Budgets

Creating a Budget as the First Step to Establishing Reality -
Do we have enough money to start the business of our dreams?  As a first step we will have to determine what the costs and expenses of our business might be before we actually start to move ahead with business planning.

Costs and Expenses
There are expenses that you will incur once at the outset of your business and others that will recur from month to month. These are easy for your to discern: you can collaborate market prices for rent of space and other items such as furniture and fixtures, but how do you compute how much you will be able to sell?
Our market research should have revealed to us what our competition is doing in the way of sales and units sold. If we searched enough and made inquiries, that research will also have an indication of what the cost structure of businesses in the same industry are like. You have also computed what your expenses will be in the first month at least! So we have some information with which we can budget with.

Another issue to address is one of feasibility. Are there enough potential customers in your target market to purchase your product to make sales worthwhile? What happens if your target market is not big enough? What happens if your product is not one that people want to buy? If the answer to these two questions is "No", then don't venture out and start this business.

But if you determine that it is worthwhile after doing extensive market research, how do you figure out Sales? How much can you sell? AND I ask you at what price are you going to sell your product? Remember Sales is a function of Price times Units Sold (Sales = Price x Units Sold). If you look at this equation you have two elements with which to play - - Price (how much to charge in view of your given cost structure), and Units Sold (how much can you sell?). You can arrive at your sales goal in dollars if you lower the price and raise the number of units sold. Or, you can arrive at the same sales goal if you raise the price and reduce the number of units sold.

Take a look at the table below which is used to ascertain the price level and number of units to sell.


This table shows three possibilities whereby the entrepreneur is using varying numbers of units and several price points to determine if his cost structure can be covered with sales. In this budget he will use the average column to expand his budget from month to month. This "flexible budgeting" can be used with your prediction of how the economy will be: worst case, better case, best case to arrive at an average case.

Bottom Up Method
You can also determine a budget by using the Bottom Up Method. Here you would determine what profit you want to have, use your cost structure and then work backwards to determine the Net Sales that would give you the profit you desire. Thus, we are working from the bottom up.

Many people who use the Bottom Up Method have realized that to arrive at the profit that they are seeking they need to expand their business or add on extra help in order to achieve the scale that they desire.

Deviation Analysis
The budget that we have created can be used after we have begun operating for a time. We want to know how well we have done in comparison with what we thought we would do at the initiation of our business. We can take the budget that we have created and compare it do what we have actually done. We can then see how we have deviated from the original plan. Perhaps we have done much better than what we originally planned or maybe we have not done what we aimed for. Take a look at the format below to see how you can use the table above for the Deviation Analysis.

The Comments column is used to explain the variance, which is the differential between Actual and Budget, either up or down. We can write the reasons for the variance, like "we had to lower price to attract consumers and thus didn't achieve the sales level" Or, "due to increasing demand, we raised the price to $xx and achieved greater dollar sales". Or, we achieved greater Gross Profits because the costs of our goods went down". These explanations help management understand how to alter their operations going forward. Feedback enables fine tuning of the operations and makes for a more efficient operation. Thus deviation analysis helps management understand the effects of the economy and supply and demand on its operations.

Distrubution Channels

The method we use to get our product to the consumer can define our competitive advantage and reputation and add to the quality of our service. It can also mean cost efficiencies.

Direct Marketing
Direct Marketing is where the manufacturer sells directly to the consumer. For example, an Internet company which has its catalogue on the Internet would sell directly to the consumer and ship directly to the consumer either by parcel post, FEDEX or UPS. The advantage here is that the manufacturer has control over shipping and expedites the shipment via his "strategic partners" the U.S. Postal Service, FEDEX or UPS. It is also cost effective. The manufacturer is able to offer the product cheaper than if the product were offered in a retail store or department store. Case in point, you can purchase books and other items from Amazon.com, receive them in 3 to 5 business days and the shipping is FREE. The charge is cheaper than if you were to buy it in a store.

Levels of Channels
The more links you have in your distribution channel the more the costs are added to the product.

• One Level - The manufacturer would use a retailer, like Bloomingdale's who would sell to the consumer. Bloomingdale's is going to add their cost to the cost of your product. Therefore, the consumer will be paying more for the product.
• Two Levels - The manufacturer would use a wholesaler who would use the retailer who sells to the consumer. The wholesaler, like the retailer, would add on his costs to the cost of the product. The consumer would be paying more for the product.
• Three Levels - The manufacturer would use a jobber (used for overseas sales), who would utilize a wholesaler, who would use a retailer who sells to the consumer. Yes, as you are now catching on, there are more costs and the end result is that the consumer pays for the product. The lengthier the channel and the more links in the channel chain the more costs are added to the product!

