How to Make a Budget for a Retail Store

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Small business budgeting can be challenging, and owners of retail stores may understand that more than most. Whether you’re waiting to see if that new piece of inventory will sell, or waiting for those sales to roll in, you often have to bet and rely on the unexpected. Learning how to make a budget for a retail store can help make that cycle of ups and downs a little more predictable, though it’s often a trial-and-error process. You set revenue goals and try to allocate your resources effectively to achieve them. Successful budgeting depends on making good projections of your income, cash flow and spending needs. Sometimes you miss the mark because surprises happen, but making and learning from mistakes is a normal part of retail budget planning. Each new year offers a new chance to reset and get better at it.

Make sure your annual budget review includes a thorough analysis of these six key spending categories. Then you’ll be ready to start creating a business budget that prepares your retail store to build more profits.

1. Labor

Predicting labor costs is paramount when assessing how to make a budget for a retail store. As the owner of a small retail business, one of your biggest expenses is acquiring and paying your workers.

High turnover – a perennial challenge in the retail industry – leads to additional recruiting, hiring and training costs. In a November 2018 survey by Korn Ferry, 29% of retailers said their turnover rates had increased since the beginning of the year. For part-time hourly retail employees, the rate rose from 76% in 2017 to 81% in 2018.

In the past, you may have pegged your labor budget to a fixed percentage of sales, but now you may find that method inadequate to cover your needs. Or perhaps you’ve relied on a one-size-fits-all training model but think a customized employee training program in customer service may be a better fit. Those are the kinds of considerations you need to factor into your next budget to make its labor cost projections more accurate.

2. Facilities

Rent should be an easy budget line item to determine since it’s a fixed cost – at least until the store’s current lease expires. If you’ve received an announcement or hints about an increase in rent, you’ll need to adjust your retail budget planning accordingly.

Designing and furnishing your shop’s interior is another important consideration when determining how to make a budget for a retail store. If you’ve been thinking about refinishing the floors or purchasing that new display system you saw at a trade show, be sure to incorporate those costs into your budget.

According to McKinsey & Company, energy is the fourth largest in-store operating expense for U.S. retail businesses, behind labor, rent and marketing. Like many retail store owners, you may be investing in ideas aimed at reducing that cost. Perhaps you plan to switch to more modernized HVAC equipment or lighting fixtures. If you’re a grocer, you may be looking to upgrade to a more energy-efficient refrigeration system. Take some time to calculate the potential energy savings vs. the upfront costs of these investments so your budget will be more on-target.

3. Marketing

Marketing likely makes up a major portion of your retail store’s budget, and if it’s following the industry trend, that number is likely to rise when you update your budget.

In 2018, RetailMeNot reported that nearly 90% of retailers planned to increase their marketing spending, distributing the funds almost evenly across social, mobile, brand and display channels.

As you work on the forecast for next year’s retail advertising budget, consider what new types of marketing and promotions you might be introducing. You also may have plans to expand some of your tried-and-true methods and drop the ones that didn’t work.

In any case, a change in your marketing strategy calls for tweaking this portion of your budget.

Bookstore owner knows how to make a budget for a retail store

4. Inventory

For a retail store owner, inventory management can be the difference between profitable sales and business losses from stacks of unsold merchandise sitting in warehouses.

When you sit down to revamp your budget, review your inventory history over the last few years. Notice which items were overstocked and had to be sold at a discount, and which were so popular you frequently ran out. How often did you have to scramble to compensate when your buying strategy was off? Use that information to adjust your ordering plans for next year and come up with a more realistic figure for your inventory expense.

When learning how to make a budget for a retail store, also consider whether you plan to add or discontinue any items. Don’t forget to include a contingency in the budget to account for revenue losses from discounts, damage, shoplifting and employee theft.

5. Technology

When aligned with your goals, small business technology can add efficiency to your daily operations and free up your time to focus on business growth. This spending category can include equipment, point of sale (POS) systems, internet service, e-commerce platforms, office computers and printers, payroll software, customer relationship management software, inventory management software, staff scheduling software, and budgeting software. The most tech-savvy retailers might add mobile applications and even artificial intelligence to the list.

While the retail industry once lagged behind many others when it came to investing in technology, it’s now a leader in IT spending, according to Gartner. The firm pointed to software as the fastest-growing category of technology spending among retailers.

No matter how far out you’ve decided to ride the digital wave, you’ll want to carefully assess how much to spend on technology and where to apply those dollars for optimum results.

6. Security

It’s a cost of business no one likes to think about, but theft, fraud and other crimes are unfortunate realities in the retail business that your budget must address. When you’re working on a new budget, take some time to reevaluate your store’s security, especially if you’ve had a significant number of incidents that led to unexpected costs.

Protecting your merchandise and creating a safe environment for your customers and employees may call for installing more sophisticated security cameras or hiring security guards. You may also want to take extra measures to protect your customers’ personal data. Assessing the cost of these preventive measures is an essential part of understanding how to make a budget for a retail store.

These six major spending categories are by no means an exhaustive list of what you should include in your retail budget planning. You’ll also need to factor in other operating costs like taxes, insurance, professional services and credit card processing fees, to name a few.

Even if you put all these items in your budget, you still have to find a way to afford them. Make sure you prioritize by your business needs and reflect that in your budget. If you’re eager to make some worthy investments now, consider financing options like retail business loans to fuel your company’s growth without tying up your cash flow.

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