Tip of the Week

Retail SMART	Budgeting - Forecasting Profits
	By: Dennis A. Conforto Chairman & CEO of A-Z Media Group, Inc.

For the month of November we will be discussing the entire forecasting process that makes up the budgets for the following year. In companies with a fiscal year end of December 31, November is the month for the forecasting and budgeting process. Forecasting and budgeting is a process that most retail owners hate. People in business always hate doing things they are not very good at. It’s one of the many reasons I don’t golf; I am just lousy at it and I walk away from each game feeling worse, so guess what? I don’t golf. Budgeting is the same for many people; they are lousy at and feel worse after trying to do it so guess what? They don’t forecast or budget. The First Rule of Business: There is one really good rule to always remember when it comes to running a business: Always do first those things which you hate doing most. Most businesses fail because owners always seem to delay the very thing they should do first. The more they delay it, the worse they feel about it and the less likely they are to do it. I would suppose that most scrapbooking retailers will go into 2006 without a clearly defined 2006 Budget. My goal here is to prevent that from happening. Here is what I will be writing about week by week for the month of November when it comes to budgeting and forecasting. Week 1: Forecasting 2006 Profits Week 2: Forecasting 2006 Advertising Week 3: Forecasting 2006 Product Selection Week 4: Forecasting 2005 Year-end Clearance Week 5: Forecasting 2005 Year-end Bonuses The Problems with Common Top-Line Forecasting: Most executives when they forecast for the next year they usually start with the revenue line. In other words they say, sales were $500,000 this year, I will project a 10% growth and my sales for the year will be $550,000 in 2006. From that point they assume the same percent of cost for non-fixed expenses and the same cost for fixed expenses. When they are done with that, the results show what the profits will be. While most executives use this approach, and it works, it is clearly not the best way of approaching the budget process. The goal of any business is simply to produce a profit, without profits there is no business. Profits are the lifeblood of business. Rather than seeing “profit” as a negative, retailers and executive must realize that with profits, companies can do many good and wonderful things for their consumers, employees and the community. This sort of top line thinking - starting with the goal revenues and then calculating the expenses to get to the bottom line profits – forces executives spend more time trying to hack at the budgets to cut costs, rather than focusing on innovation. As a result, the company lacks profit, making the company more of a burden, rather than the positive influence it can be for everyone who is a part of what a company does. The Right Way to Forecast: Businesses must first correct their planning process to think about profits as the driver of the budget not revenues. This means they must do bottom-line up planning rather than the typical top line down planning. It all starts with the correct question, which is, “How much money does my company need to make this year?” not how much do I want my company to do in sales this year. The difference in the results of a bottom up thinking retailer and the top line down thinking retailer is like night and day. A Dramatic Difference Bottom line thinking starts with the profit goal first and calculate from that the top line. When this occurs, those same executives understand quickly that their top line has to be higher than what they thought it would be. It forces them to see their business in a different way and forces them to ask questions that normally they would never have to ask. This kind of thinking makes business people smarter because they are forced to be innovative if they want to reach the goal they have set. The truth is those that think about the bottom line first are better and being the low cost providers because they are better at innovation. Great business people innovate, good executives copy, and poor executives don’t have a clue of what to do. If you are a good manager or an “I don’t have a clue owner” I suggest you focus first on hitting the right target, your bottom line. When you do this, you will see more clearly; understand more deeply how to innovate and how to grow your business into constant healthy profits. The pressure you feel today will be replaced with an ever-building road map of your future success. And that is what being business SMART is all about.