We’re a week into the new year – how’s business going
against budget? No budget? Big mistake! You’ve heard all the old hack phrases
about aiming at nothing and hitting it with surprising regularity...but
seriously, how can you drive a business without a road map?
A sales or revenue budget is a start and if that’s all you
have then it’s better than nothing. But so often clients tell us that they have
no way of knowing what their sales will be next week or next month let along
next year! Our answer is “that’s just a cop out!” Even if your business is one
where the customers walk in the door, ring the phone or email the order you can
still set a budget for sales. Look at the monthly sales for the past, say, 3
years. Do you see any seasonal pattern? Has there been any growth? What are the
current conditions in your market? These all give you a starting point to set a
sales budget for the year ahead.
So now
you’ve got a sales budget – what are you going to do with it? Well there are a
number of things that are all quite easy:
- Compare your monthly actual sales against budget and think about why they’re different. Talk to your team about what is happening, think about what products/services were popular or unpopular, were outside events impacting (e.g. news stories about economic woes, elections etc) or did you have any activity that might have made an impact (like advertising, product placement, promotions etc)?
- Check whether your monthly budget sales exceed break-even, i.e. are you going to make a profit at that level of revenue? You don’t know? Well you’ve just highlighted another important measure you need to get on top of – more about that later.
- Try something new – focus on a particular product or service, talk to customers about the things they’re not buying from you, set a sales target for your team with a reward or celebration if you reach or beat it. If you’re not sure what to do – just do anything! Doing something different will always have an impact.
- Work out how many items/hours or whatever you need to sell or produce to make that budget. Work out how many sales you need to make – i.e. what is your average sale? Work out how many customers you need to meet to hit your target. These are critical numbers you should always be measuring. When you break the activities down that together results in a sale it’s much easier to think about what affects those little bits and what you might try that will improve your results. For example, if the average customer buys $265 of product/service each time you make a sale, think about what else you could offer them to increase that. They’re already there and buying from you...
You get the message I’m sure.
So what else? Well:
- Work out an overhead budget. These are the costs you’re going to incur whether anyone sets foot in your place or not.
- Work out your gross profit – the difference between what you sell something for and how much it costs you. For some service businesses, say a hairdresser, where the service providers are on wages you can just treat sales as gross profit. For others you know what your products cost you.
- Work out your break-even sales. This is the value of sales where the gross profit equals the overheads.
- Gross profit is 50%
- Break even sales = overheads/GP
= 22,500/0.5
= $45,000
How much do you need to sell to make $150,000 per year profit? That’s $12,500 per month. Just add that amount to your overheads and re-work the break-even equation:
- Monthly overheads plus profit target = $22,500 + 12,500 = $35,000
- Gross profit is 50%
- Profit target sales = (overheads + profit)/GP
= 35,000/0.5
= $70,000
So now you can start to use your budget to drive business performance. How much profit do you want to make? What sales targets do you need to set to make that? How many sales/customers do you need to hit that target? What are your results now? What are some things you need to do to reach that target?
Now we’re talking Strategy. And all because you thought about setting a sales budget – but more importantly, without one you can’t even get started.
