How Will Right Pricing Make Your Business More Profitable? Post 5 of the series

OK, now for the moment of truth – the sales budget. The budget that tells you where and when your money should be coming into the business and whether this is enough to cover all your expenses and make you profitable.

So, how do you create a sales budget?

Well, year one it’s called guess-work. Basically you try and predict what products will sell in which month and how many of them you will sell.

Year two, reality sets in and you should have some indication from the sales records of year one as a guide (you do keep track of your sales on a daily, weekly and/or monthly basis don’t you?).

By year three you should know exactly where your sales are coming from and when.

There are some businesses that I have worked with that can accurately track by the day and literally by the hour when sales are coming in. The benefit here is that stock ordering and product delivery is kept to a just-in-time framework – avoiding overstocking. Also staffing can be accurately managed, avoiding the paying of casual staff for quiet times not busy times. It also helps manage customer expectation.

So, how do you produce a sales budget?

Like your personal and business expense budgets, divide your page into months.

Now, here you can take two different tracks.

One is you can list every product as an individual line item and predict how many of each you will sell each month.

This works well for business that have a great computer system that can track a large number of line items and have the staff that can list and update every product a company sells. For instance, a supermarket may have 5,000 to 10,000 individual line items on their shelves. That’s a lot of work keeping that list up-to-date. But they do do it. Each and every product, each and every sale is tracked and recorded. They have become so sophisticated that they know where and when you buy your products (and you thought those loyalty cards were for you?!?)

Alternatively, it works well where you have a business, such as mine, that only provides a limited number of products or services. It’s easy to track and keep records on.

The other way, where you have a relatively large number of products, is to do a sales budget based on average pricing. What I mean by this is, instead of listing every product (say Brand A toothpaste 50g, 75g, 120g and Brand B toothpaste 50g, 75g, 120g) you bunch all like products together and average the buy and sell prices along with the total number of sales for all of those products in your sales budget (in the example above you would just list Toothpaste as a line item).

Just bear in mind, this is a sales forecast budget, not a stock control register. A stock control register is where you would list and track sales of each individual item so as to ensure you have the right stock in the right place at the right time.

Next, against each product note its “buy” price (a variable expense to your business) and your “sell” price. (So, what do we call the difference?)

Once you have done this, just as you did with your other budgets, record how many sales you will make of each product on a month-by-month basis.

Your speadsheet should record the total by buy/supply price and the total sales income for each product or service you sell on a monthly basis and give you a total of these variable expenses and sales incomes for the complete year for each product and a total for all products across the whole year.

What next?

Simply add the variable expenses to your fixed expenses to give you the Total Expenses for your business for the year and subtract this total from your Total Sales Income. Hopefully your Sales Income is greater than your Total Expenses. That’s called, in simple terms, profit. If not, it’s called a loss.

You can even take it one step further, divide your Total Sales Income by the number of customers or sales transaction in the year to find the average sale in dollar terms. Now ask yourself, what if you could increase that average sale by say 5% or 10%? You’d either make more money from the same number of customers or need fewer customers to make the same turnover. Something to think about.

More to come.

All success.

Colin
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