Financial Planning Worksheets

Financial Planning for Small and Medium
Businesses

By
Andrew Grigolyunovich, CFA

© 2012, Andrew Grigolyunovich
All Rights Reserved
This book is protected by the copyright laws of the United States and the European Union

Financial Planning for Small and Medium Businesses. Andrew Grigolyunovich, CFA

Table of contents
TABLE OF CONTENTS......................................................................................................................................................... 2
INTRODUCTION ............................................................................................................................................................... 3
THE FINANCIAL PLANNING PROCESS FOR AN ENTERPRISE .......................................................................................................... 5
SETTING GOALS............................................................................................................................................................... 6
Questions to ask ..................................................................................................................................................... 6
Limiting factors in goal setting ............................................................................................................................... 7
Typical errors in setting goals ................................................................................................................................. 9
Execution .............................................................................................................................................................. 10
DEFINING ASSUMPTIONS ................................................................................................................................................. 12
CHOOSING THE RIGHT TOOLS ........................................................................................................................................... 15
THE STRUCTURE OF A BUDGET.......................................................................................................................................... 16
Projecting sales and cost of goods sold ................................................................................................................. 18
Projecting sales amounts ...................................................................................................................................... 23
PROJECTING OTHER COSTS .............................................................................................................................................. 27
Structuring cost budgets ....................................................................................................................................... 27
Projecting salaries ................................................................................................................................................ 29
Projecting costs for a retail network ..................................................................................................................... 34
Projecting marketing costs ................................................................................................................................... 35
Projecting other costs ........................................................................................................................................... 36
Working capital projections .................................................................................................................................. 37
Inventory projections ............................................................................................................................................ 37
Projecting account payable and accounts receivable ............................................................................................ 39
Projecting capital investment and depreciation schedules .................................................................................... 40
Projecting external financing ................................................................................................................................ 43
Adding Everything Up ........................................................................................................................................... 44
CONSOLIDATION............................................................................................................................................................ 47
EVALUATION ................................................................................................................................................................ 48
Sensitivity analysis – checking the most critical assumptions ................................................................................ 49
Ratio analysis ....................................................................................................................................................... 49
Scenario analysis .................................................................................................................................................. 50
CONCLUSION ................................................................................................................................................................ 51
ABOUT THE AUTHOR ...................................................................................................................................................... 52

”Plans are nothing; planning is everything.”
Dwight D. Eisenhower

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www.agcapitalcfo.com – outsourced CFO services
www.cfotemplates.com – professional financial Excel templates


Introduction

My name is Andrew Grigolyunovich, CFA. I have been engaged in corporate financial planning and analysis
for more than 10 years. 2012 was 11th consecutive year I have created at least one corporate budget (see
more on my experience in the section About the Author).

I own a company that helps small and medium businesses avoid costly mistakes and to thereby make more
money. It is common to see an owner/manager of a SME who is a great specialist in the business he or she
is engaged. But even a smart, well-educated person can, at the same time, be clueless about the financial
health of their company. My job is to help people understand the essential financial aspects of their
businesses, to help them avoid costly mistakes and to create financial plans for them.

When discussing the book with Jon Shore, head of international business development at AG Capital CFO
Services, he asked me “Do you have an interesting story to tell your readers in the introduction?” “Dozens
of those” – was my reply.

Here is a great example from my recent experience.

I was working with a company that was operating in the wholesale import industry. The company was
importing olive oil. The business model was very well-thought out; they never made an order until they had
pre-sold it with some of the largest retailers in their country with some decent margins and the company
was able to attract investor funding to finance each of the orders.

Sounds like nothing can go wrong with a business like that; however, it did. As the company started to
expand, the deal flow started to grow and the funds from each order were mixed up in the company’s bank
account. Logically, as the business volume grew, they needed to attract more funds but at some point the
company’s management realized that something was wrong and that the company was using new
investments to cover old debts.

Initially they thought the problem is with their accounting because they could not attribute the cashflows to
the order flow. So, they just continued to pump funds into the company and, at the same time tried to
improve their management accounting practices. This nightmare lasted for almost a year.

They were smart enough to call for professional help. It actually turned out that the problem was even
deeper than it was expected initially. After a financial plan was created for the company, they realized that
the problems arose not only due to the lack of accountability – the volume of the business was still not large
enough at the moment of the analysis to cover the fixed costs.

The company has learned its lessons and reorganized the purchase process. Since the business was growing
quite rapidly it was not very difficult to reach the desired level of sales. Now they know how high their break-
even level of sales and purchases are. Now they prosper and have a good stable and financially strong
business.

This business case might be interesting to read but it tough to be there struggling financially. Unfortunately
the problem is widespread among SMEs.

This book is designed for those business owners, managers or start-up entrepreneurs who have a great
business or a good business idea, have a great understanding of their industry, but lack financial knowledge
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and do not have a CFO or Financial Director in their team. From what I have experienced since inception of
AG Capital CFO Services, I can definitely say that there is a great need for good financial planning among
SME’s but only few of them can reasonably do it themselves or afford to hire a professional CFO. I thought
that if I could share my experience with those entrepreneurs who need financial planning and analysis but
just don’t know how to do it, that this book could be my input to help making businesses more successful
and a bit more efficient.

So, if you or your company finds yourself in one or more of the bullet points listed below then I am
definitely writing for you.

 You have an SME that does not have its own CFO;
 You have to make important decisions about the development path of your company;
 Your business model is good, the annual report shows that you work with profit but you don’t see
the proceeds on your bank account;
 Your company has various lines of business, product groups, sales channels;
 You plan to make a reorganization your company;
 Your results are poor and you have to create a plan on how to save your company

OK, let’s get started!

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The Financial Planning Process for an Enterprise

Different businesses have completely different corporate structures. Some of them are multi-product and
multi-divisional enterprises, while others are a one-man show. Regardless of the structure the financial
planning process for each of them has similar steps, only the scale and the number of people involved
varies.

The flowchart for the corporate budgeting process could be shown as follows.

Goal Setting

Defining Assumptions

Planning sales and cost of Department cost planning Administration cost
goods sold planning

Consolidation

Revision

Evaluation

Approval Performance evaluation

The planning process starts with goal setting – that is the part of the process that is so often omitted and
forgotten, although it definitely shouldn’t be. During this step you should define what is expected from the
company – high level of profits, great dividend payout rate or a high growth rate.

During the next step you should define the main assumptions about the next year. What is the present
state of economy in the world and in what state do you predict it is going to be. What will the inflation
rates and currency exchange rates will be, will there be any new business expansion projects undertaken by
the company, etc.

Then begins the planning process. Projecting sales and forecasting costs might happen simultaneously,
especially if the company has various departments and different people are responsible for each part of the
budget.

