“Businesses do not plan to fail, they fail to plan” (Part 4)

By Peter Cox October 01, 2014 Industry news

In the last three articles we reviewed how to put together a realistic Sales Budget as well as a realistic Gross Profit Margin target and as such a $ Gross Profit target.

We also calculated how to target for a Closing Stock Holding using the Stock Productivity Index (Gross Profit Margin x Stockturn).

The next part of the budgeting process is to calculate how much to purchase over the next 12 months to achieve the Stock Productivity Index target.

This to me is the most important target because has a substantial effect on your cash flow.

To calculate the targeted purchases we have completed most of the background work already.

In the case study we have built up over the last three articles, we have achieved the following key figures:

  1. Target sales (July issue) $2,600,000.
  2. Target Gross Profit (Aug issue) $780,000.
  3. Target Closing Stock Holding (Sept issue) $364,000.

The remaining number to complete the budget is Budgeted Purchases. How do we derive that number?

 

P&LS FROM THE GROUND UP

To get our Budgeted Purchases figure,we need to complete a Profit & Loss statement backwards…

Step 1: Sales – Gross profit = Target Cost of Sales:
$2,600,000 – 780,000 = $1,820,000

Step 2: Target Cost of Sales + Target Closing Stock = Target Stock Available to Sell (this is the stock we plan to have available to sell at cost):
$1,820,000 + 364,000 = $2,184,000

Step 4: Target Stock Available to Sell – Actual Opening Stock (the stock take figure at the end of the financial year; for the case study this is $600,000) = Budgeted Store Purchases:
$2,184,000 – $600,000 = $1,584,000

This last number represents the budgeted purchases for the store for the next 12 months and is in reality is the most important number in the budget.

Why? Because for once you have an idea on how much to purchase in dollar terms for the year. Note this is not what you buy, but it can tell you how much you can spend.

Given that the budget can be configured to produce a monthly sales target based on historical activity and as such a Gross Profit dollar target per month, the budget can also drill down to a purchase budget per month (even taking into account future bulk buys and deals with terms).

This is a powerful number to keep in the back of your mind, as you purchase product over the next 12 months.

 

GETTING TO THE BUDGET

We now have the following budget built up over the last several issues:

From the Target Gross Profit result of $780,000 we take away the budgeted overheads to give us the Target Net Profit, which is the return to investors.

In the next issue I will show you how you take the Budgeted Purchases extrapolate out for 12 months and establish the system where you will never again be overstocked. It’s called the Open to Buy Budgeting System.

We now have all the information to put together a system that has the potential to save for some stores hundreds of thousands of dollars a year and still service your customers’ needs and expand your business

Remember – if you don’t budget you cannot measure!

Note: If you have missed out on any of Peter Cox’s columns, they are all available online on or website and can be found by using this shortened URL: http://bit.ly/1b6T3jI

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Peter Cox is a senior consultant for Macquarie Advisory Partnership based in Sydney. He has over a decade of experience training and consulting in the retail hardware industry. He conducts key-note addresses, and management and sales workshops, which are aimed at improving profitability and liquidity in one of Australasia’s most competitive retail environments. Phone 0061 438 712 200 or visit www.petermcox.com.au

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