A member of The Budget Brigade asks: How do you create a budget for a business when you don’t know how well the product is going to sell?
Business Sales
Before we get to the budgeting part of this question, let’s start with a definition used: business. This may sound like an odd place to begin, but go with me for a minute here. We want to create a budget. But a budget for a business is going to be different that a budget for a hobby because they have two different goals and are in two different stages of profitability. So before getting into product pricing and budgeting, it’s important to sit for a minute and assess: do you really have a business or do you have a hobby you hope will one day become a business?
Product Sales
While we may not know exactly how well a product is going to sell, we need to have a general idea before getting the product ready to market. Otherwise, we could be spending time and money launching a product that no one wants, which is a terrible business plan.
There are two purposes to a product: for the consumer, it’s to provide something to help them survive or make their life easier/more enjoyable; for the seller, it’s to make money to help support the business. If your product doesn’t make a profit (which is different than just selling for money), it fails one of its essential purposes.
Where to start? You need to make sure you can design, produce, and sell your product at a margin that offers a profit once all time and materials are accounted for all the way from R&D through delivery to the customer. (We’ll eventually cover this in a separate article, because it can get complex.)
Once you’re sure you have a product that can be profitable, you want to make sure it will be profitable.
How? Market research. If you can make a profit selling a dual juicer and blender at $500, but the market will only support that type of gadget at $250, you either have to redesign your product, reduce your materials, manufacturing, and distribution costs, or find an entirely different product to sell.
Target Market
Defining your target market can help. High-income earners with lots of disposable income are more likely to purchase a $500 dual juicer and blender than a single father struggling to keep up with his rent. Understanding your end-user can help you understand how you can price your product, as well as tailor your product to their needs and wants.
Assess the Current Market
Is there another juicer/blender combo already in the market place? (I honestly wasn’t sure if this already was a thing. It is! And they range anywhere from $80 to $800.)
- What’s it priced at, and for what type of design and features?
- Where’s it sold?
- Are you able to speak to someone within one of the vendor to see how well it sells?
- If you can’t get information from the vendor or manufacturer, can you poll the audience?
Surveying your target market about what they currently have, what features they would want at what cost, etc. helps you understand pricing and marketability, which can help you predict sales.
You never want to develop a product you hope will sell. You want to know there’s a market before you go to market.
Testing
Companies often do testing and test marketing. Invest a little and then assess, before dumping a ton of resources behind an unknown with a hope and a prayer. Perhaps you make the most terrifying Frankenstein-esque juicer/blender humans have ever laid eyes on. But it functions, and it only took a month and $250 to make. Having people from your specific target market you identified above test the product to let you know they “have to be one of the first to get to buy this” or they “won’t ever buy this until you fix the splattering issue” is get feedback before you finalize your product and order the first 1,000 units.
What Makes You “Special”?
The testing stage is also a great opportunity to explore: what’s unique about your product? What does it offer that other products in the marketplace don’t? If you can’t come up with anything, you need to go back to the drawing board.
Market Demand and Potential Sales
Here, we arrive at the heart of the first part of our brigade member’s question. With the research you’ve done above, you should be able to come up with an estimate for the demand and potential sales of your product.
It’s not going to be perfect. Inflation could increase, and discretionary spending can slow. A juicer/blender can become a luxury less and less families can afford. Shifts in market happen, especially for products that take a while to develop and get to market. But understanding your market, the demand for your type of product, and the pricing required to be able to sell your product to that particular market are all key steps in coming up with an estimate that should give you a general idea.
This is also where it’s important to be a business, not a hobby, and have connections in your industry. Speaking with other business owners that are not in direct competition with you (or, even better, are and don’t mind sharing their numbers with you) for your product but have a similar target market and have a similar sales point/utility can give you a clear picture of what potential sales can be.
The potential sales may not end up where you start at and will have a degree of uncertainty, but a degree of uncertainty is a much better starting point than no idea at all.
If you have no idea how your product will sell, you can’t budget.
Previous Sales History
Once you have a product on the market, one of the easiest ways to predict how your product is going to sell is to look back at its previous sales history. If, on average, you sell 125 juicer/blenders a month, then you can estimate that you are going to sell roughly 125 next month. Your sales should increase, and you should continually assess and refine your marketing strategy, but you have a baseline you can work with.
Budgeting with Your Baseline in Mind
Now, we arrive at our member’s actual question: how do we budget when sales may fluctuate?
We budget for the bottom of the baseline.
For example, let’s look at the last twelve months of sales for our juicer/blender.
January: 125
February: 145
March: 135
April: 137
May: 142
June: 122
July: 147
August: 152
September: 127
October: 133
November: 192
December: 189
When we take the average of the sales, we get 145 juicer/blenders a month. If we have a healthy amount of cash on hand for our business (which we should, if it’s an actual business), we can run our budget with the net profit of selling these 145 juicer/blenders.
If we’re a start-up and this is our first year with a product in sales, we might still be building up our “business emergency fund” cash on hand. In this case, it might make more sense to budget using the lowest sales of the lookback period. In this case, you would budget with the net profit off of the 122 sales in June.
This can get complicated if you only have 130 juicer/blenders left in stock and need to reorder, which puts a heavy cost of goods sold (COGS) expense upfront and can cut down on your profit available for other expenses. This is where inventory control becomes important, and why having a healthy cash on hand position is critical. Not only do you need to be able to cover the upfront expense of your first run, but you need to have enough saved to reorder once you hit an inventory threshold. This is why I like to work on net income. It takes the COGS into account when calculating the net income left to budget, which allows you to save the COGS portion for each item sold towards the next one you want to purchase.
