Preparing a budget – Costs

Once you’ve been through the process of reviewing and setting your sales budget for the year, it’s time to turn your attention to the cost side of achieving these targets.

Direct costs

These are any costs that are directly incurred as a result of the sales you make and can be directly attributable to a job of a piece of business.

The place to start is your gross margin from previous years, this will give you a good indication of your cost of sales. Don’t just stick with this figure though! Having reviewed your sales you will have set a plan of perhaps selling more or selling something different, extending your opening hours or increasing your prices, this leads on to looking at the costs of sales in a similar way. Can you negotiate a smaller cost increase with your supplier? Negotiate a discount for purchasing more? Are there cheaper alternative suppliers? Are there better, more efficient ways of working?

Once you’ve reviewed these it maybe possible to increase your gross margin and therefore as well as selling more, getting a lower cost will result in a bigger gross margin and more profit.

Fixed costs/overheads

These are all the costs that are incurred regardless of whether any sales are made. If you’ve employed staff or signed a rent agreement for premises these will still be incurred whether or not you have sold anything.

This is one of the key reasons why it is so important to plan for the year ahead, so that you can be prepared for any changes within your business and plan accordingly.

You can use the spending for the previous year as a basis for the costs for the coming year but remember to use it as an opportunity to look at what has been bought in the past and whether or not it was worthwhile. That way you can avoid making expensive mistakes again. Go through all costs line by line as there will undoubtedly be room for improvement.

When reviewing your fixed costs incorporate your resources plan as this will give you key information about buying new equipment or recruiting more staff. It will also cover the type and salary of new staff.