How To Budget a Retail Business in 6 Steps (+ Free Templates)
This article is part of a larger series on Retail Management.
Creating and sticking to an organized retail budget is imperative to the success of your retail business—it will help you predict sales fluctuations, set buying budgets and quantities, understand costs, and prevent overspending. Here, we will go over how to budget a retail business in six steps.
Looking for budgeting guidelines to help you stay organized and check all the boxes? Download our free retail budgeting templates to keep yourself on track.
Step 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. You can use this information to make predictions about your upcoming revenue stream so that you can set a realistic budget that keeps you in the black. This is a practice called sales forecasting.
You will want to collect data on:
- Sales from all stores: You need to know how much your store(s) made in previous years to detect trends and make predictions about what your sales revenue could look like this year. If you have multiple locations, then you want to keep each store’s sales data separate so that you can view the individual performance of each location and allocate budgets accordingly.
- Gross margin: You need to understand how much of your revenue is left after you remove all associated costs, such as labor, payroll, and your cost of goods sold (COGS).
- 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.
- Anomalous events: So that you don’t overestimate or underestimate your budget, be sure to note any anomalous events that impacted your sales. For example, the pandemic caused you to go several months with record low sales—understanding the event that led to the sales decline helps you avoid falsely anticipating low sales numbers for the coming year.
- Fixed costs: In addition to gathering sales data, you will also need to have a grasp of all of your fixed costs. Often called overhead costs, your fixed costs are all your business expenses that are not impacted by your sales—like rent and utilities. These are the costs that you will owe regardless of your store’s performance and will not change month over month.
- Variable costs: On the flip side of your fixed costs, you should gather information on your variable costs. These are costs that are impacted by your sales—like your COGS, payroll, and shipping costs. Understanding these expenses and how they fluctuate will help you to anticipate how your expenses will change as your sales increase or decrease.
Want to learn more about the expenses you should track in your accounting? Check out What Are Expenses in Accounting? Variable & Fixed Explained.
Like-for-Like (LFL) Comparison
In addition to taking a look at all the data above to make your sales forecast, you might also want to do an LFL comparison. With LFL comparisons, you compare two stores with similar characteristics and omit any major outlying factors that could distort their numbers. By isolating and evaluating specific variables so you can see how they impact performance, LFL comparisons allow you to understand why a certain store is succeeding or why another is faltering.
For example, I worked at a boutique with four locations and we wanted to see how the different positioning of the stores impacted sales so we could distribute inventory accordingly. To do this, we first removed all variables between the stores, other than location—like if one store had an event and the others didn’t, or if one store carried a different product than the others. This made the stores essentially the same, other than their respective locations. From there, we looked at store performance and were able to determine that our downtown store did the most sales, so it needed to carry the highest inventory volume.
Along with the metrics mentioned above, making LFL comparisons can help you set your sales calendar, staffing plan, and marketing campaign, and provide insights into what budgeting plan will be most fruitful for your business.
Step 2: Analyze Data & Look for Opportunities
Once you have gathered your data, use it to look for opportunities—you always want to identify areas where you can capitalize on profitability. 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.
For example, say, 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.
Leverage your data for sales and demand forecasting, to inform your marketing strategy and budget, and to better understand the reasons for your business’s success and failures.
Create a Marketing Calendar
A retail marketing calendar includes dates and events you can capitalize on for revenue opportunities—check out this 2022 marketing calendar for a complete guide. Insights from your past sales data come in handy when creating your marketing and promotional calendar to drive sales.
For example, you found that in July, your store had very little traffic on the Fourth of July 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.
Creating a marketing calendar also helps in setting a marketing budget. Don’t worry, though—we will look at how much you should be spending on marketing when we get down to Step 4.
Step 3: Write a Sales Budget to Predict Revenue
A sales budget refers to your annual estimated sales broken down by month and day, and it is used to predict your overall sales revenue for the year. Your sales budget is arguably the most crucial part of creating your overall budget as it determines your general spending limits.
Factor in things like sale days and weekends when creating your sales budget so that you don’t set your numbers too high or low and skew your budget.
You can take many strategies when creating your sales budget, whether that be increasing your margins, sticking to a budget, or maximizing your promotions. Ultimately, your approach to setting sales goals should take into account all the data you collected in step one.
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, say, you anticipate your sales revenue for 2022 to be 10% higher than 2021 because of the rise in in-store sales and your new buy now, pay later (BNPL) services. You would then be able to set sales goals for each month or even for each day based on your 2021 numbers, just 10% higher for your anticipated growth.
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% annual benchmark. And remember, it is still a very volatile market, so stick to safe predictions and avoid overspending to save yourself any headaches.
When you set your sales goals, you also determine your profit margins—the amount by which your sales revenue exceeds your expenses. This will tell you how much money you have in profit after you remove all expenses from your sales revenue.
Know the margin you need to meet to make your business profitable. Then, adjust your budgeting plan as needed to meet that margin. The general profit margin range you should shoot for depends on the type of goods you sell and the kind of retail you do. You can use the graph below for some industry-specific margin averages.
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.
Use the profit margin calculator below to see just how much your profit margin is and whether or not you are hitting your goals.
Step 4: Make a Cost Budget to Predict Costs
A cost budget is a plan that 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, including marketing and labor.
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.
Now, let’s look at those areas and list the specific items you should account for in creating a cost budget for your retail business. You can also use our cost budget template for free.
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.
Retail Budgeting Benchmarks
As you start budgeting and distributing funds to certain expense categories, it is helpful to know the allocation benchmarks for the retail industry. In general, the cost distribution you should aim to meet is:
Store Facilities: 10%–12%
Admin Expenses: 4%–5%
Inventory: Depends on your industry and COGS
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, consider downsizing or renegotiating your lease terms. Be sure to implement energy-saving policies at your store (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 utilities, rent and lease payments are fixed costs—the terms should be well understood before entering into a lease agreement so you don’t end up in a financial hole where rent is sucking your business dry.
Finding the right retail space and going through the hoops to rent it out can be daunting. Check out our guide to finding and leasing a retail space to make renting a breeze.
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 appropriately staffing your store and can help you set fair and competitive hourly wages and salaries. Knowing how to create a payroll budget is important as payroll will be a major part of your overall budget every month.
One way that you can reduce your labor costs is to reduce employee turnover as a commonly cited figure says that replacing an employee typically costs businesses six to nine months of their pay. Training costs time, attention, and money, and a well-seasoned employee is much more valuable than a newbie still learning the ropes. Try to boost your employee retention by rewarding your staff and making your business a good place to work.
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 are willing to spend. Typically, retail businesses spend anywhere from 3%–5% of their total revenue on marketing initiatives.
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.
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. We estimate it at around 4%–5%, but it is ultimately 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.
This includes: All COGS—cost of merchandise, shipping, production, storage, and inventory management
Consider your COGS, or 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.
Your inventory will not just have upfront costs, it will also incur holding costs the longer you have it in your store. Check out our guide to inventory carrying costs and use our inventory carrying cost calculator.
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.
Consider using accounting software like QuickBooks Online to help you keep track of all your expenses and balance your books.
Step 5: Create Your Projected P&L Statement 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:
- 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.
Check out our free P&L template that you can use for your planning.
Step 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.
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.
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 goals. Remember, however, that 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.