Budgeting – Terror or Triumph Part II 

Budgeting – Terror or Triumph Part II Budgeting Expenses

We hope that the sales budgeting process we covered last month has worked well for you [link to article].  To complete our budget, we will now turn our attention to expense budgeting.  There are several types of expenses to budget. Let’s gather our historical data and get to work on a 5-Step process for expense budgeting.  Like our sales history, if we’ve been vigilant in keeping up with our monthly expense history, this will be easy.  If we haven’t, let’s vow to do this also in the future.

Step 1 – Determine the Type
Determine which expense budget line items are based on historical data. An example of this might be our cleaning costs – is the service we use maintaining the same price this year, or will we see an increase in this line item?  Or instead, are we going to hire someone to clean, and then need to add this new position to our headcount?  Identify all the expenses that are based on set prices – maintaining, increasing or decreasing as the case may be. Then, identify the expenses that are calculated as a percentage of sales, such as credit card fees and sales commissions.  Any expense that can be calculated as a percentage of sales should be done this way.  Some expenses are based on headcount, such as projected training costs.  We’ll use our previous year’s expense budget line items to help determine these expenses – we will want to make a note of our assumptions and the type of budget for each line item this year so we don’t have to try to remember this next year.

Step 2 – Determine the Cost of Goods Sold (COGS)
If our business has consistent margins every year, we will use a percentage of sales. This is the easiest kind of planning because the expense rises or falls as the sales budget does.  We need to make sure that we know what is included in COGS:  Wine only?  Food?  Shipping?  We will check in with our Finance team to be sure we are on the same page.  If we want to change our COGS percentage, we can change cost of the wine, the retail price of the wine, our product mix, and the level of discounting for club members and for case purchases.  Lots of levers are at our disposal to impact this critical component of our budget.

Step 3 – Budget Labor Costs
For this category, we will include base salary plus a percentage overhead “load” by headcount.  The load will cover benefits, payroll taxes, worker’s comp.  Consider changes required if we are adding new guest experiences versus last year.  We will also provide for the impact of internal changes, such as training, incentive compensation, promotions, and our event calendar.

Step 4 – Budget Cases for Wine Clubs
We need to budget our wine club needs for specific wines out as far in advance a possible.  We will project quantities needed for inventory and production planning purposes.  Project revenue (net of club member discount) and make sure price points of all shipments are maximized.  Project COGS for each wine to then calculate total revenue, COGS and gross profit per shipment.  Compare this to the average historical COGS and gross margin percentage.

Step 5 – Reality Check and Action Plan
We have spent a lot of time on the details, and now it is time for the Budget Roll-Up.  This is our reality check, against goals management has specified, and against historical metrics.  Is our plan doable?  Have we planned in any additional resources (time, people, money) needed for our anticipated changes?

Lastly, we will now clarify the goals we have set in our budget and create our action plans.  What will need to happen in order for us to meet our sales and expense goals?  This is the perfect time to develop SMART goals – Specific, Measurable, Achievable, Relevant, and Time-bound.  We’ll use our SMART goals to help us identify champions and timelines for each goal so that we have a roadmap to follow and deliver results on budget.

Ready – Set – Budget!

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