Designing the Distribution Channel
There are factors to consider when deciding upon the best method of distribution for your product. We must consider the nature and characteristics of our product, the buying habits and patterns of the consumer, the frequency of purchases and the amount spent.

Product characteristics
The nature and characteristics of the product will necessitate certain services offered by an intermediary. Is the product bulky, standardized or understandardized, does it require technical knowledge or increased service, or it is perishable or not? Some of these characteristics will require storage or salespeople who will be able to demonstrate, answer technical questions and sell the product. If your product is ice cream, it will require refrigeration in transit to the local retailer.

If your product is expensive (a large ticket item) then you may need a distribution channel which has the capability of offering financing for its purchase. Some wholesalers will offer advertising and promotion services because they know what the retailer needs and what the consumer wants.

Your business characteristics
The size of your company or business and its financial position will indicate whether you can handle your our distribution. How many products are you selling and are you capable of maintaining your own truck fleet to distribute the products to the retailer? If you can, then you will have little reliance on others to move your product.

Types of Distribution

• Intensive Distribution - If you have a product which is inexpensive, may be considered a staple or a necessity, then you may want to have Intensive Distribution where it would be available in as many outlets as possible, like razor blades or batteries. They are almost everywhere you can think of.
• Exclusive Distribution - Are you a designer of evening gowns? Maybe you would want to have your gowns sold exclusively -- in only one outlet in a certain area.
• Selective Distribution - Perhaps you have a quality product and would want to sell it "Wherever quality products are sold". More than exclusive but not intensive.

Salesforce Distribution
Depending upon the kind and nature of your business, you may consider using your own salesforce. However, management of a salesforce has associated problems and considerations:

• Personnel Management. You have to define the profile for selecting and hiring individuals for your sales team. You have to train them, assign them to regions or accounts, and your have to motivate them and hold their hands for them to sell. Once they sell something you have to pay them. How much will you pay them.
• Evaluation of Personal Performance. What criteria will you use to evaluate their performance: sales volume, gross margins on product SOLD, call rate, average order size, or orders received vis-a-vis calls made.

Pricing

The Marketing Mix
Marketers have tools at their disposal with which to control their offerings to consumers. These tools are called the "4 P's of Marketing" or the "Tools of Marketing". Specifically, these are

• Price
• Product
• Place (distribution)
• Promotion

With the exception of Price all of the tools are costs. Price is revenues (or sales). We control the formula for the product, its design and purpose. We decide where to sell our product and how to get it to the customer. We also determine how to communicate, advertise and promote our product. Let's discuss Price.

Price
How do you determine the price at which your product will be sold? There are several ways and we can use several formulas to arrive at price. But first, we must understand what the factors are that affect price:

1. Costs to manufacture, transport, insure, etc. These are costs which we will have to pay for and which contribute to the cost of the product. Therefore, we must recoup them in the price of the product.
2. Supply and Demand - The two economic variables which we cannot control. These will affect the amount of product we are able to sell. Our competition can generate inventories and supplies of the same product which will mount if the consumer is unwilling to purchase the product due to a slow economy and the danger of being laid off.
3. Price the customer is willing to pay. If the customer feels that the product is overpriced, he is not willing to pay for it and will look for an alternative product or the product of the competition.
4. Competition's prices and offerings - If the competition is selling at a lower price for comparable products, then the consumer will go there. If the consumer feels that your product has more value or benefits, then the consumer will purchase the your products.
5. Other non-controllable variables - The government can place burdens on the manufacturer with additional taxes, excise taxes, export and import duties, etc. and compliance measures for environmental protection, such as chimney scrubbers, All these things add to costs and make our lives more difficult to make a profit.

Strategies
As entrepreneurs and marketers extraordinaire we have certain goals that we set for ourselves in the management of our business. Those goals have to do with the amount of sales and profits we set for our organization. These goals will impact our price for our product.

1. Survival - Many business owners are satisfied with a minimum profit or breakeven. They are happy with the life style that the company's operations affords them and are not interested in performing better.
2. Maximize Current Profit - This is the strategy of the low cost manufacturer. His costs are low and pricing provides for a good profit.
3. Maximize Current Revenues - The owner is looking to gain market share in dollars. He depends on image and quality pricing. Good quality yields a high price.
4. Maximize Sales Growth - The owner is looking to gain market share in units. The more he sells in units than his competition the greater his market share in units. This does not necessarily mean that he will be profitable or have large profits. He may be selling his product at a low price in order to sell more units.
5. Product Quality Leadership - The owner knows that he has very good quality in the product he created. Therefore, he will charge for the quality.

