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MAKING A PLAN

According to standard accounting definitions, a budget is "a formal written statement of management's plans for the future, expressed in financial terms." More simply put, it is an estimate of earnings and expenses over a set period of time, usually a year. Factors such as the economy, labor market, changes in industry or technology, and unforeseen disasters or other circumstances (such as road construction) may affect the budget. A budget outlines your plan for success and places your focus on your goals by making sure the income (usually sales) is sufficient and the costs related to that income are under control.

Sales
The first portion of the budget, and possibly the most important part, is the sales plan or budget. While there is no exact formula to use to produce a guaranteed accurate sales plan, there are steps that can help to match future reality to historical data and knowledge.

Look at you historical data and determine by class where dips, peaks and plateaus generally occur. If for example, you have been in business for three years and February and early March has always been very slow for you, unless you are making changes that will affect the previous patterns of your customers, those same dips, peaks, and plateaus are likely to occur this year as well. Plan for them. Then make a commitment to update the sales plans at least quarterly. Quarterly means every three months when you are speaking of a year. Remember, the sales plan is not carved in stone but written in pencil so change it as needed.

Note: No one will hit every class for an entire quarter and need to make no changes. Commit to keeping your plan updated. The sales plan is used to calculate all expenses related to sales, payroll, personnel requirements, inventory purchases. Keeping the sales plan reasonable will have a positive affect on your bottom line-especially if the Open-to-Buy is kept updated and the orders respond to success or short-comings in the sales plans.

Expenses
The National Retail Federation has suggested sixteen classifications of expenses relating to the budgeting process. Generally, any expense of operating a business will fall into one of these classifications. The classifications are:

Payroll
Advertising
Taxes
Supplies
Service Purchased
Unclassified (Miscellaneous)
Travel
Communications
Pensions
Insurance
Depreciation
Professional Services
Bad Debts
Equipment Rentals
Equipment Maintenance & Service Contracts
Real Property  

Each of these expense classifications can have many sub-titles under it. For example, Advertising would include Newspaper, TV & Radio, Direct Mail, Displays, Merchants' Association, Agency Fee, Web site, Trunk Shows, eNewsletter service provider or other expenses. Each of these sub-categories needs to be examined and a budget prepared.

After the annual expense is determined, it should be divided by month. Rent would be the same for each month. Payroll should be higher during the holiday season than perhaps late winter or early Spring when there are fewer or less popular holidays to bring out the shoppers.

So, how do you plan expenses? One method is to examine historical data.  Looking at previous utility bills should give you a fairly good idea of heating or cooling costs for the next year. Once you know the average usage, the utility company can provide you with an estimate of your future cost by kilo-watt hour or gallon of water for example and you can determine your budget estimates. If you use a weather forecasting service and they say your winter will be warmer than normal, you may take the average usage from prior years and reduce it by 5 or 10% (or more) to get your monthly estimates. 

Some items will remain the same from one year to the next. Real property rentals will typically remain the same fixed rate until the lease is re-negotiated. Some expenses, such as shopping bags or credit card fees can be calculated as a percentage of sales. Remember, your sales plan, inventory and cost of goods sold are all tied to your Open-to-Buy. You should not plan to have a 10% increase in sales in the budget and a 15% on the Open-to-Buy. Every document should build off the next to give the most accurate budget possible.

We recommend a budgeting process that normally includes budgeting for each of the General Ledger accounts that appear on your Income Statement. It must be detailed enough to give an exact accounting of where and when all the dollars are spent. After all, it does little good to know that payroll is too high unless you can also determine which payroll is too high (selling, office?) so you can then determine how to cut or control these expenses.

Miscellaneous Income and Expense
There are two sections of the Income Statement that remain to be planned. These are miscellaneous income items that are not part of the normal everyday operation of a retail store, such as finance charge income (if the store carries its own receivables) or miscellaneous expenses such as interest expense. There may also be a loss due to fire or some one-time expense or income item not related to the day-to-day operation of a retail store.

Once the budget is prepared, it is important to examine discrepancies between the budgeted plans and actual results each month to determine developing trends or to note changes to or errors in the plans. Otherwise, a business constantly fights chaos. If the economy shifts and you are exceeding your sales plan by 20%, logically you will need to increase other expenses, payroll, credit card processing and selling expenses to name a few. Failure to update the budget, like failure to update the Open-to-Buy leaves the store vulnerable to over-compensating or under-compensating based on "gut feel" which, unfortunately, frequently leads to the chaos theory of business.

Keep in mind that profit does not equal cash. You must have an adequate cash flow to stay in business; otherwise, how will you pay your vendors and employees? 

Don't be ruled by chaos. Plan for your future.  Do it for your store, yourself, your employees and your community. Use your plan and your Open-To-Buy to help make the best decisions possible. Questions?  We can help.  Check out our Open To Buy and/or our Budgeting service.

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