The next step is the consolidation process. In simple words, during this step you have to put projected
income and costs together so the goals can be reached. This part of the process is by far the trickiest and

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the most important to the success of the whole budgeting process. During this part it is necessary to
understand what the most important assumptions are behind the budget, (sensitivity analysis), and to
understand what the different paths are for development of the company’s business during the next year
(scenario analysis).

During the evaluation process the company’s governing body, or you, evaluates the budget that was
created by the finance department. In a small company where the business owner is both creating the
budget and also evaluating and reviewing it, the evaluation process is actually very much integrated with
the consolidation process.

Then the process is very simple. The budget is either rejected by the company’s management and is sent
for re-consolidation, or is accepted and is sent to corresponding company’s departments for execution.

During the course of the year, it is very important to keep track of the budget performance so that
discrepancies are quickly noticed. Sometimes, in case of very large discrepancies, the budget will be re-
planned completely during the year in some companies, while other companies have a policy of making
quarterly adjustments to the budget plan to match actual results.

We will cover each of the steps of the process in detail, giving the most attention, of course, to the planning
and the consolidation parts of the budgeting process.

Setting Goals

Questions to ask
One of the least time-consuming, but definitely one of the most important
parts of the budgeting process is goal setting. The main question you need to
answer for yourself is very simple: “What do we want to achieve next year?”
Note that it might be easier to find the answer for a single owner private
company than for a large enterprise with several levels of management. In
the latter case different people might have different views regarding the
company’s development.

Regardless of the structure of the company’s governance, it is very important
that each and every employee engaged in the budget planning process has
the same goal in mind and actually knows exactly what the company wants to
achieve so that they can plan their own part of the budget accordingly.

The goals vary and possible actions that a company would take vary widely with them:

1. We want to become the industry leader in terms of sales – we set the goal to reach $100 mln in
sales to do this
2. We want to increase the company’s profit and net margins before a possible sale of the business
– the goal is to reach $10 mln in net income at a 15% net margin
3. We want to maximize the level of dividends for the owners – so we set the goal to pay out $1 mln
every month as dividends
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4. We are in a tough financial situation and we want just to survive – the goal is to keep cash at or
above 0 throughout the year

Please note that the goals need to be precise, specific and achievable – otherwise the whole process of
setting goals is useless. So the goal shall be stated as “To reach $100 mln in sales” rather than “To increase
sales”.

Strategies are dependent upon the goal that is set. For example; it would be logical for a company that has
set its goal to become the market leader to take on every possible deal that does not bring direct losses to
them and to spend a lot on marketing. Such a company will not care about its bottom line – growing the
top line is the key priority. After a substantial growth in sales is achieved by the company the bottom line
will improve by itself due to economies of scale.

On the other hand, a company that looks to go public or to be sold by existing owners will likely
concentrate on improving its margins. Such companies might forego deals/opportunities that are on the
verge of profitability but tie up too much of its resources.

Companies in stable/declining industries have good market share and stable cashflows and have limited
growth opportunities because of the nature of their business, (e.g. traditional book retailers), will probably
focus on profitable deals that do not require tying up too much in working capital resources or making
substantial capital investments. This might be especially true when the company is private, is either the
main source of income for its shareholder or the only “cash cow” in the portfolio of the shareholder. Paying
out a maximum level of dividends would be the top priority for such company.

Sometimes a company finds itself in a tough financial situation with changing market conditions. This might
be especially true when market conditions have changed dramatically. Consider a luxury furniture retailer
in a just-collapsed real-estate market like Florida or California in 2009. Such a company, forecasting 2-digit
market growth, most probably, has excess inventory that is illiquid and accrued accounts payable that now
add up to several months of sales volumes. In addition to that, the sales volume of the company has
dropped substantially so that now they are not even covering the direct costs in their retail locations.

In a situation like that a company tries to restructure itself, cutting costs, selling out illiquid goods at large
discounts, etc. However, such changes take time and it is very critical to have enough resources to “buy”
this time so that the company can fulfill its restructuring plan. By “buying time” I mean covering current
costs from the accrued profits of the previous years. In situations like that a budget is usually called a
restructuring plan.

It is fine to set several goals for your company, similar to a balanced scorecard approach. For example; you
might want your company to increase sales by 20% while at the same time keeping the net margin at the
current level of 10% and to pay out dividends of $50,000 every month. However, before getting to goal
setting you need to consider your limiting factors.

Limiting factors in goal setting
In order to get the goals correctly, you should also consider your limiting factors or constraints. Some of the
limiting factors might be imposed on you by creditors, investors and, actually, yourself.

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Bank covenants. If a company has a bank loan, usually in the agreement among Borrower’s obligations, you
will find not only an obligation to pay interest and principal on a timely basis, but also to comply with

Here is an example from a client of AG Capital CFO Services; a manufacturing company.

A few years ago a company built a new factory and received a substantial bank loan to finance the project.
Despite the 10-year repayment schedule, the bank put a covenant in the loan agreement that the company
shall keep its debt/EBITDA ratio not higher than 3.5, (in other words to be able to repay the loan in 3.5
years), otherwise the company would lose the favourable interest rate. So, every year, the company has to
budget for much higher level of profit in order not to lose the preferential interest rate. (Losing it would cost
the company several thousand dollars annually). This has become one of their limiting factors when setting
budgeting goals.

several financial ratios or covenants. For example, if a company uses an overdraft, it might be required to
keep monthly sales at least as high as the credit line limit. In such case, if your sales department plans for
smaller sales, this might signal a non-compliance threat. Actually, the bank’s overdraft becomes the
minimum level of monthly sales that you shall put into the budget.

Investor requirements. If a company has received private external financing the investors will usually have
their own requirements regarding return on their investment that correspondingly converts into profit level
requirements to the company.

Owner’s private needs. For single-owner companies, especially in cases when the company is the only
source of income for the owner, the annual cost of keeping owner’s standard of living should be considered
in order to define the required level of dividends from the company.

So, to sum up, before you even consider setting a measurable goal for the company for the next year you
must account for all the possible covenants/external factors that might affect your choice.

The chart below is created to help you understand and write down your company’s limiting
factors/covenants that need to be taken into account while setting next year’s goals.

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Bank • ........................................................................
• ........................................................................
covenants • ........................................................................

Investor • ........................................................................
• ........................................................................
covenants • ........................................................................

Personal • ........................................................................
• ........................................................................
covenants • ........................................................................

Typical errors in setting goals
While working with various companies in different industries I have
seen many different examples of the goal setting process. Some of
the goals were specific and motivating. Others, as I found out from
the clients’ previous experience, turned out to be distracting and
demotivating. Please bear in mind that the goals you set before you
begin the budgeting process can significantly influence both the
budget plan itself and real-life budget performance during the course
of the year. Errors in this process are costly so it is better to set the
goals from the beginning.

