{"id":2048,"date":"2018-03-27T22:08:56","date_gmt":"2018-03-27T22:08:56","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/?post_type=chapter&#038;p=2048"},"modified":"2024-04-25T02:51:57","modified_gmt":"2024-04-25T02:51:57","slug":"budget-preparation","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/chapter\/budget-preparation\/","title":{"raw":"Budget Preparation","rendered":"Budget Preparation"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Objectives<\/h3>\r\n<ul>\r\n \t<li>Describe each decision of budget preparation<\/li>\r\n<\/ul>\r\n<\/div>\r\nDuring budget preparation, the retail manager needs to ask and answer the following questions:\r\n<ol>\r\n \t<li>What are the expected sales for this time period?<\/li>\r\n \t<li>How much merchandise on hand will be needed to produce the projected sales?<\/li>\r\n \t<li>How much and when will price reductions need to be taken in order to dispose of merchandise to generate sales and revenue?<\/li>\r\n \t<li>What additional merchandise purchases will be needed during the season?<\/li>\r\n \t<li>What gross margin dollars and percent will be needed to achieve the desired profit?<\/li>\r\n<\/ol>\r\nOn the face of it, these aren\u2019t especially difficult questions to answer.\r\n<ol>\r\n \t<li>Perhaps we\u2019d estimate that sales continue at the same rate that they did in the previous time period. Or, perhaps, we project that they\u2019ll exceed last year\u2019s (LY\u2019s) sales levels by a certain percent (+x%). Or, it\u2019s possible that we\u2019d expect a given item to perform similarly to another.<\/li>\r\n \t<li>If we have a fair understanding of expected sales (revenue) and the average selling price, we can easily determine inventory needs. Inventory = sales revenue \/ average selling price<\/li>\r\n \t<li>This one is a bit more complex, but you\u2019ll notice that in point #2, we didn\u2019t divide sales revenue by retail price. Instead, we used \u201caverage selling price.\u201d This conveys that we don\u2019t expect to sell all items at full price. Rather, some portion of our inventory will be discounted to accelerate turns and reduce inventory (risk). Looking at past data, a retail manager may know what portion or percent of a product\u2019s inventory will be discounted to ensure there isn\u2019t remnant inventory. Further, they may have good information about when decisions to reduce prices should occur. Lacking appropriate historical references, a retail manager will have to monitor these decisions more closely.<\/li>\r\n \t<li>This is a question of \u201cWhat if?\u201d What if we don\u2019t have enough cash on-hand to order the full inventory need to meet our revenue goals? When will we need to re-order product? What if the product is far more successful than we expected and we\u2019ll exceed our revenue goals? Will we be able to place more orders? Will they arrive in time to capitalize on the opportunity?<\/li>\r\n \t<li>As you saw earlier, gross margin dollars and gross margin percent are easily calculated.\r\n<ol>\r\n \t<li>Gross margin dollars = selling price \u2013 cost of goods<\/li>\r\n \t<li>Gross margin percent = (selling price \u2013 cost of goods) \/ selling price<\/li>\r\n<\/ol>\r\n<\/li>\r\n<\/ol>\r\nWhere this gets much, much more difficult is understanding \u201chow much will be needed to achieve the desired profit?\u201d\r\n\r\nThe challenge for a business is to build a budget that provides for the financial health of the company. That is, a budget that generates sufficient revenue to cover operating expenses, while also returning profit for reinvestment in the company or distribution to the owners in the form of cash payouts (dividends). Thus, the above questions take on heightened importance because they directly impact the financial health and future of the company.\r\n\r\nIf sales fall below budget projections, then there isn\u2019t enough positive cash flow (income greater than expenses) to cover all operating costs or provide for reinvestment in the business. In this event, the firm risks several outcomes, such having to forgo important investments in the business that would spur future growth while its competitors move ahead or being forced to borrow funds to cover its performance miss, meaning that some future cash flow will be required to pay back the loan, including interest. It also may have to\u00a0 reduce costs, possibly including labor or marketing, leaving people laid-off and promotions less effective than competition, respectively.\r\n\r\nAs you might assume, those are not good situations for the firm to find itself. Thus, the budgeting process becomes critically important to ensure the financial health and future of the company.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Questions<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/a199737e-6ae0-4a0b-9c0d-d6ca28f642ef\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Objectives<\/h3>\n<ul>\n<li>Describe each decision of budget preparation<\/li>\n<\/ul>\n<\/div>\n<p>During budget preparation, the retail manager needs to ask and answer the following questions:<\/p>\n<ol>\n<li>What are the expected sales for this time period?<\/li>\n<li>How much merchandise on hand will be needed to produce the projected sales?<\/li>\n<li>How much and when will price reductions need to be taken in order to dispose of merchandise to generate sales and revenue?