (OTB) and this is very important to avoid overstock or under-stock issues.

Read More: Open to Buy: The Complete Guide

Besides its importance to plan for buying merchandise in proper quantities, the retail budgeting process will generate an estimate about the costs associated with the business and the revenue needed to cover these costs to end the year profitably.

A business could be able to generate good sales, but the costs associated with running this business could keep branching out to the extent that they are no longer covered by the sales, which would make the business non-viable.

That’s why before starting the year all the revenue streams should be listed and forecasted and all the cost lines should be planned in advance and adhered to throughout the year

RETAIL BUDGETING STEPS

Retail budgeting process
The retail budgeting process is comprised of 3 core steps:

  • Step 1: Sales Budgeting
  • Step 2: Cost Budgeting
  • Step 3: P&L Budgeting
The process starts with gathering data and inputs from inside and outside the business and analyzing those findings, then proceeding with the 3 core steps.
 
After the P&L budget is finalized, the data from this budget is used to create a cash flow plan.
 
This cash flow plan will need input about the incoming orders for merchandise purchases and when they should be paid for.
 
This is extracted  from the Open to Buy budget that is created based on the sales and margin forecasts.
 
In the coming chapters we will explain the 3 core steps of the retail budgeting process 

STEP 1: SALES BUDGETING

Sales budgeting is the first step in the retail budgeting process, after data gathering, and is the most important step.

As you will see later on, all the other budget lines will be dependent on the sales budget in the first place, so failing to forecast a realistic sales budget can result in loss for the business, as costs will not be in sync with the actual sales generated that year.

In order to master the sales budgeting step, the manager needs to take into consideration all the external & internal factors that might affect sales for that given year.

Having this particular knowledge and experience will allow him/her to make a realistic forecast for next year.

It is very important to be realistic in your sales budget because the buying budget will be determined based on this forecast, and rectifying this in the future will not be an easy process.

If this sales data is wrong or unrealistic, it will result in wrong purchasing and this will again affect the sales and margins for that period.

Learn how to budget sales and create a full P&L budget for new and existing stores, as well as create a 3 years financial projection in this Retail Budgeting Course

RECOMMENDED COURSE

Margin Budgeting

Included in the sales budgeting step will also be the margin budgeting. 

Determining the margin is as important as estimating the sales, because it is the gross profit that pays the business expenses, not the revenue itself. it makes the biggest difference on your profitability if you deliver 100,000$ at 55% margin vs 100,000$ at 40% margin.

Furthermore, the gross margin determines the cost of goods sold (COGS), which will determine the purchasing budget.

Read More: Gross Margin Types

Once you have estimated your sales forecast/budget and your margin %, you will be able to calculate your gross profit by multiplying your sales by the margin %. 

For example if your sales are 100,000$ at a 45% margin

Gross Profit = Sales x Gross Margin (%)

Gross Profit= 100,000 $ x 0.45 = 45,000 $

STEP 2: COST BUDGETING

After you have determined the estimated revenue & gross profit for next year through your sales budgeting process, you will start to determine your operating cost budget.

Ideally you want to keep your costs at the lowest level, but at the same time not too low, that it starts affecting your operations or customer experience. 

You will find, year after year, that your costs could be optimized by tweaking something here and there or negotiating a better deal with one or more of your vendors.

Cost budgeting will include different lines summarized as below:

  1. Rent
  2. Manpower
  3. Selling & Promotion
  4. Admin Expenses

STEP 3: P&L BUDGETING

The final step in the retail budgeting process is the P&L budgeting, and it is dependent  on the previous two steps.

P&L stands for profit & loss, and this statement is also referred to as income statement.

Read all about P&L in our complete guide on P&L Management

Revenue & Gross Profit

At the top of your P&L budget will be your revenue, and we have determined this in Step 1. Together with the cost of goods sold (also determined in step 1) this will give you the gross profit budget.

Operating Income

You will then subtract your operating expenses (determined in step 2) & depreciation from your gross profit (determined in step 1) and you will get the operating income. 

However; this is not your final net income for the business. To determine the net income you will then subtract the other non-operating expenses, which include taxes & interests.

Net Income

The final figure will then be the Net Profit of your business. This is the main figure of this entire budgeting process and your aim is to maximize this figure year after year.

THE BUDGETING BUNDLE

We packed together the retail budget templates you will need for your business. You can download them from members area

RETAIL BUDGETING MISSTEPS

Below we will list common mistakes that happen in the budgeting process and how they can affect the business.

Budgeting High Sales

Some managers get too optimistic or fail to properly assess the market condition around them and budget a very high growth in sales on the current year.

Besides this leading to high inventory buying, that the business will be busy clearing throughout the year, it will also result in false cost budgeting for other operating expenses, which will exacerbate the losses at the end of the year.

That’s why gathering external and internal data prior to starting the process is essential for accurate forecasting.

Budgeting Low Sales

That will not affect the costs as they would have been reduced and probably leading to long term efficiencies. However, this will result in less buying and missing the opportunity of making more sales.

Budgeting Inaccurate Margins

It is very important to budget the margins accurately, because, at the end of the day, it is the margins that actually pay the bills.

Usually budgeting wrong margins is a result of not knowing the costs of merchandise properly, the realistic price points for this merchandise to sell successfully, or not planning for the required marketing promotions and events to deliver the targeted sales budget.

In many cases, the manager finds that the sales budget has been put too high, so he starts running frequent promotions to try and catch up on those numbers. This not only affects the current year’s margins, but could also affect the margins for years to come.

MASTERING RETAIL BUDGETING

In order to master the retail budgeting process it will take some time & experience in the market to be able to accurately forecast next year’s figures and get used to the process.

Learn the right way to budget for a retail business in this retail budgeting & planning course and practice creating a budget using hypothetical data we provide.

You will get to know the factors affecting retail budgets, and how to adjust your budget to seasonality, so that your monthly budgets will be realistic and so will your inventory planning.

A good practice is to re-visit your budget at different intervals throughout the year (e.g every quarter) and start adjusting your forecast for the remaining months based on the current sales trend and recent developments in the market. It will not affect your current budget, as it is final, but it is a good practice that will help you understand the cause & effect of certain circumstances and market conditions.

We have also found it very helpful to maintain a “Notes” diary or field in your budget excel file, that links exceptional sales figures (too high sales or too low sales) throughout the year to the specific events that lead to such exceptional behavior. This way you will be able to normalize those figures for next year’s budget if such events are to be absent, and know what to expect if such events are to happen again.

Retail Management Courses

RESOURCES

We have created a lot of tools, templates, courses and guides that take you through the entire financial planning process for your retail or e-commerce business.

You will learn how to:

  • Set a retail sales budget
  • Calculate your buying budget by product department/category (online or Excel)
  • Plan your entire P&L and project profits in advance
  • Plan your cash flow and project cash on hand in advance
  • Connect your cash forecast to your buying plan