I have categorized the main errors made during the goal setting process and have listed the most common
causes of wrong goal-setting:

Setting unattainable goals. This is a very common scenario for companies that develop business plans for
new business ventures. Sometimes, in order to justify their investment needs and to show very good return
on investment, these companies project their income growth at the level of hundreds and thousands of
percent for a five-year period. I have seen some business plans that project a 100%+ market share, which is
nonsense. So, if you are planning for a new business, keep in mind the market volume and carefully
evaluate the share of the market that you will aim for.

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An overly-ambitious goal is set for the company. Several of years ago I enjoyed reading Jack Welch’s, (the
former CEO of General Electric), book Winning. It was especially interesting to read as I was a CEO for a
retail company at that time. In his book Jack Welch reveals the simple way he was setting goals for his
employees – take previous year’s results and double them. As simple as that. His argument was that, at
first, people get frustrated and discouraged by these ambitious goals but later they have no other choice
than to start thinking out-of-the-box. For example; even if a salesman fails to fill the plan by say 20%, (and
quite many of them did fail), it is still a 60% increase against the previous year’s result – a great result for
the company.

However, should a company budget a sales increase of 100% it might lead to severe problems. Either the
cost budgets would be increased due to the “expected” increase in income or higher dividend payouts
would be promised to owners. That would lead to a depletion of the company’s cash reserve and a need to
revise the plan in the middle of the year.

Goals are set regardless of economic developments. This goal setting problem was very pronounced for
Quite often companies set goals without taking into foreign subsidiaries of companies that were
account possible economic developments. During the headquartered in countries less influenced by the
latest financial crisis in 2008-2009 I saw many crisis. One of AG Capital’s clients, a Latvian
distributor Swedish construction tools had their
companies that were setting their sales forecasts
budget approved in the end of 2008.
without taking into account the forecasted
developments in the economies of their customers’ In January 2009 Latvia was hit by the economic
countries. recession, the GDP in 2009 fell by 18% while Sweden
was one of the least affected countries during the
Management cannot promptly warn owners about crisis.
goal unattainability. Yes, we’ve seen examples of
In August 2009 the Swedish company’s owners
companies where employees, even the most senior understood that there was a serious problem with the
people, silently accept whatever goals are set by the economy and not in the company. Only then were
owners of the company. This can cause great harm in Latvian management persuaded the Swedish owners
a company, especially if the goals are unattainable to revise the budget. By that time they were trailing
from the very beginning. 60% on sales against the plan.

So, if you are a top-level employee, you have to keep
in mind the above-mentioned reasons for errors in setting budgeting goals. If you feel that the owners of
the company are setting unrealistic goals you should inform them. Otherwise, if the goals are silently
accepted, reaching the goals becomes the responsibility of the manager, not the problem of the owner that
has his head in the clouds.

Execution
You have evaluated different goals, decided whether you want to concentrate on growth, income or
dividends, listed your limiting factors and you have learned from the mistakes others’ regarding the goal
setting process. Now it’s time to execute by setting specific measurable attainable goals for your company
for the next financial year.

You can use the table below as a guide. It has been limited to three lines deliberately. Setting too many
goals would just scatter your attention during the year. It is even better to have just one simple goal that
would be easy to express to your employees.
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My company’s financial goals for the year _____

Goal 1:______________________________________________________________________

Goal 2:______________________________________________________________________

Goal 3:______________________________________________________________________

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Defining assumptions

OK, we’ve set the goals for the company and now it’s the time to establish your key assumptions. Some of
the assumptions, like rate of growth of the economy have already been considered. Others, for example,
whether you plan to open new retail locations or to
expand manufacturing capacities, shall be defined at
this stage. One of AG Capital’s clients, a retail company working
in the luxury goods sector, was severely hit by the
The main goal for explicitly setting the assumptions is to financial crisis of 2008-2009. The company was quite
get a common view over the next planning period successful and able to keep its cash balance positive
among all the members of your team involved in the during the restructuring process. However, one of the
financial planning process. It is crucial for each methods to achieve this was keeping purchases very
department to have the same vision of what is expected low and selling the older items that were already in
stock.
for the company. An example of what could happen if
each department works separately is presented in the When the restructuring was over, the company’s
box to the right. marketing department was informed that, from now
on, the company would grow sales at full speed and
The main categories that need to be covered in the would allocate some funds for media advertising. The
assumptions are as follows: marketing manager decided to promote a special
category of goods that had the highest markups.
1. Economic factors - industry growth, GDP However, during the planning process for the
growth, level of inflation, interest rates, etc. campaign it turned out that the purchasing
2. Currency rates – especially if your company is department was unaware that the restructuring was
involved into international business. over and was still keeping purchase levels low.
3. Possible changes in the applicable taxes in
The company had to drop the marketing campaign
every market your company is serving.
since they had almost nothing to sell.
4. Changes in pricing/markup policies of the
company. For exchange-traded goods or raw
materials you need to use a unified forecast for
the price fluctuations of the goods.
5. Possible expansion projects within the company – whether and when you plan to build a new
factory or open a new shop. It is a good idea to let your HR department know these plans in
advance so that they are able to budget their expenses accordingly.
6. Other significant risk factors to the company.

It is a good idea to build a spreadsheet model for at least some of the
projections you will be using for your budgeting purposes. Then you will be
able to quickly change the assumptions if needed and will be able to
automatically recalculate all the numbers in the model as well as to
evaluate different scenarios that might happen during the course of the
year.

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An example of a key assumption sheet is shown below. This is part of the budget of a fictional company
“Happy Retailer” that I will be using as an example throughout this book. This company budget projects flat
industry sales (Sales +/- vs. plan); an inter-bank borrowing rate of 2%, specific sales tax rate for each of its
shops, as well as a projection on the applicable tax system. All of these numbers are automatically linked to
corresponding parts in the budget and will automatically adjust the final results should they be changed.

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We have also created a table for you so you are able to create your own list of assumptions.

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Choosing the Right Tools

I am a member of quite a number of groups on LinkedIn. Some of these
groups unite CFOs and financial planning specialists. Almost every other
week someone in these groups begins a discussion about what is the best
budgeting software on the market. Some people name some specific
budgeting software; others use Excel or other spreadsheet programs.

However, in almost all of the discussions the bottom line is the same.
Specific budgeting software is designed for large organizations; it is costly
to buy and to customize and it helps when the planning process is very
complex. Still, even the advocates of the budgeting software admit that no software possesses as much
flexibility as Microsoft Excel®. Moreover, users can create financial planning models themselves, according
to their own needs.

This book is designed for small and medium enterprises, not for financial planning specialists with years of
experience. I am willing to bet that having read this e-book to this point you won’t need anything more
advanced than Microsoft Excel for your financial planning purposes.

