How to Budget for Increased Profitability
Is your store’s profit in line with your expectations? Financial gurus Alan Friedman and Daniel Jobe of Friedman, Kannenberg & Co. make it their business to help music retailers plan on profitability. At 2015 Summer NAMM, Friedman and Jobe gave retailers easy steps for building a working budget.
Jobe stated that it’s important to create a budget and make changes month to month or as needed along the way, so you know what’s going to happen and can grow your business.
“You wouldn’t build a house without a blueprint,” Friedman said. “Why would you run a business without a budget?”
Download their free budget tool at www.fkco.com/budgeting.
Here are highlights from the session:
What is a budget?
A written estimate of future income and expenditures for a set period of time. According to Friedman and Jobe, it’s something you’ll want to do every year. They suggested going on a retreat to put together your budget.
There are several reasons:
• To make a plan and set a direction for your business. This gives you an idea of what you want to do with your money. “Don’t leave anything to happenstance,” Jobe said.
• To improve current and future performance.
• To forecast future profitability. It’s about setting that goal.
“People who use budgets are intentionally growing their business,” Jobe said.
Why does budgeting seem so difficult?
According to Friedman and Jobe, many retailers say it’s time-consuming to budget—a cheap excuse that can end up costing you.
Here are some common objections to budgeting:
• I don’t know how to start. Start with last year. Friedman commented that you can actually have flat sales and still make a profit by controlling expenses. This is a prime reason to use a budget.
Tip: Jobe advised making a folder of expenses or items that come up during the year to add to your budget, so you don’t have to try to remember it all at the end of the year.
• I don’t have any control. Some retailers might think, “It’s just my best guess, so it doesn’t matter.” Friedman insisted that you should still come up with numbers to budget because it will affect your bottom line and cash flow. (“Use it to predict where your profit’s going to be,” Friedman said.) Your budget lets you see your cash-flow peaks and valleys. You can also predict when you might need a line of credit from your bank during slow times, such as the summer, and you can start negotiating with the bank ahead of time.
The pre-budget process
According to Friedman and Jobe, this is all about the top line.
• Forecast sales. Assign budget goals to your sales team. Break it down, and don’t give them a huge dollar total that’s unrealistic to meet.
- Be specific, so they know what’s expected each month in total dollars sold, profit margin dollars, items per sale and gross profit. Friedman suggested staying mindful of how many gross profit dollars you need to generate to cover your monthly overhead.
- Share the results with your team. Ask your sales team to give you the numbers for whatever they’ve sold at the end of each month. That way, your employees will take ownership of the numbers, track their accounts and sales, and contribute individually to the larger sales total.
• Track door count. If you don’t know what’s going on with your business (e.g., if traffic is down by 10 percent during a particular month), you don’t have checks and balances in place that let you gauge your success. Door count with sales tells you if you’re generating the right volume and if those sales are being closed.
• Forecast rentals. You should know how many rentals by instrument type, by school and per road rep your rentals program is doing. Rentals by school can vary. They often depend upon the band director, so you have to know what to expect from each school. Give your road reps tangible numbers that you want them to hit, and work closely with them to track their progress with each school—in case you lose an account, you know exactly what sales dollars you need to replace.
• Forecast repairs.
- Paid versus warranty repairs. You want to focus on these two categories.
- Repairs by school.
- Repairs by repair staff. (Build a compensation plan based on this.)
• Forecast lessons. Lessons can complement your business. Track the number of lessons and students by type every month.
Create your budget
Friedman and Jobe walked attendees through the budgeting process using a sample spreadsheet: www.fkco.com/budgeting. By dropping in last year’s number, the spreadsheet will auto-populate a budget for you. There are hidden layers that let you build a complete profit and loss statement. Jobe commented that this process should take you about an hour or less. If you spend one hour every month, it will show you where your business is going. “Now you can try to drive your business,” Friedman said. “You can change direction, such as cutting expenses and driving more sales.”
Implement and follow-up
Jobe reassured attendees that they’ll “get better at it as you do it every year. Start now.”
- Download the budget spreadsheet.
- Involve others, such as sales and operations.
- Update monthly with actual data.
- Review your monthly performance.
- Hire accountants for tax planning.