The second phase of a 100m sprint is acceleration, picking up speed. In your budget, the second step is to set your budget for sales and cost of goods sold, which accelerates the growth of your business. As you review your plans for 2015, there will be a couple of different areas to consider for your sales growth. First, think about your average growth that you see with each year of experience. For example, if you have averaged a 10% increase in sales over the last 4 years, you can likely budget to do another 10% increase. However, if you are going to implement a new marketing strategy or have a new line of business you will be exploring in the new year, you may be able to consider a more significant increase. If you don’t have enough history to get an average growth rate, or if you have seen inconsistent trends in sales, then you may need to review how your most recent volumes will contribute to your 2015 volume in sales.
The second area to consider for sales growth is how you set your pricing. Review your pricing strategy. If you are in a service business, are you charging enough for your services? Do you have some clients that are being under-billed for the services they are receiving? Review your fees, client by client, to determine if there need to be adjustments to what you are billing. Maybe you need to make an across the board price increase to your billing rate (ie – $10/hour increase or 10% increase in packages). If you sell a product, determine if you are charging appropriately for each product. Review margins to determine if there are any products that are generating much lower margins than expected or outside of your typical margins. Adjust pricing as needed on your lower margin products.
If you update any pricing (specific clients or products), take this into consideration when you are setting your budget for sales in the next year. If you typically see a 10% growth in sales on an average year (with no major updates to pricing), and you have determined that you are going to increase specific pricing, then this needs to be taken into account. For example, let’s assume that you have 4 product lines or service offerings. You have determined that you are going to increase one of them by $100 per unit. After you have calculated your estimated sales with a 10% increase (let’s say your average monthly sales are $50,000 this year – so next year, you expect an average of $55,000/month), review how many units you expect to sell that will now be sold at $100 more. So, if you sell around 100 of those per month, and you have increased the fee by $100/unit, then you are going to have an additional $10,000 per month in revenue, in addition to the 10% increase noted above. So, your new average monthly sale will be $65,000/month.
Once you have determined what you believe your sales will be (with average growth rates and pricing adjustments), review to determine how that sales growth is going to occur throughout the year. For example, if you typically see an average sales growth of 10% year over year, it likely doesn’t occur in the first month and then just stay steady the rest of the year. So, you need to set the sales figure for each month. Ie – maybe it’s $60,000/month for January (after all, you increased your prices to get the initial $10,000/month increase off the bat). Then, maybe it’s $61,000, $62,000, $63,000, and so on, until you’re at approximately $71,000 – $72,000 per month in sales by December. Or, maybe you have a cyclical business. Review your prior year P&L by month to determine how the sales occurred throughout the year and use your increases that you have estimated to set your monthly sales.
After your sales budget is set, you can then set your cost of goods sold figures for each month. Your cost of goods sold should be driven by your level of sales. Review your margin levels from the past year and determine if you have made any updates to margins based on your price increases and service or product mix. Set your cost of goods sold figures for each month based on your level of sales. When you are finished with step #2 you should have your sales, cost of goods sold, and margin for each month of 2015.