There are 4 options that you might considering while choosing financial planning tools, (ranked by final cost
to you, except for the value of your time):

1. You might want to create an Excel spreadsheet model for your company yourself. This might
require some intermediate level of Excel knowledge and, at least, some basic understanding of
finance principles, if you wish to create a flexible budget with linked P&L, cashflow statement and
pro-forma balance sheet. In this case you might want to download a demo file from
www.cfotemplates.com that corresponds to your industry. This might give you some great ideas on
how to design and structure your budget at no cost.

2. Another option that saves you time and money is to get a pre-built Microsoft Excel template
applicable to your industry. Once again I would recommend www.cfotemplates.com. The templates
are created by financial professionals and the company specializes in financial templates for
professionals. They also offer customization of the templates for customer needs at a very
affordable rate.

This option is great if you value your time, as the time-consuming process of creating the financial
planning model has already been done by someone else.

3. Another option is to use a consulting company that specializes in corporate finance and is very
experienced in developing budgeting systems for its clients. In this case you save even more time
by getting everything right from the start. A financial consulting firm will also train you and create
an Excel model that you can manage yourself. Once again, my recommendation is AG Capital CFO
Services. AG Capital CFO Services has introduced budgeting systems for a hundred clients. It might
also be the most cost-effective way to do your budgeting as the company is located in Latvia, a
lower-income member of EU.

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4. The final option would be hiring the professional and experienced CFO who would create a
budgeting system part of his job. However, you have to weight all the pros and cons before hiring
this person since this would usually be a significant increase to your administration costs. You need
to be very sure that you can afford a CFO before you hire one.

Now I will be presenting the budgeting creation process for “Happy Retailer” using one of the
templates available from cfotemplates.com. Retail industry was chosen as an example since it is one of the
easiest to understand for a non-finance person. The processes are quite simple and almost everyone has
daily interactions with the retail industry as a customer.

The Structure of a Budget

The structure of the sample budget I will be using for illustrations in this e-book is represented in
the chart below. The real-life budgets usually follow the same structure; the difference is only in the
specifics of the company’s cost budgets.

Cashflow budget

Profit&Loss Budget Pro-forma Balance Sheet

Sales/COGS budget Inventory purchase
budget
Sales salary budget
A/R budget
Administration salary
budget A/P budget

Retail network budget CAPEX budget

Other cost budgets Financing budget

To create a budget for a company you need to create separate budgets for sales, cost of goods sold,
salaries, etc. Then these projections are linked together in the Profit & Loss budget. The same procedure is
repeated for components of a balance sheet – you make separate projections for each component of
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working capital, for investment projects, external financing projections, etc. Then the numbers are
automatically transferred to the pro-forma balance sheet.

Finally the numbers in the P&L and balance sheet projections are combined together and the
cashflow budget is derived. After that you can gauge whether the projected cash flows are adequate and
meet your goals. Note that the projections of all three main financial statements are interconnected – if
anything changes in one of them, the changes will automatically be reflected in the other statements.

We will now examine, in detail, each of the components of the P&L budget and the pro-forma
balance sheet.

17


Projecting sales and cost of goods sold
Creating tables for the sales budget

The most important part of the financial planning process is to understand the interconnections between
the company’s sales results, variable costs, key sales drivers and the implications for the company’s working
capital.

This part of the budget is the one that varies the most between industries. In the example that we use in
this book I am demonstrating how to create a financial plan for a retail company.

For retail companies there are several factors that influence sales. First, the number of locations. The total
turnover will be dependent on the number of shops in operation each month. This in turn will depend on
the dates the new shops are expected to open. The second factor that influences sales is the seasonality.

An example of a retail company sales budget that satisfies both conditions is shown below.
Happy Retailer, LLC Sales 2012

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total

Net Sales by Shop 3 590 878 3 130 878 3 130 878 3 370 878 3 370 878 2 709 544 3 106 344 2 709 544 3 630 878 3 630 878 3 630 878 3 987 544 40 000 000

Existing shops 3 590 878 3 130 878 3 130 878 3 130 878 3 130 878 2 517 544 2 885 544 2 517 544 3 130 878 3 130 878 3 130 878 3 437 544 36 865 200
Mall Of America 502 167 436 667 436 667 436 667 436 667 349 333 401 733 349 333 436 667 436 667 436 667 480 333 5 139 567
King of Prussia Mall 551 044 487 544 487 544 487 544 487 544 402 878 453 678 402 878 487 544 487 544 487 544 529 878 5 753 167
Palisades Center 377 583 328 333 328 333 328 333 328 333 262 667 302 067 262 667 328 333 328 333 328 333 361 167 3 864 483
The Galleria 377 583 328 333 328 333 328 333 328 333 262 667 302 067 262 667 328 333 328 333 328 333 361 167 3 864 483
Sawgrass Mills 425 500 370 000 370 000 370 000 370 000 296 000 340 400 296 000 370 000 370 000 370 000 407 000 4 354 900
Woodfield Mall 431 250 375 000 375 000 375 000 375 000 300 000 345 000 300 000 375 000 375 000 375 000 412 500 4 413 750
Del Amo Fashion Center 471 500 410 000 410 000 410 000 410 000 328 000 377 200 328 000 410 000 410 000 410 000 451 000 4 825 700
South Coast Plaza 454 250 395 000 395 000 395 000 395 000 316 000 363 400 316 000 395 000 395 000 395 000 434 500 4 649 150

New shops 0 0 0 240 000 240 000 192 000 220 800 192 000 500 000 500 000 500 000 550 000 3 134 800
Aventura Mall 0 0 0 240 000 240 000 192 000 220 800 192 000 240 000 240 000 240 000 264 000 2 068 800
Millcreek Mall 0 0 0 0 0 0 0 0 260 000 260 000 260 000 286 000 1 066 000

Scenario correction 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Inputs

Base case scenario 4 165 878 3 630 878 3 630 878 3 630 878 3 630 878 2 917 544 3 345 544 2 917 544 3 630 878 3 630 878 3 630 878 3 987 544 42 750 200

Existing shops 3 590 878 3 130 878 3 130 878 3 130 878 3 130 878 2 517 544 2 885 544 2 517 544 3 130 878 3 130 878 3 130 878 3 437 544 36 865 200
Mall Of America 502 167 436 667 436 667 436 667 436 667 349 333 401 733 349 333 436 667 436 667 436 667 480 333 5 139 567
The Galleria 377 583 328 333 328 333 328 333 328 333 262 667 302 067 262 667 328 333 328 333 328 333 361 167 3 864 483
Sawgrass Mills 425 500 370 000 370 000 370 000 370 000 296 000 340 400 296 000 370 000 370 000 370 000 407 000 4 354 900
Woodfield Mall 431 250 375 000 375 000 375 000 375 000 300 000 345 000 300 000 375 000 375 000 375 000 412 500 4 413 750

New shops 575 000 500 000 500 000 500 000 500 000 400 000 460 000 400 000 500 000 500 000 500 000 550 000 5 885 000
Aventura Mall 276 000 240 000 240 000 240 000 240 000 192 000 220 800 192 000 240 000 240 000 240 000 264 000 2 824 800
Millcreek Mall 299 000 260 000 260 000 260 000 260 000 208 000 239 200 208 000 260 000 260 000 260 000 286 000 3 060 200

Note, that there are actually two tables with a similar structure – the Sales budget and the Inputs.
Projecting sales in a manner like this gives two advantages compared to a budget that has just a sales table.

