This article is part of a larger series on Retail Management.
Creating and sticking to a retail budget are imperative to the success of your store. An organized retail budget will help you predict sales fluctuations, set buying budgets and quantities, understand costs, and prevent overspending. Be prepared for the unexpected that can change or adjust your budget. Trial and error are a part of the process.
Here, we will go over how to budget a retail business in six steps:
1. Gather Data for Accurate Forecasting
The first step to creating a budget is gathering data from past years that will help you understand your business by the numbers. The goal of this step is to use the information that you gather to make predictions about your upcoming revenue stream so that you can set a realistic budget that keeps you in the green. This is a practice called sales forecasting.
For retail, you will want to collect data on your:
- Sales from all stores: You need to know how much your store(s) made in previous years in order to detect trends and make predictions about what sales could look like this year. If you have multiple locations, then you want to be sure that you keep each store’s sales data separate so that you can view the individual performance of each location.
- Gross margin: You need to understand how much of your revenue is left after you remove all associated costs such as labor, inventory space, and wholesale price.
- Marketing calendar: To get an accurate picture of your sales, you need to know when you hosted sales and events that might have created a boost in your sales.
- Anomalous events: So that you don’t over or underestimate your budget, you want to be sure that you note any anomalous events that impacted your sales. An event such as the global pandemic could cause several months of record low sales—you would want to know about the event that led to the sales decline when you are looking at your data so that you don’t falsely anticipate low sales numbers for the year.
- Fixed Overhead costs: The final piece of data you will need for this stage is your previous year’s overhead costs or all the costs associated with running your business other than the cost of inventory such as rent or utilities. We will look more closely at all the things that overhead costs entail in the cost budget section of this article.
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. “LFL comparison” 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”.
LFL comparisons 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 allows you to study existing businesses and isolate specific factors so that you can understand why a certain store is succeeding or why another is faltering. Use LFLs to help you set your sales calendar, staffing plan, and marketing campaign and get insights into what budgeting plan will be most fruitful for your business.
2. Analyze Data and Look for Opportunities
Once you have gathered your data, use it to look for opportunities. Review where you were successful last year and learn from what you did well. Conversely, evaluate the times when sales were slow or promotions fell flat, and try to understand where you went wrong.
You always want to look for areas where you can capitalize on profitability. For example, you saw a ton of traffic around the holidays and your sales numbers were great from October through December. With this trend in mind, you might invest in a loyalty program in October to capitalize on foot traffic and run a sale in November to counterbalance your spending.
Use your data to do sales forecasting and demand forecasting, inform your marketing strategy and budget, and better understand the reasons for your business’s success and failures.
Create a Marketing Calendar
Marketing and promotional events cost money and cut into your margins. However, investing in these areas is a great way to boost your revenue and foster customer loyalty. Use insights from previous years to create a sales and promotion calendar that will drive your sales.
Say you noticed that July, you had very little traffic on the Fourth weekend when you were running a promotion—but had a surge of traffic the next weekend. With that in mind, you decide to move your July sale to the weekend after July 4 to capitalize on traffic.
Don’t worry; we will look at how much you should be spending on marketing when we get down to the cost budget section.
3. Write a Sales Budget to Provide to Your Stores
A sales budget refers to your annual estimated sales broken down by month and day, and it helps you predict your overall sales revenue for the year. Your sales budget is arguably your most crucial budgeting plan as it is the basis for the rest of your budget lines and sets your initial buying allotment.
Creating a sales budget is where the data from above comes into play. It will help you set realistic and attainable sales goals that will motivate—rather than frustrate—your staff, prevent you from overspending, and set you on the path to profitability.
You can take many strategies when creating your sales budget, whether that be increasing your margins, sticking to a budget, or maximizing your promotions.
This article will provide you with all the sales budgeting templates you could need.
When setting your sales budget, in addition to the data you gathered, there are two major things you should consider:
Your growth estimate 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 growth estimate 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 growth estimate 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.
In the past, the retail industry has had an annual growth rate of about 3.5%-5% depending on the year. However, as things have shaken up, this benchmark has become much harder to rely upon. In 2020 for example, when the pandemic was just beginning, retail growth dipped into the negative as the world shut down. Then this year in 2021, however, the average annual growth rate is up to 7.2%.
As you are making your growth estimates, 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.
Be sure you factor in things like sale days and weekends when creating your sales budget so that you don’t set your numbers too high or too low and skew your budget.
When you set your sales goals, you also determine your profit margins. The general range you should shoot for depends on the type of goods you sell and the kind of retail you do. You can use our article on gross margins for more information on calculating and setting the right margins for your business.
When budgeting, controlling your margins comes down to how much you plan to invest into your business, your overhead costs, the number of sales and promotions that you run, and your pricing strategy. Remember that the more sales you run and the more you spend on your business, the more you will cut into your margin.
Be sure you know the margin you need to meet to make your business profitable. Then, adjust your budgeting plan as needed to meet that margin.
