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How to set a budget or forecast

The arrival of a World Cup started a conversation in our house about how anything can be forecast – even how many pints of Carling a given pub will sell on a given night.

We discussed how, although these things may seem random, actually human behaviour can be predicted. I thought I would put together a guide to producing numbers or how to budget or forecast. This can be applied to practically anything – for a business or for your personal life. Maybe even just for fun (or is that just me?!)

Anything that can be measured, can be forecast. Whether you need to forecast sales for a business plan or you want to set a budget for a store opening. The key is understanding what factors will affect the numbers you are looking at.

What is the difference between a Budget and a Forecast?

The main difference is that a forecast can change but a budget should be set before the trading period starts. A Budget should have the building blocks of all aspects of the business including the things you assume will be / won’t happening over the given period. It will also include the numbers your business needs to hit such as break even.

Let’s look at a fictional example of Fred Blogs photography.

Last Year revenue £27,000
Prom incentive £1500 50% off. Advertised
Newborn package price reduction -£825 Price reduction of £15, 55 sold LY
Newborn package sales increase £1260 Assumed +9 sold due to price reduction
This Year Budget £28,150 +4% vs LY

Fred has been trading a while. His budget just includes what he believes will happen in the coming 12 months. We’ll talk about what he has included and why later. At this stage, it just shows his Budget includes his assumptions on what is coming for the year ahead.

Now let’s look at an example of a Budget from scratch; this is Jane Doe’s florist.

Walk-in Sales £2,600 2 people per week spending £25
Florist referrals (after 35% cut) £9,750 £13,200 based on Interflora projection
Wedding packages £7,000 10 wedding packages
Upsell accessories £4,500 approx 15 units per week
Arranging classes £6,000 monthly, £50, 10 ppl
Total Yr1 Budget £29,850
Breakeven requirement £35,000

You can see Jane’s budget assumes she will make a loss in her first year, but that is ok as she knew this before she opened and has funding to cover the loss. Were we to look at her budget over time we would see she is planning on being in profit by month 2 of her second year

The important part of both budgets is that you can see all the constituent parts.

As Jane starts to trade and implement the components of her budget, she can then review the actual performance and then forecast for the year. The forecast can be reviewed whenever relevant so that the total time period has a realistic outcome.

The key to a great budget is knowing where the numbers come from. Exactly how you will hit the required sales or revenue for the given time period is crucial.

Both of the above summaries will have information behind them to back up the numbers. For example, the Florist course will have an assumed start date, any associated costs, and a marketing plan.

What information do I need to create a Budget?

Historical data is the best place to start if you have it. Get as much as you can gather in one place and understand what you are looking at. A deep understanding of past performance and the causes of that performance will give far better guidance, and therefore a more accurate budget, than all the statistical analysis out there.

Hopefully, you have been keeping all your data in a lovely spreadsheet somewhere, but if not it is well worth the couple of hours it may take you to pull all your information in one place.

The numbers you need, ideally, to record are:

Cash sales

This is the amount of money that will pass through your till. aka turnover. This doesn’t take costs or taxes into account. Those are accounted for in profit which is calculated based on the other numbers.

Unit sales

This may not be as important as recording and forecasting your Cash/Turnover but it can be incredibly useful for understanding your business better. Looking at the average price or spend over the course of a year can help you see any patterns. During promotions, looking at units can help you assess how well the promo worked.

Attributable Costs

Finance peeps will have much more technical ways of looking at your costs but I would suggest having two buckets in terms of understanding how your business runs. The first is attributable costs. This is a cost that can be directly attributed to a sale. Most people think of Cost of Goods; you know that T-shirt you sell at £9.99 cost you £2.99 to make. Your business may not have such obvious correlations but try to make sure you have these all covered. Perhaps specific packaging or printing requirements for each order/sale.

Non-Attributable costs

These are the costs that go on the “bottom line” and may contain assets and wages. Every single thing you spend money on as part of your business should be in one or other of these buckets. From an overall position (regardless of how your accountant wants to apportion things) you can see where you are spending your money and which areas of your business are most profitable.

Recording information this way allows you to see the straight maths of how much you have earned year-to-date and how much you have spent.

How should I use historical data?

Go through all the data you have and annotate it. Was it a good month? Why? Did you have an uplift in sales due to anything in particular? Did you have additional costs that were “one-off”?

Using our World Cup example, the English win against Panama in 2018 during the group stage resulted in Greene King selling an extra 500,000 pints! Not only will this event not be repeated the following year but one needs to take into consideration the overall effect of this event, and the amazing weather at the same time, on people’s habits.

There is a lot of advice out there about using statistical (aka machine learning) forecasts. However, a machine is only able to calculate for what you tell it. This can be super useful if you want to forecast a vast amount of data (for example every line of your 2000 strong accessory range) but you should always review for anomalies. Until we have true A.I., a person forecasting will always be superior if they have taken the time to understand the data.

There are many formulas you can, however,  utilise to help you within your spreadsheets such as averages, weighted averages and even the =forecast formula itself. Especially when starting out, use these formulae to help populate each week or month sales forecast. From there you can review the numbers and ensure each forecast looks reasonable.

The most effective method of forecasting though is budget-forecast-review-forecast-review.

What if I don’t have historical data?

Understanding your business, your consumer and your competition is even more important if you have no historical data.

If you have a comprehensive understanding of who your customer is and how they run their lives you can far better predict what and when they will buy.