The first advantage is that it makes it possible to adjust the scenario for opening the new shops by just
changing the planned opening date in the Assumptions, (see above). As you may notice, the Inputs table
18


contains projected sales for each month of the year while the Sales budget automatically utilizes the
projected opening month and derives sales projections only for the months that follow. Of course, a shop
that opens ahead of schedule is a rare occurrence. A late opening is far more common. However, when the
budget is being created during the previous late October, it is a good thing to project possible sales for each
month since most of the new opening shops will not have specific scheduled opening dates.

The second advantage is the ability to adjust the sales scenario on a company-level with just a couple of
mouse clicks. Imagine a situation where you are creating the first draft of a company’s budget. You have set
your goals, made your sales projection, (based on what your sales team has told you they are capable of),

One of AG Capital CFO Services clients is a food-processing company. A couple of years ago the company has
opened a small factory outlet near its main manufacturing site to directly serve people in the neighboring
district. We were asked to separate the outlet’s sales in the company’s budget from the main sales.

We asked their accountant that was responsible for the shop’s bookkeeping to make her best estimate of
possible monthly sales. Her answer was that it is absolutely impossible to predict. "One day we may have
many clients, the other day might be quite empty”.

When we took the historical sales data by month it turned out that the variance of sales was almost
inexistent. For example, October sales amounted to $9,950, November – $10,100 and December – $10,000
(numbers are changed, but note the variance that is extremely small).

The accountant was right – there were "empty” days, but the next day the people came back to the outlet as
there was quite an established demand for fresh high-quality bakery.

Making sales projections from the historical data is usually easier than one can imagine. Just note the longer-
term trend.

and predicted costs, (based on what your heads of departments told they needed to spend). And guess
what? Sales less costs don’t meet the company goals. You need to start the budget consolidation process.

The consolidation process usually requires increasing sales and cutting costs. Sometimes it is also about
changing goals, but that should happen only in cases when you clearly understand that the goal is not
realistically achievable. Anyway, in all of these cases you will have to vary the projected sales. In the
example above we have a budget that was already balanced for seasonality and each shop performance. If
you need to increase sales by 5% you will have to make 10x12=120 adjustments. Very dull work. It will also
be time consuming if you have a chain of a 25 shops.

A much better alternative is to balance the base case sales scenario once and to make the changes in the
Assumptions, automatically adjusting each shop’s sales by the required percentage.

Getting the right level of details

OK, now we’ve got sales projections by month and by shop. However, each of the shops sells different
groups of products and, probably, also in different mixes. Different product groups usually have different
sales patterns as well as different mark-ups. Therefore, for a retail budget, it is important to further break
down sales by product groups.

19


In this particular example the total sales results are split by product groups. This means that the sales
breakdown by product groups influences the cost of goods sold (through mark-ups). For example; if you
plan to increase sales of Shirts in the Mall of America store, increasing the 10% level to 20% will result in a
corresponding drop of projected sales for other product groups as the shares of sales for different product
groups will always add up to 100%.

King of Del Amo South
Sales by product Mall Of Palisades The Sawgrass Woodfield Aventura Millcreek
Prussia Fashion Coast
groups America Center Galleria Mills Mall Mall Mall
Mall Center Plaza
Shirts 10% 20% 15% 10% 10% 10% 10% 15% 10% 10%
Jeans 20% 10% 15% 20% 20% 5% 20% 15% 20% 20%
Jackets 15% 10% 15% 15% 15% 10% 15% 15% 15% 15%
Sportswear 5% 10% 10% 10% 5% 10% 5% 10% 10% 5%
Swimwear 5% 5% 10% 10% 10% 20% 5% 10% 10% 10%
Socks 5% 5% 5% 5% 5% 5% 5% 5% 5% 5%
Shoes 15% 15% 5% 5% 5% 15% 15% 5% 5% 5%
Sweaters 5% 10% 5% 5% 10% 5% 5% 5% 5% 10%
Pants 10% 5% 10% 10% 10% 10% 10% 10% 10% 10%
Coats 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%

Another option would be creating sales projections by month, by shop and also by product group. However
by doing this we will start facing the issue of “overdetalization”. With higher level of details monthly
fluctuations between the product groups average out. Creating too much detail in each part of the budget
may result in historical fluctuations making the forecast less accurate despite forecasting at a more detailed
level.

Can using too much detail hurt? Yes it can - see a real-life example below.

Here is an example from another client, a food-processing company. They decided to forecast their sales
with a very high level of detail.

They projected their sales by months, by sales channels, and by individual products (not even product
groups). Imagine the workload for the company’s sales department to make these projections! The
company’s budget creation process took us four and a half months. Four of those were devoted to sales
projections. However, the workload was not even the main problem for them. The main problem arose from
the fact that sales by items and by sales channels were not regular, especially for some niche products.

Imagine that a retailer buys some items just a couple of times per year in comparatively small amounts. It is
quite difficult to predict the timing of these orders as well as the amounts since historical data, on which it
might be possible to base the forecasts, is very fragmented.

As a result, their projected product group and company totals usually match actual results. But deviations
on an individual product level are just enormous. Finally, the question is – was the higher level of details
worth the effort.

Therefore, in this particular case it was decided to forecast sales on shop level and then just to divide the
totals by product groups for the purpose of obtaining more precise cost of goods sold.

20


What are the possible levels of details for sales projections in this particular case? See the chart in the box.

The extreme case of not getting into
details for the company’s Less details
management would be just to assume
that their next year’s sales would
Total sales for the year (1 figure)
amount to $40 MM and that’s it.
However, such an approach is too
Total sales by month
unreliable – you can overlook a lot of
details and not really understand what Detailed by month and by shop
Optimal level
makes up these numbers. The
of details
opposite extreme would be trying to Detailed by month by shop and by product group
predict how many blue T-shirts
reference number 405382 size M Detailed by month, by shop, by product group
and by supplier
would be sold in the Galleria outlet in
July. Detailed by month, by shop, and by item

The best way is to either predict total
More details
July sales in Galleria or to predict July
sales of T-shirts in Galleria. Getting
into more details in this particular case would not pay in terms of precision of forecasts.