Sensible Prices
As you probably realize by now, setting prices is not an easy task in view of the competition's offerings and the fact that we need to cover our own costs. We must determine a profit margin that is respectable and acceptable for us and which achieves our goals and objectives as indicated above. However, our pricing cannot be too high or our competition will benefit from this. Our pricing cannot be too low, or we will suffer for it. What we must do is consider the competitor's price, our cost structure, and what the market will bear. We cannot sell anything if the market, that consumer out there, will not see the benefit in the product and pay for it.
Remember, we must be competitive and promote our competitive advantage: quality, convenience, personalization, guarantees and warranties, etc.

Advertising and Promotion

Now that you have decided upon your product or service, the pricing and distribution of it, we must be able to inform consumers where you are located and why they should purchase your product. That communication is through advertising. By now we should have identified the competitive advantage or unique selling proposition and how that uniqueness will benefit the consumer. Just as we saw when performing our market research by using the Yellow Pages, an image of the business is portrayed to the reader. Therefore, what we communicate to the consumer must portray that image and be conveyed in our advertising. However, a constraint we may have is that we cannot spend too much on our advertising campaign. Let's take a look firstly at what we want our advertising to convey to our target market.

Three "I's" of Advertising
What you want your advertising to do is

1. Involve the audience by inviting them to participate, arouse their curiosity, and convince them that they need your product or service.
2. Inform the customer about the benefits and uniqueness of your product or service in terms that they can understand. You must tell them how, where and when the item or service can be purchased.
3. Illustrate the benefits through words, images or sounds that get the audience's attention and convey your information.

Where to Advertise
There are several ways to reach our audience. Each way has a certain impact, effect and cost. In our market research we probably discovered what our target market reads and which TV and radio stations they listen to. If we know this, then we will know how to reach our target market.

Newspapers
There are local, regional and national newspapers, and they all reach a large audience. If you are a small business you would want to advertise where your customers are, probably in a local or hometown newspaper. Ads vary in cost and size, and the newspapers will probably offer you a package deal if you advertise for a week or month. What you want to do is to find the circulation of the newspaper the demographics of their readers. Newspapers are probably the most cost effective method of advertising.

Consumer and Trade Magazines
Where should your product be advertised in a consumer magazine or in a trade magazine? If your consumer is the end user, then you would want to advertise in a consumer magazine. If you sell to a business, then your efforts would be better placed in a trade magazine. Magazines take time to put together and go to press. Magazines have a lead time of approximately three months. Therefore, if you want your ad to be included in the next issue or in two weeks time, let's say, then you will be surprised. If you want to change your ad to represent a forthcoming sale, you won't be able to do it. However, you can cut down your costs by using what they call "remnant space". That is space that is left over and available after they have laid out the pages. Magazines are more expensive than newspapers.

Radio
Radio is a very good way to advertise your business. Think of the number of times you have heard an ad for a local business while you are driving to or from work. Therefore, radio has many advantages:

• It is usually local
• It reaches an identifiable and loyal audience which generally tune in at specific times.
• Ads can be changed frequently
• Advertising time is relatively inexpensive and can be repeated frequently.

But radio depends on listenership The more people who tune in at certain times of day, the more expensive the advertising time. You have 30 sec. spots or 60 sec. spots which can be read by the host or recorded. Your ad must attract the listener in the first three seconds. So think carefully about what you want to say to catch their attention.

Television
TV reaches a large audience; it can be regional or national. The price of the air time will change depending upon the coverage area reached. TV time is expensive and, of course, you have to create that commercial. The cost of production can also be expensive. But local cable programming is more affordable for small businesses.

Publicity
Something we do not have to pay for! Call the editor of a newspaper and find out if they are going to be doing any articles on your kind of business. You may be able to pose yourself as an expert in that area. If you are a restauranteur, invite the food editor for a meal in exchange for an article. But you must have an angle -- what are they going to write about that is interesting.

Press Release
You can write a press release to announce events related to your business and ask the newspaper editor if he would print it. In my business, we write up press releases to announce vendor partnerships, expansion to new areas, and the taking on a new functional management. See your text for examples of how to write press releases. They have a journalistic style.