Inventory is an entire subject we could cover in its own article, and likely will in the future as it can be where a lot of small business struggle and ultimately find themselves in the red because of poor planning and preparation.
Use Your Budget as Your GPS to Success
When budgeting for a business, just like budgeting for a household, set priorities for your goals and use those to guide how you allocate your spending.
You may want to develop your next product: a food processor/blender combo. But you first need to increase then sales of your juicer/blender and, ideally, your profit margin on each sale. You also have to keep the lights and rent covered for your small warehouse and distribution center. And cover your ecommerce website expenses in order to keep driving the sales you already have.
Don’t forget your time as well. You have to cover your salary in order to make your time spent filling orders and driving sales make any sense.
Your budget should first and foremost cover your required expenses to keep your business running, just as your home budget covers your four walls before anything else.
Let’s step away from our juicer/blender example and give you a real world example for a moment. My ultimate goal with starting The Budget Brigade is to be able to make enough money between budget coaching sessions, sponsorships, and ad revenue, coupled with my editing/writing work, to run the two full time as my “day job”. Being able to work fully remote on a schedule I set would allow my husband and I the ultimate flexibility to travel with our camper to travel and hike during “mini-retirements” while still earning enough income to save for retirement and pay our bills as we shifted into full FIRE territory.
As part of this dream, I would love to become AFC certified for financial coaching. To become certified, it requires a $1,575 cash investment and 1,000 hours of training. Considering I am not earning money from The Budget Brigade yet, it isn’t in the budget, pure and simple. So it is a goal I’ve set, but for now, I’m covering minimum expenses like the domain name and hosting while I build a brand to shift a hobby to a side hustle to a business.
Will I get my AFC certification? Absolutely! Eventually. I might even become a Certified Financial Planner at some point in the next five to ten years. But not today and not next year, because it isn’t a high priority at this point, and I don’t have a business with enough profit to justify the cost.
My goal before my AFC cert is much cheaper and can help ramp up my income to afford the AFC certification: I’m going to buy an inexpensive editing software in order to get a YouTube channel and podcast up and running. And not just any old software I can find through Google. I have a writer friend who already runs a successful YouTube channel, so I reached out and asked her what software she has used. She offered a great solution at a cheap cost point ($80 vs the $1,575 for the certification.) So now I have a budget cost goal to aim for. The YouTube and podcase are part of my marketing strategy growth plan to build brand awareness while providing more resources for The Brigade. And these two avenues of growth has the potential to ROI a lot faster than the cost and time associated with the certificate. After all, I already have fifteen years of budgeting experience to coach. The certified is just a nice recognition to provide more authority.
When setting your budget and priorities, remember: it’s going to take twice as long and cost twice as much as you originally plan for.
Spend Money to Make Money
I hear it all the time: you have to spend money to make money. That’s true, but you also have to have money to spend in the first place. When you spend money to make money, you are spending the profits from the money you’ve already made. The only exception is your initial start-up phase, which should have a specific investment capital number set so you don’t fall into a sunk cost fallacy trap. And that initial capital has to come from somewhere else, which is typically the profits from another successful business you are already running, or from your primary source of household income.
Starting a business in debt with a loan is setting yourself up for failure. DON’T DO IT! It’s hard to make a profit when you’re bleeding money towards interest straight from the beginning. You’re also on a financial ledge, at the liberty of the loan holder to call in your loan, or to not renew it, leaving you in a position where you don’t have the capital to pay the loan.
What if my business doesn’t make enough to cover the basic expenses every month at the baseline?
If your business doesn’t make enough to cover your basic expenses at your baseline sales, then you don’t have a business, you have a hobby. (Hello, my current aspirations to become a published author.) Sometimes, a very expensive one. A business, by definition, has to make a profit. Since I haven’t landed an agent and thus a publishing deal, Lauren Beltz Writes is a hobby, not a business. And I’m very careful that my main investment is my time, since I enjoy writing as a hobby. We have a set budget line item for hobbies/education/writing in our personal budget. It’s far smaller than the rest of our entertainment budget, typically about $35/month. If the money isn’t in the budget, I don’t spend it!
If your profit margin is tight, it’s time to assess what the fat in your current expenses is. A successful entrepreneur is always evaluating their processes and looking for ways to improve.
- Where can you make your process more efficient to save money and time?
- Where are you wasting money on things that aren’t returning on your investment (ROIing)?
- What cheap avenue haven’t you explored to get your product in front of your target market?
Be creative! Be resourceful.
Find others in your industry who are further in their entrepreneurial endeavors than you are. Often, they are more than happy to share their wisdom and help you learn from their mistakes so you can skip that painful first-hand experience.
Most importantly, stick to your budget! Opportunities will arise that you will want to jump on. You’ll easily be able to talk yourself into them. It’s an investment into the future. That’s fine, if it’s worth realigning your values/priorities and thus adjusting your budget to show that. But the numbers have to make sense at the end of the day. Spending money is easy. Spending it wisely takes work and discipline.
People can get too greedy, it’s human nature. It takes time to build up a brand and awareness. No success happens overnight. Set realistic expectations and corresponding realistic budgets for those expectations and where you are currently in your process.