You can use your gross margin percentage to calculate your gross profit using this formula:
Gross Profit = Sales Revenue x Gross Margin (%)
4. Make a Cost Budget to Optimize Your Dollar
A cost budget itemizes how much you expect to spend on your business for the year. As a retailer, your inventory will be a significant expense, but there are also other key areas of your business to which you will have to allocate funds.
How much you can spend on your business is ultimately determined by how much revenue you expect to make that year. Use your sales budget and gross revenue predictions to decide how much you can spend in total.
If you are a new business, then you can look at our article on startup costs to get a rundown of what you can expect to spend to get your business up and running. Also, consider using accounting software like QuickBooks Online to help you keep track of all your expenses and balance your books.
Now, let’s look at those areas and list the specific things you should account for in budgeting for your retail business. We also have a cost budget template that breaks down these categories and is free for you to use:
What this includes: rent, utility payments, internet, cleaning, phone, and renovations
Your facilities should account for 10%–12% of your revenue. If you find that your rent is too high, then consider downsizing or renegotiating your lease terms. Be sure to implement energy-saving policies into your store practices (e.g., using energy-efficient bulbs, turning the lights off at close, and keeping the windows closed for climate control). This will help you cut facility costs.
While there are some things you can do to control the cost of your facilities, this is basically a fixed cost and should be understood before entering into a lease agreement.
What this includes: payroll, hiring and training, snacks and other supplies, uniforms, and bonus structure
Typically, labor costs should be equal to 10%–15% of your annual revenue. This percentage is a good benchmark for knowing whether you are over or understaffing your store and can help you set fair and competitive hourly wages and salaries.
One way that you can reduce your labor costs is to reduce employee turnover. Training costs time, attention, and money, and a well-seasoned employee is much more valuable than a newbie still learning the ropes. Try and boost your employee retention by rewarding your staff and making your business a good place to work.
What this includes: advertising, sales, promotional materials, customer loyalty programs, branding, and shopping bags
Unlike your labor and facilities costs, your marketing expenses are largely determined by you and how much you need to, want to, or can spend. Typically, retail businesses spend anywhere from 3%–5% of their total revenue on marketing initiatives. Across the board, retailers spend an average of 4.4% of the total revenue on marketing, with larger businesses spending even more.
Remember, your margin budget will largely determine your marketing budget. Use your margin as a guide to avoid overspending, and be sure to invest wisely and use smart marketing strategies to capitalize on your investments.
What this includes: travel expenses, credit card fees, licensing and government fees, POS software, other software or web app subscriptions, and security
Administrative expenses 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.
What this includes: COGS, cost of merchandise, shipping, production, storage, and inventory management
COGS (Costs of Goods Sold) refers to all the costs associated with your inventory and production. How much you spend on your inventory is a difficult question that largely comes down to your previous years’ data, your industry, how much your goods cost, and how much risk you are willing to take.
Typically, you determine your COGS as part of your margin budget and use your margin to help guide how much you can spend on your merchandise. Additionally, you want to keep your sales predictions in mind when considering how much inventory to purchase.
The last thing you want is to majorly over- or under-purchase inventory. Inaccurate buying will not only lead your storage costs to increase and your inventory to become stale, but it will also frustrate customers who want fresh items or an item that has already sold out.
Under-buying is always better than over-buying.
Retail Budgeting Benchmarks
Store Facilities: 10%–12%
Admin Expenses: 4%–5%
Inventory: Depends on your industry and COGS
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 how much you anticipate selling based on your sales budget.
- COGS: This is how much you anticipate spending on your inventory based on your margin budget and projected buying plan.
- Operating Expenses: This includes your labor, administrative, facilities, and any other expenses incurred by your business.
- Depreciation: This accounts for any market decreases in the value of your profits.
- 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.
- Net Profit: This is how much you have left after subtracting all costs from your total revenue.
6. Design a Cash Flow Plan to Stay on Track
The final step in creating a budget for your retail business is to create a cash flow forecast. Cash Flows show you how much money you have at any given time based on outgoing, incoming, and on-hand cash and provide an overview of how well you are sticking to your budget.
Your cash flow will have four parts:
- Outgoing Cash: How much you have spent
- Net Cash: Your current revenue minus your outgoing revenue
- Month Ending Cash: How much cash you have on hand plus your net cash
- Total Annual Cash: A running total of how much cash you have month over month
To start your own cash flow budget, you can use our cash flow template.
With all of these budgets at your disposal, you can easily track and compare weekly, monthly, and quarterly targets and see how well you are progressing toward your budgeting goals. Remember, however, that while these budgets are a great framework for staying on course, they are also living documents. As things happen—economic downturn (or upturn), rising costs, inflation—you will have to adjust and revisit your budget. Let your budgets be fluid and have the ability to change as your circumstances do too.
Creating a budget for your retail business will set your business on the right track for profitability. By devising a realistic plan that accounts for all of your expenses, you can ensure that you will not overspend, overbuy inventory, or frustrate your employees. Use our six-step guide to help you create a budget that works for your business.