by David Brown
Good budgets don’t need to be complicated, but they do need to be thorough to make sure they cover your short, medium and long term financial requirements.
The main driver of an attainable sales budget increase is a clear understanding of the required/desired profit needs of the business and its owners. For example, it is possible to increase sales by 10-15% and still lose money because that increase has been achieved through discounting which has resulted in less gross profit and increased costs.
We suggest starting with the end in mind e.g. spend some time thinking about how much profit you want and then translate that to the amount of sales you need to deliver that bottom line result. We call this process ‘The GAP Analysis’ which is simply a metaphor to help you identify the gap between the required financial performance of your business and the current performance.
When considering how much profit you need, be sure to include your retirement/exit plans (including a timeframe), the market salary for your role and an appropriate return on the capital you have invested in your business (a 26% return on your capital is appropriate).
Once you add all these together along with your normal operating expenses, you will know how much Gross Profit you need to generate. This will then form the basis of your Sales Budget e.g. if you need $500,000 of gross profit to deliver your required net return and your gross margin is 55%, you would need to do sales of $910,000.
Even putting this process to one side, we truly believe that if you are not aiming for a 20% increase in sales, you are not aiming high enough. If that sounds unrealistic, please consider just some of the many ways to achieve this:
- The average store has a close ratio of around 18% – that means that 5 out of every 6 people walk out empty handed and disappointed. By making 1 extra sale from every 10 people (10%) who are walking out, you would increase sales by 40% to 50%.
- Most stores make 50% of their sales from just 4% of their units … Return on Effort. Typically, around 200 items makes up 50% of your dollars so if you could sell another 200 of these (or similar) items, you could increase sales by 50%. That is much easier to achieve than selling another 5,000 items, which makes up the other 50%.
- Most stores have 1 (sometimes 2) Top Salespeople who produce far better results than the rest of the team. Clients tell us “if we could just find another Sue, our business would take off”. What Sue proves is, it can be done. And if she can do it, others can too. Too many stores put up with their hiring mistakes and let non-performing people take the place of the next Super Star.
Some other budgeting tips …
When determining your budget, it helps to disregard historic figures and look at the potential the business has. When deciding what is possible for your store one of the most significant factors to consider is the size of the immediate shopping precinct.
Another factor is how much competition is there for the sales dollars, not only amongst other jewelers in the area, but also other unrelated stores who will encroach on your customer base?
Thirdly, what is the size of your own customer database and is it being tapped to its full potential? An under-utilized database is often the most valuable potential any business has, and with the cost of acquiring new customers increasing, for many jewelers it is the only affordable way to drive traffic.
Next, think about new opportunities within your business e.g. you may be looking to build your Diamond business or introduce a new Prototype range. The reason you are making these changes is to increase sales so make sure they are added to your sales budget.
Lastly, and most importantly, when setting a budget, look at the limitations you may be imposing on yourself. Get excited about the things you can influence i.e. everything that happens inside your store, and ignore the things you can’t influence i.e. everything that happens outside your store, such as the global economy or local unemployment.
It’s time to demand more from your business and for yourself!
If you would like to speak further about how we can help you set a budget or need more strategies on how to achieve some growth in your business, please contact Becka Johnson Kibby, 877-569-8657, Ext.1