As I mentioned in that article, the problem with this method is that it can derive a sales target is that is unrealistic because the number comes from the shareholders’ expectations of profit and these may well not match the marketplace!
I prefer to start the budget at the top line (i.e. sales) and filter down to the target profit return to the shareholders.
In doing this, it is important that in setting the sales target you are conservative. There should be no prizes in setting the highest target sales and, as I will show you in this series of articles, this has a cataclysmic effect on a budget in several areas, the most important being in planned purchasing.
What’s more, if the budget is unrealistic, management and staff will take no notice of it, because it is unachievable.
SETTING THE SALES TARGET
When setting the sales target, several elements will have an impact on setting the yearly target. The following are some but not all of these:
The final step in completing the sales component of the budgeting process is to calculate when you believe the sales will occur in the future by month.
Do not simply take a sales budget for 12 months and divide it by 12 to get the monthly sales target. We all know that in this industry there are some months of the year you are working 36 hours a day and some months when one can be shooting rubber bands into bins!
The best method of setting the monthly sales budget is simply to look historically at the sales trends.
SETTING THE GP MARGIN TARGET
The next important step in the budgeting process is to set the Gross Profit Margin target. When I set budgets in this area I always use a target margin after rebate.
How to set the target margin? First review the existing and past Gross Profit Margins. The calculation is:
$ Gross Profit ÷ $ Sales x 100 = Gross Profit Margin
$600,000 ÷ $2,000,000 x 100 = 30%
Is the result of 30% good, fair or bad?
In this industry the Gross Profit Margin you should be targeting is influenced by the market you are in and the mix of product you sell. For further information on what you should be targeting please contact me via my website.
IMPROVING GP PERFORMANCE
With any store I believe there are always areas where you can improve Gross Profit performance within the store. Remember for a number of operations a 1% increase in Gross Profit Margin can equate to an increase of 50% net profit.
These areas are:
This, believe it or not, is not the total list of factors within a store that affects margins.
BE RATIONAL, BE CONSERVATIVE
When targeting a Gross Profit Margin remember: the first rule of budgeting is BE CONSERVATIVE. If you are currently achieving a Gross Profit Margin of 30% it is not rational to then decide to target 60%.
When you have set your Gross Profit Margin percentage target, multiply that rate into the monthly $ Sales target to get the monthly $ Gross Profit target.
Once you have that number, you can calculate your monthly closing stock targets and purchase targets (which are the subject of the next article!).
Remember – if you don’t budget, you cannot measure.
Peter Cox is a senior consultant for Macquarie Advisory Partnership based in Sydney. He has over a decade of experience training and consulting in the retail hardware industry. He conducts key-note addresses, and management and sales workshops, which are aimed at improving profitability and liquidity in one of Australasia’s most competitive retail environments. Phone 0061 438 712 200 or visit www.petermcox.com.au