The Operating Budget

 RFT Operating Budget

From the modest family right up to the multi-national corporation, everybody needs a budget.  If we don’t have goals, how do we control our spending and how will we know if we are succeeding.  We can’t judge success by sales numbers alone.  Most small businesses don’t have huge reserves; even small mistakes can be costly.  The smart strategy is to build a business plan, constantly strive to improve, learn from mistakes and stick to the plan.

The Operating Budget combines our forecast for Sales, Cost of Sales and Gross Profit with our Expense estimates producing a Net Profit at the end of a fiscal period.  Not to frighten those who dislike algebra, it really is like an equation with Sales and expenses on one side and Net Profit on the other.  Increase sales without changing any of the other elements and Profit Increases.  Increase Expenses while holding all other factors equal and Profit decreases.  If we plan to make a profit and why, otherwise would we be in business, we need to establish yardsticks for income and expense.

Most budgets are plotted for a fiscal year.  Because income and expense frequently fluctuates over a year’s cycle, the annual budget is broken down in periods.  If July and August are typically slow months in our business, we’ll reflect that in our sales estimates.  In spite of slower sales, our fixed operating costs won’t vary.  In fact, these months might not return a net profit at all.  But the other ten months are profitable and, when the entire year is tallied, we post a satisfactory profit.  We want our budget for sales and expenses to reflect reality.  We’re setting targets that we hope to meet or exceed.  Breaking an entire year’s budget into periods establishes a yardstick that reflects the business cycle.

Typically, the breakpoints in the year’s budget are 12 months.  Some retailers actually budget based on 13 periods.  Assuming the retail business is operating seven days a week, January has 31 selling days and February has only 28; three less days of sales and three less days of wages.  Some months have four weeks and some have almost five.  Thirteen 4-week periods in the year smoothes out these fluctuations, making for a consistent period-to-period picture.  In our working example, we have used calendar months.

The operating Budget worksheet in the Retail Forecasting Workbook has three main components:

Sales and Cost of Sales:

These numbers are generated in the Sales and Cost of Sales worksheet.  Any change in estimated sales, and Cost of Sales Percentages will be automatically reflected in the operating budget. This section of the operating statement is locked, preventing manual entry.

Operating Expenses:

These are the expenses incurred in running the day-to-day retail operation.  The cells are open for manual entry and the layout can be easily adapted to most retail operations.  For some of the more detailed costs like wages and employer benefits, a supporting spreadsheet can be added to the workbook and the cells altered  to represent the result of the supporting calculations ( =’Wages and Benefits’ B27).   In the example we provided, wages are estimated at 15% of Sales and Employee Benefits are 10% of Wages.

Admin/Financial Expenses

These are the non-operating costs such as the cost of money and financial services.  If a retail business has a revolving loan, the cost of borrowing appears here as it is not directly related to merchandising.

We encourage you to download the sample Budget and Forecasting Tool and substitute your own numbers.

Dave Hands


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