Determining details for other
industries Possible levels of sales projection details
for my company
Ok, we have seen the example of a
retail company deciding on the layout of
Less details
its sales budget but what about other
industries? I have created budgets for
companies from very different ...........................................

industries. Each of these companies has
...........................................
a unique business model and the sales
budget needs to be customized for each
Optimal level ...........................................
specific case.
of details
...........................................
The first question that you need to
answer for yourself is; what is the basis
...........................................
for my forecast - units or money. For
example, a company that is
...........................................
manufacturing and selling wooden
pellets can usually predict sales volumes
More details
in tons but not in dollars since the prices
for pellets fluctuate significantly over
the year. On the other hand, food manufacturers will, most likely, make their forecasts in dollars. First, it
usually takes some time and effort to re-negotiate prices with retail chains. Second, price fluctuations for
food are usually not as great as for commodities.

21


Then, if you decide to go for units, you will have to connect units with dollars, (the budget is a financial
plan, and so we plan in dollars, not in units). The most convenient way to do this is to make a special table
in the Assumptions where it is possible to predict average selling prices in each particular month. For
example, a chain of gas stations might forecast their sales in gallons and put an average price per gallon in
the Assumptions part of the budget for gas of each octane number.

If the manufacturing process is more complicated and is needed to forecast prices for each specific product
or product group, it might be a good idea to insert the table with average prices as a part of the sales
budget.

Define Forecast the
Determine the
forecasting sales numbers
level of forecast Create tables
basis - units or and fill in the
details
dollars tables

After that the process is very simple. You just have to create the tables and to fill them with the forecasted
numbers (see the next section on forecasting techniques).

To make the process a little bit clearer for you, I have tried to summarize the best practices from the
experience of our clients from various industries.

Catering companies, cafés and restaurants are very similar in their budgeting approach to the retail sector.
They forecast sales by month by location and then try to break them down by different product groups. It is
especially important for them since the markups for coffee differ quite a bit from the markups for main
courses.

Professional services companies, (business consultants); usually project their income in units, the number
of service hours they plan to sell each month. Then they multiply the number of hours by the service price
per hour. They might also go into more details and project the number of hours sold per employee (for
smaller companies with several income-generating employees) or per function (for larger companies).

A similar approach is also used in providing technical services, (e.g. for automobile repair shops). Such
businesses project income from their service division deriving it from the number of hours sold and
multiplying it by the average hourly price of services. Then, based on the number of hours sold, these
companies are usually able to derive, from their historical results, how much revenue they will generate
from selling spare parts to the cars they repair.

Marketing agencies can usually project their sales by months and by clients, especially if, at the end of the
previous year, they have negotiated the budgets for the next year’s work load. It might also be a good idea
to make projections by products since different products will have very different pricing strategies and
corresponding markups.

Retailers, as discussed, usually make their projections by months, by locations and by product groups.
Depending on the type of business, projections might be based either on dollars or on units. It might be a
good idea for retailers that sell more expensive items (e.g. auto retailers) to project sales by units, while
retailers that sell less expensive items to project sales in dollars.
22


Wholesalers, depending on the specifics of business, usually make their sales projections by month, by
sales channels and by product groups. Here it is absolutely essential to split forecasts to a highly detailed
level since different sales channels and product groups might have different margins. Margins are often
quite narrow for wholesalers to there is not much room for error.

Manufacturing companies, depending on the industry, usually project their sales by month, by sales
channel and by product group. The choice of forecasting basis – units or dollars – is usually determined by
one of two factors. First, the higher the price of the products the company manufactures, the more
reasonable it becomes to forecast in units. For example; auto manufacturers should probably forecast in
units while stationary good manufacturers will have a much easier time by
forecasting in dollars.

The second factor is the level of price fluctuations. If selling prices and raw
material prices fluctuate widely during the year it might be wise to make
forecasts in units, while companies with stable selling prices might make
life easier by forecasting in dollars.

Quite a specific approach is used by construction companies. These
businesses are in a unique situation at the end of each year especially the
smaller companies that specialize in working as subcontractors. Most of the contracts they have will expire
within the first half of the year, although they know that there still will be some business next year. These
companies can project the first months of the year with precision; however, they will have to make
educated guesses about the sales during the second part of the year.

These companies project their sales per each project, specifically dividing the planned numbers between
materials, labor, mechanisms, transportation and overhead. Such a division allows these companies to
easily project their variable costs.

Airlines forecast their income at the level of individual flights, taking into account the scheduled list of
flights, the number of rotations per month and the projected income per rotation. Income per rotation
might be derived either through an average occupancy rate per flight, (for passenger flights), or a fixed
amount (for cargo flights).

Real estate companies usually make forecasts at the level of each particular unit of real estate. For
example, companies that own commercial properties and rent them out may try to forecast income per
month per each premise (also taking into account all the clauses in the rent contracts that allow them to
increase rent, for example, at the rate of inflation once a year). Possible vacancy rates shall be introduced
into the sales budget as a “discount” to the maximum level of sales.

Projecting sales amounts
Ok, we have decided on the level of details for sales projections and now we have the tables for making the
base case sales forecasts. But how do we know what numbers to input for each shop in each particular
month?

Method 1. Historical results.
23


For established businesses with regular customer flow, (like retail), the best way to forecast the
future is to analyze past results. The idea is very simple – get historical results for the previous year, look for
seasonal patterns, consider recent and forecasted developments in the industry and in the economy and
try to adjust the historical results taking into account economic developments.

For example; consider a restaurant that has historical levels of income as presented in the first row
of the following table.

Actual Sales 2011, $ 438 753 442 093 552 435 553 053 547 596 593 461 656 072 626 158 546 283 545 071 549 746 704 256 6 754 977
5% increase, $ 460 691 464 198 580 057 580 706 574 976 623 134 688 876 657 466 573 597 572 325 577 233 739 469 7 092 726
Sales Budget 2012, $ 462 500 462 500 575 000 575 000 575 000 625 000 690 000 655 000 575 000 575 000 575 000 740 000 7 085 000

It is very important to look for seasonal patterns in the historical results. Note how the sales change
during the year in the example. December is clearly the best month due to corporate banquets and
Christmas/New Year dinners. On the other hand January and February have lower revenues. Summer
results are better than average due to the addition of an outdoor terrace and longer daylight hours. Here it
is noteworthy that the results peak in July. All the other months are relatively equal in sales; there are
fluctuations but these are not very large.

Now when we have determined the historical seasonality, it’s time to forecast the planned results.
Let’s assume that we think the economy will be steady and the increase in sales will be very modest, 5%.
So, the next step is to calculate the projected results with a 5% increase. See the second line in the table
above.

Finally, it is time to make the budget forecast while incorporating seasonality patterns. It might be a
good idea to round the numbers. For example; an implied sales forecast for December would be $739,469,
so let’s input $740,000 into the budget. The same procedure is applied for June-August results. However,
the sales results for other months are derived slightly differently.

