Shop Talk: Practical answers for tough business questions
Question: Last year was our third year in business and we did well over the holidays with sales increasing about 3 percent over the previous year. I can’t help but wonder, though, if I was too conservative in my buying, because we ran out of many things, and I think we missed sales because of it. I want to do better this year and am hoping you can give me some tips on how to create a holiday budget. Is there some kind of formula I can use?
Answer: The best place to start is by looking at your sales for last year’s holiday season. I usually look at the sales from November 15, because some customers shop early, through January 15, because we have strong gift card sales after the holidays and many vendors shut down for a couple of weeks. You want to be sure your shelves are still full after the December sales rush. Once you have this number, look at your sales year to date and compare that figure to the same period last year. Are your sales up? By what percentage? Say your sales so far this year are up 7 percent over the same time last year. You can reasonably assume your holiday sales will be up by the same percentage this year. So, take your holiday sales last year, and in this case, multiply by 1.07, which will give you anticipated sales for this year: $100,000 x 1.07 = $107,000.
Next, multiply this anticipated sales amount by your cost of goods sold (COGS) percentage for last year. COGS percentage is the total cost of your merchandise purchases expressed as a percentage of sales. If you had $300,000 in sales and you spent $165,000 purchasing inventory, your COGS percentage is 55 percent. (Example: COGS divided by total sales equals COGS margin or percentage: $165,000 divided by $300,000 = 55 percent.)
Now take the anticipated holiday sales figure and multiply it by the COGS percentage to find your open-to-buy budget for the upcoming holiday season. ($107,000 x .55 = $58,850). With this target budget, you can now decide exactly how to spend it. Be sure to look at the items you know you sold out of by December 15 and again on December 20 to incorporate information on sales that may have been missed, and buy accordingly. Also, look at trends so far this year: Are you selling more candles and less jewelry? That will help you decide where to spend.
First published in Vol. 27 No. 5 of Retailing Insight. © 2013 Continuity Publishing Inc. All rights reserved.