For example; if you know that the majority of babies in the UK are born toward the end of September you can gear your promotions and forecasted sales accordingly. The Office of National Statistics has lots of information of this kind. How could you apply their data to your business?

Understand your customer

The first and most obvious step is understanding who will buy from you. People are often tempted to try and sell to “everyone” but this is counterproductive. By segmenting your customer base and understanding who they are and what they want, you can be more targeted. This doesn’t necessarily mean people outside of a given segment won’t buy your product. It does mean that you can get your product in front of people that are more likely to buy from you.

Depending on your budget you can commission surveys but you can also use free resources like the British Library and social media. You can also take to your feet and physically go out and ask people. Make sure you are aware of any legal and moral requirements before you start shoving surveys in front of unsuspecting people though!

Understand your competition

Even if no-one does quite what you do, there will still be competition. Remember to look at the market through the eyes of your customer. Where do they buy your product now? If your product doesn’t exist yet, what do they use instead? How do they shop your competition?

Do you understand your USP (unique selling point)? Do you understand your competition’s?

Understand external factors

Weather and football aside there are many customer habits and economic variables you may have to take into account.

Did you know that when it rains the majority of people change the location of their shopping trip to indoor malls? The combination of good weather and a bank holiday drastically affects what people buy and where they shop. However just because it is sunny does not stop people from buying that amazing coat they see in the store in August. Snow, though, will stop people buying sleeveless tops in January.

These last two seem contradictory don’t they? Think though about the mindset of people at the time. In January the summer seems so distant and you have a limited budget. Maybe another scarf seems like a better purchase? In August winter is well and truly on its way. There may have already been a week of low temperatures so better get that coat now while you see it.

The point I am trying to make here is that “the weather was hot” doesn’t necessarily mean anything.  However, if you understand the surrounding circumstances that might affect your customers’ behaviour when the sun was also out you will have a much higher chance of being able to pre-empt their wants and needs.

Another example – for what was forecast to be a rare hot Glastonbury festival, the Monsoon store at Paddington station stocked up on all things festival goers may want including flower crowns and bright pink wellies (you know, just in case).

How do I know what is relevant information?

Understanding your customer is key to knowing what information is important! The more you know your target customer, you know what is important to them. Do they go to festivals or the opera? Is their newspaper of choice the Guardian or the Sun? Do they have school-age children?

If your customer is very budget conscious, a rise in utility and fuel prices may indirectly affect you. Whereas if you run a luxury brand this may not feature at all.

Completing a SWOT analysis before any budgeting period is a fantastic, way to get your thoughts in order.

Head over to my Free Templates section where there is a SWOT and a SWOT actions template for you to use. This allows you to capture the internal and external factors that you envisage affecting your business in the future. By identifying the risks and opportunities,  you can look to implement mitigating/optimising strategies for each one.

Remember what you are trying to establish and capture is ALL the circumstances under which your business could be affected. No, you may not be able to tell whether the risk you identified had the exact impact you thought but this is about getting as close as possible to the actual outcome.

Fundamentally the budget (especially for your first couple of years trade) will be wrong! It is about being as close to correct as you can.

With a well put together budget with a strategy and SWOT, you will be in a place that allows you to be agile when the unexpected happens. I find people tend to believe that not having structure makes them able to react to market changes. In my experience quite the opposite is true; if you know what you want to achieve and how you will do it, you are

  1. more likely to achieve it
  2. able to see WHY it isn’t going to plan and do something about it.

Otherwise, you risk missing your budget or forecast then standing back and scratching your head. Hmmm, I wonder why we missed the number? This also means you can see issues coming rather than at the end of the month being surprised by the outcome.

Say Fred Blogs, our photographer from earlier, sells a Prom package with 3 people in it at £180, a Wedding package at £320, and a Newborn package at £130 in June. His cash sales are £630 and his unit sales are 3. The attributable costs Fred might want to include; USB sticks, travel, printing, postage, as well as his hourly rate to edit the photos. Fred needs to record non-attributable costs for June as anything else he spent; like advertising, photo props, printer ink etc

How do I know what will be a Best Seller?

Just as understanding your customer and your competition is important, understanding your own offer is also crucial.

Fundamentally every single Buying Office in the world is trying to stock only best-sellers and you will be no different. One needs to remember, however, that even if everything sells brilliantly (which it won’t) the law of averages says 50% will be below average sellers!

This applies whether your range is a shop full of clothes or different photography packages. If you understand your customer, and with the benefit of historical data, you should be able to see what the traits of your best-sellers would be.

For example. In what is termed “basic” clothing (such as vest tops, trousers etc) black and white will generally outperform colours by a long way. Makes sense when you think about what that kind of clothing is for, right? Generally, cheaper products sell more units which also seems pretty logical, right? There is a point at which, for a given product or service, in a given business there will be a sweet spot of highest unit sales for the highest price point (i.e generating the most cash)

Here is a graph to illustrate how units and price point work together. It is made with example data but you should be able to apply this to your business. In this example, see how the 4.99 price point is actually the biggest cash sales? I am going to do another article about lead-in and exit price points. Understanding your price structure is super important to understanding your range and getting accurate forecasts.

Graph showing relationship of Price, Unit sales and Cash sales
Graph showing relationship of Price, Unit sales and Cash sales

So, in summary, understanding your data and your customers is key. Budgeting and forecasting is the act of shaping your future business – use all the information you can find and then review how you did. Especially after key trading periods. Happy forecasting!