<\/li>\n<li>What additional merchandise purchases will be needed during the season?<\/li>\n<li>What gross margin dollars and percent will be needed to achieve the desired profit?<\/li>\n<\/ol>\n<p>On the face of it, these aren\u2019t especially difficult questions to answer.<\/p>\n<ol>\n<li>Perhaps we\u2019d estimate that sales continue at the same rate that they did in the previous time period. Or, perhaps, we project that they\u2019ll exceed last year\u2019s (LY\u2019s) sales levels by a certain percent (+x%). Or, it\u2019s possible that we\u2019d expect a given item to perform similarly to another.<\/li>\n<li>If we have a fair understanding of expected sales (revenue) and the average selling price, we can easily determine inventory needs. Inventory = sales revenue \/ average selling price<\/li>\n<li>This one is a bit more complex, but you\u2019ll notice that in point #2, we didn\u2019t divide sales revenue by retail price. Instead, we used \u201caverage selling price.\u201d This conveys that we don\u2019t expect to sell all items at full price. Rather, some portion of our inventory will be discounted to accelerate turns and reduce inventory (risk). Looking at past data, a retail manager may know what portion or percent of a product\u2019s inventory will be discounted to ensure there isn\u2019t remnant inventory. Further, they may have good information about when decisions to reduce prices should occur. Lacking appropriate historical references, a retail manager will have to monitor these decisions more closely.<\/li>\n<li>This is a question of \u201cWhat if?\u201d What if we don\u2019t have enough cash on-hand to order the full inventory need to meet our revenue goals? When will we need to re-order product? What if the product is far more successful than we expected and we\u2019ll exceed our revenue goals? Will we be able to place more orders? Will they arrive in time to capitalize on the opportunity?<\/li>\n<li>As you saw earlier, gross margin dollars and gross margin percent are easily calculated.\n<ol>\n<li>Gross margin dollars = selling price \u2013 cost of goods<\/li>\n<li>Gross margin percent = (selling price \u2013 cost of goods) \/ selling price<\/li>\n<\/ol>\n<\/li>\n<\/ol>\n<p>Where this gets much, much more difficult is understanding \u201chow much will be needed to achieve the desired profit?\u201d<\/p>\n<p>The challenge for a business is to build a budget that provides for the financial health of the company. That is, a budget that generates sufficient revenue to cover operating expenses, while also returning profit for reinvestment in the company or distribution to the owners in the form of cash payouts (dividends). Thus, the above questions take on heightened importance because they directly impact the financial health and future of the company.<\/p>\n<p>If sales fall below budget projections, then there isn\u2019t enough positive cash flow (income greater than expenses) to cover all operating costs or provide for reinvestment in the business. In this event, the firm risks several outcomes, such having to forgo important investments in the business that would spur future growth while its competitors move ahead or being forced to borrow funds to cover its performance miss, meaning that some future cash flow will be required to pay back the loan, including interest. It also may have to\u00a0 reduce costs, possibly including labor or marketing, leaving people laid-off and promotions less effective than competition, respectively.<\/p>\n<p>As you might assume, those are not good situations for the firm to find itself. Thus, the budgeting process becomes critically important to ensure the financial health and future of the company.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Questions<\/h3>\n<p>\t<iframe id=\"assessment_practice_a199737e-6ae0-4a0b-9c0d-d6ca28f642ef\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/a199737e-6ae0-4a0b-9c0d-d6ca28f642ef?iframe_resize_id=assessment_practice_id_a199737e-6ae0-4a0b-9c0d-d6ca28f642ef\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-2048\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Budget Preparation. <strong>Authored by<\/strong>: Patrick Williams. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":83755,"menu_order":16,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Budget Preparation\",\"author\":\"Patrick Williams\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"9b582aa7-c0f6-4262-a1df-68802bd3045c, 1dbc73cb-4388-41eb-b10c-b6c1c6147f77","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-2048","chapter","type-chapter","status-publish","hentry"],"part":2010,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters\/2048","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/users\/83755"}],"version-history":[{"count":14,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters\/2048\/revisions"}],"predecessor-version":[{"id":6480,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters\/2048\/revisions\/6480"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/parts\/2010"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters\/2048\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/media?parent=2048"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapter-type?post=2048"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/contributor?post=2048"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/license?post=2048"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}