March-May and September-November periods have relatively similar sales. So it is a good idea to
calculate an average of the implied sales for these months, to round it and to use the rounded figure as a
sales budget for each of the months. In this example the average is $576,482, so, to be on the safe side; we
round it to $575,000 and use the number for each of the six months. That is the way to keep seasonality,
but to get rid of slight deviations in the results that are explained by purely accidental factors. The same
procedure is applied to January-February results.

The action flow in case of using this method is depicted in the chart below.

Determine the
Obtain the Look for Forecast the sales
growth rate, take
historical sales seasonality numbers and fill
the economy into
results patterns in the tables
account

Method 2. Break-even level of sales

24


The method described above is the easiest to understand and apply, however, the problem is that
there are industries like construction, whose business is project-based and the projects are can be forecast
only within a limited time frame.

It is usually not very precise to take historical results from a construction company and to assume
they will be able to reach exactly the same results, (corrected by macroeconomic factors), next year.
Actually, such companies, especially smaller ones, have big issues with forecasting their sales, since, at the
time of forecasting, they have projects awarded to them just for the first part of the year.

One of our clients is a construction company. 2009 was a disastrous year for the whole industry as the credit
market was frozen and there were very few projects for the industry. The company was making its internal
restructuring, cutting costs and was using our firm to develop their financials.

When we started the planning process they had just a couple of small construction contracts that were not
large to fill their capacity. So first we determined the fixed costs that they needed to bear every month to
stay in business, (office rent, administration salaries, interest, etc.). Then we calculated the required level of
sales for the company to break even. This sales level was determined to be reasonably achievable and was
accepted as the sales budget for the company.

Eventually they surpassed their sales goals, ending the year with a net profit.

So, the solution for such companies would be to start with forecasting their fixed costs instead of
forecasting sales, (fixed cost projections are covered in the next part of this e-book). Then, when it is known
what the cost of doing business for them is, it is possible to calculate the break-even level of sales and the
level of sales that is needed to reach the goals.

Determine the level Evaluate the
Link variable costs
Forecast the fixed of sales required to probability of
to sales in the
costs break-even or to reaching such level
forecasting model
reach goals of sales

The critical part here is to determine how achievable the sales goals are. For example; the
construction company in the example above understands that the required level of income for them to
break even is say $100 mln but they feel that the market has still not recovered and it would be unrealistic
to set such a goal. Most likely the goal they will be able to achieve will be in the $70-80 mln range. This is a
clear signal that their fixed costs are too high and they need to cut them in order to break-even.

Projecting sales for new business units

25


One of the trickiest parts of the planning process is to forecast income for a new business unit
within a company. The new business unit might be a new shop for a retail company, a new restaurant for a
chain of restaurants, a new product group for a wholesaler, etc. Forecasting for a startup is even trickier
since the business model itself has not yet proven itself.

The easiest way to forecast sales for a new business unit is to compare it with an existing one.

In the example described earlier for the Happy Retailer, LLC, there are 2 new shops the company
plans to open during the year – located in the Aventura Mall and in the Millcreek Mall. Note that the
income projections for both shops are very conservative, compared to the existing shops – they are lower
by 20%-27% compared to the worst of existing shops.

Sometimes a company’s new business unit’s sales
actually are the best during the first month of
operations. This holds true when a very sought-after
product or retailer comes to the market. The picture
to the left depicts a queue at McDonald’s in Moscow
in 1990. They have probably never achieved sales
results like this in this restaurant since then.

Projecting Cost of Goods Sold

Ok, we have already created a sales budget for the company, now
we need to understand what the costs of goods are. In many industries the
Product group Markup cost of goods, (COG), or cost of materials is usually the greatest variable
Shirts 104% expense item.
Jeans 83%
Jackets 73% In this particular case we are projecting the markups for each
Sportswear 88% product group in order to get to the cost of goods sold. The markups are
Swimwear 83%
usually derived from the historical data. In this particular case it is assumed
Socks 104%
Shoes 73% that the markups stay the same throughout the year. However, if a
Sweaters 78% company has different pricing strategies during different times of the year
Pants 83% it might be a good idea to forecast markups for each separate month. For
Coats 88% example, in some countries food processing companies that distribute eggs,
tend to increase prices before Easter due to increased demand, while the cost of goods stays the same.

Then, after the cost of goods sold has been calculated for each product group, it is possible to
calculate it also by shops, as we know the break-down of sales by product groups.

26


So, the planning process for the Happy Retailer LLC is as follows:

1. Forecast sales by shops
2. Forecast each product group’s share of sales for each shop
3. Derive sales by product groups
4. Forecast average markups for each product group
5. Derive the cost of goods sold for each product group
6. Derive the cost of goods sold for each shop

Happy Retailer, LLC Sales 2012


COGS by Shop 1 946 826 1 697 404 1 697 404 1 827 437 1 827 437 1 468 868 1 684 009 1 468 868 1 968 710 1 968 710 1 968 710 2 162 122 21 686 505

Existing shops 1 946 826 1 697 404 1 697 404 1 697 404 1 697 404 1 364 841 1 564 378 1 364 841 1 697 404 1 697 404 1 697 404 1 863 685 19 986 396
Mall Of America 274 105 238 353 238 353 238 353 238 353 190 682 219 284 190 682 238 353 238 353 238 353 262 188 2 805 409
The Galleria 204 577 177 893 177 893 177 893 177 893 142 315 163 662 142 315 177 893 177 893 177 893 195 683 2 093 804
Sawgrass Mills 231 199 201 042 201 042 201 042 201 042 160 834 184 959 160 834 201 042 201 042 201 042 221 147 2 366 268
Woodfield Mall 234 363 203 794 203 794 203 794 203 794 163 035 187 490 163 035 203 794 203 794 203 794 224 173 2 398 651

New shops 0 0 0 130 034 130 034 104 027 119 631 104 027 271 307 271 307 271 307 298 437 1 700 109
Aventura Mall 0 0 0 130 034 130 034 104 027 119 631 104 027 130 034 130 034 130 034 143 037 1 120 890
Millcreek Mall 0 0 0 0 0 0 0 0 141 273 141 273 141 273 155 400 579 219

Projecting Other Costs

Structuring cost budgets
Each company has many different cost types. In order to get a
clear view of the budget it is important to divide the costs into specific
budgets and put each into a separate worksheet. There are companies
that budget all the possible costs in just one worksheet and the
worksheet is several hundreds of rows long. In my opinion such
budgets are really onerous. The key to creating the correct number of
cost budgets is to understand which departments have responsibilities
for these costs.

For example, Happy Retailer’s budget contains the following
cost budgets:

 Retail network cost budget
 Sales personnel salary budget
 Administrative personnel salary budget
 HR budget
 Marketing budget
 Other selling cost budget
 Other operating cost budget
27


 Administration cost budget
 Capital expenditure budget
 Financing budget

The latter two budgets are focused on forecasting balance sheet values – investments into fixed
assets and external loan amortization schedules. However, these budgets also contain projections over
such costs as depreciation and loan interest. The other budgets are 100% connected to the P&L statement.

The retail network cost budget is separated from the others because it is determined mostly by
conditions of the rent agreements that were already signed before the start of the budgeting process.
There is little discretion in taking or not taking on these costs. On the other hand these costs should be
controlled for possible errors or discrepancies compared to what is agreed to in the rent agreements.

Since Happy Retailer is a retail company, it has shop personnel and administrators. In Happy
Retailer’s case it is a good idea to divide personnel into 2 salary budgets, as sales people are numerous and
their salaries are actually projected on a shop level, not on an individual level. Administration salaries, on
the other hand, are projected on the individual level and are less variable.

For the Happy Retailer we have also created a separate HR, marketing, other selling cost, other
operating cost and administration cost budgets.

When structuring your company’s cost budgets consider the following factors: (These will
determine the cost budgets your company will have)

 Structure – what are your company’s departments? Do they incur and control costs that no
other department does? For example; an accounting department might have salaries and
telecommunication costs that are born by all the other departments too. It might be a good
idea to include such costs into a salary budget and a telecom budget and not to create a
separate accounting budget. On the other hand, online marketing is something unique to
the marketing department. That shall be put into a separate budget.
 Responsible persons – who is responsible for what? If an IT manager is responsible, not
only for IT equipment and software but also for controlling telecom costs, it might be a
good idea to include the telecom costs into IT budget.
 Cost variability – as in the example above regarding sales and administration salaries,
sometimes it is a good idea to divide costs into variable and fixed and to create 2 separate
cost budgets.
 Discretion over costs – costs that the company has little flexibility over, like rent for the
shops, might be put into a separate cost budget.

28


My company’s budget will have the following
cost budgets:

Projecting salaries
In our example Happy Retailer’s salary projections are divided into 2 separate budgets – sales
personnel salaries and administration salaries.

Sales personnel salaries are projected on a shop level. Here the company is not trying to forecast
what John Smith’s from Palisades Center salary will be. Sales personnel tend to have a higher rotation level
so chances are, that by the end of next year, John Smith is no longer with the company or has been
transferred to another position. Therefore, with the sales personnel salaries, the focus is on the necessary
staffing level of shops.

It is important to understand how many people are needed for each of the shops and what the
salary system is. What are the average base salaries and what percentage of turnover is paid to the
personnel? These assumptions are entered into the assumption table on the sales personnel salary budget.

29


Sales Personnel Salaries & Commissions
Base % # of
Shop Salary commission salesmen
Mall Of America 30500 2% 8
King of Prussia Mall 36500 2% 9
Palisades Center 38500 2% 10
The Galleria 37800 2% 5
Sawgrass Mills 39000 2% 5
Woodfield Mall 33000 2% 7
Del Amo Fashion Center 33000 2% 7
South Coast Plaza 33000 2% 7

Aventura Mall 37500 2% 8
Millcreek Mall 40000 2% 8

Then the numbers from the Assumption table are automatically linked to the salary budget (see
below). The average base salary is multiplied by the number of sales people but the commission is
multiplied with the planned turnover from the sales budget for each particular shop and added to the gross
salary. Note that the assumptions for the shops that are not yet opened are also put into the model. Then
the formulas shall look to the Assumptions worksheet, check the opening month of a shop and
correspondingly adjust the salary budget. Note this in the table below.
Happy Retailer, LLC Sales Persons Salary Budget 2012

1 2 3 4 5 6 7 8 9 10 11 12
Total 288 907 277 895 277 895 313 565 313 565 297 733 307 232 297 733 351 710 351 710 351 710 360 248 3 789 902

Gross Salaries 241 359 232 159 232 159 261 959 261 959 248 733 256 669 248 733 293 826 293 826 293 826 300 959 3 166 167

Existing shops 241 359 232 159 232 159 232 159 232 159 219 893 227 253 219 893 232 159 232 159 232 159 238 293 2 771 804
Mall Of America 30 377 29 067 29 067 29 067 29 067 27 320 28 368 27 320 29 067 29 067 29 067 29 940 346 791
King of Prussia Mall 38 396 37 126 37 126 37 126 37 126 35 433 36 449 35 433 37 126 37 126 37 126 37 973 443 563
Palisades Center 39 635 38 650 38 650 38 650 38 650 37 337 38 125 37 337 38 650 38 650 38 650 39 307 462 290
The Galleria 23 302 22 317 22 317 22 317 22 317 21 003 21 791 21 003 22 317 22 317 22 317 22 973 266 290
Sawgrass Mills 24 760 23 650 23 650 23 650 23 650 22 170 23 058 22 170 23 650 23 650 23 650 24 390 282 098
Woodfield Mall 27 875 26 750 26 750 26 750 26 750 25 250 26 150 25 250 26 750 26 750 26 750 27 500 319 275
Del Amo Fashion Center 28 680 27 450 27 450 27 450 27 450 25 810 26 794 25 810 27 450 27 450 27 450 28 270 327 514
South Coast Plaza 28 335 27 150 27 150 27 150 27 150 25 570 26 518 25 570 27 150 27 150 27 150 27 940 323 983

New shops 0 0 0 29 800 29 800 28 840 29 416 28 840 61 667 61 667 61 667 62 667 394 363
Aventura Mall 0 0 0 29 800 29 800 28 840 29 416 28 840 29 800 29 800 29 800 30 280 266 376
Millcreek Mall 0 0 0 0 0 0 0 0 31 867 31 867 31 867 32 387 127 987

Payroll Taxes 23 412 22 519 22 519 25 410 25 410 24 127 24 897 24 127 28 501 28 501 28 501 29 193 307 118
Other Payroll Related Benefits 24 136 23 216 23 216 26 196 26 196 24 873 25 667 24 873 29 383 29 383 29 383 30 096 316 617
Number of Salespeople 58 58 58 66 66 66 66 66 74 74 74 74 67
Avg Gross Salary 4161 4003 4003 3969 3969 3769 3889 3769 3971 3971 3971 4067 3959

Please, note that the assumptions for the average payroll taxes and other payroll benefits as a
percentage of total salaries are placed on the Assumptions worksheet. This part of the budget might be
elaborated in greater detail depending on the complexity of the tax system in your company’s country.

Another important factor that you will need to take into account is the salary level your employees
are going to receive on average, (see the last line of the salary budget – it is calculated automatically).
Given the sales figures and the salary system, are you overpaying or underpaying, compared to your
competitors? Will you be able to attract top employees to work for what you offer them?

30

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