Trade Shows
Trade Shows are a great way to meet potential vendors and suppliers, meet the competition and see what they are offering, and test your new product and get customers reactions. There are things that you must do, however, before you commit to a trade show. You must know the cost of trade show booth space -- set-up fees, electrical hook-ups,union fes for workers, etc. It can be expensive. But perhaps you can share the booth space in big shows with other entrepreneurs.

Guerilla Marketing
This is street marketing and one that is very inexpensive and will bring in local area customers to your business. Think about how many times you have returned to your car and found flyers and bumper stickers on it which advertise some local business. How often have you left the subway train (if you are in the NY City area) and have been handed a flyer for a neighborhood store? These are effective, low-cost and simple to make up. You may want to read a book on the subject, one of the more popular ones is Guerrilla Marketing by Jay Conrad Levinson.

Digital or Social Marketing
The development of the computer and all things digital have created a great opportunity for us to market and advertise our product inexpensively and quickly through mobil technology.  With the development of Facebook, Twitter, and Linked-In and others, we can market our product directly to a select group.  "Be my fan", "follow me" or "connect with me" are the buzz words we so frequently hear.  Creating a blog to write about your product and have others contribute their feelings and attitudes about your product is a great way to develop your audience.

Unique Selling Proposition and Positioning

Now that we have identified our competitors and their strengths and weaknesses, it is necessary for us to determine how we are going to be different. The value proposition that we are going to "hang our hat on" and be different is called our unique selling proposition.

Differentiating Factors

There are several ways we can differentiate ourselves from the competition. They are as follows:

Price Quality Service Location Filling a special niche Flexibility and adaptability Consumer orientation Reputation and Image Personnel

Cultural identity Warranty Financing Product range Convenience Accessibility Reliability Consistency Perceived value

Positioning for USP

When we determine which characteristic or attribute to use to differentiate ourselves from the competition, we are positioning ourselves against them. These attributes can be called "benefits" to the consumer. How does the consumer benefit when he buys our product? We are advised by those who have studied markets to promote only one differentiating factor or benefit which will be our Unique Selling Proposition (USP) and to stick to it. For example, Crest toothpaste consistently promotes its anticavity protection, and Mercedes promotes its great automotive engineering. The reason to keep to only one USP is because the consumer will only remember one.

The most commonly promoted number-one propositions are "best quality", "best service", "lowest price," "best value", "safest", "fastest", "most customized", "most convenient", and "most advanced technology".

Competition - Who Are They & How to Find Them

The other part of the market that we must study and explore is the Competition. As I mentioned earlier, "Business is War" and we must know everything we can about our competitors. We must also ask ourselves where would our potential customers go to buy a certain product if they don't buy it from us?

Direct Competition

For that product or service that we are selling we have competitors who are selling relatively the same product to the same market. These are direct competitors. MacDonald's and Burger King are direct competitors as are Home Depot and Lowe's. They sell the same items to the same market.

Some aspiring entrepreneurs when queried by me when they were applying for financing, told me that they had no competition. How naive! Everyone has a competitor, they just didn't look hard enough. The only time that you wouldn't have a competitor is if you have identified a niche with an unfulfilled need!

Indirect Competition

Indirect competitors are those who sell the same product through a different distribution channel and thus to a different market. For example, consider Hallmark Card stores. Their indirect competition are those who sell greeting cards from a different kind of store, like CVS drug stores. They sell a wide array of personal products, pharmaceuticals, and greeting cards. Target Department Stores which sell tires and auto parts are indirect competition for the Pep Boys Auto Centers. Direct merchants or catalogue companies are indirect competition to department stores. L. L. Bean's catalogue business is an indirect competitor to Banana Republic, for example.

How to Find the Competition

You may have a good idea of whom your competition is. But you need to corroborate and substantiate it. For a small business, the first place to look would be the Yellow Pages. There you have all businesses organized by business line. All you have to do is to look up the particular business line and you will find numerous businesses indicated. They are listed in alphabetical order and some of them even have ads on the pages.

From these ads you will perceive a certain kind of image about that advertiser -- whether it is a large business, with many services, or not. To corroborate this information you should visit the businesses and determine if your impression of the business is the same of what you physically see. Can you get any ideas from the sales people or the attitudes of the customers when they are shopping in those stores? Is it a pleasant atmosphere or is the place disorganized and crowded? You can determine how you would fashion your business in view of this competition.

In addition to the Yellow Pages you can go to a business library and search Dun & Bradstreet's for the competition on a wider scale and territory. You will need to know the business line and/or the NAICS or SIC code (North American Industrial Classification System or Standard Industrial Classification) to do a sorted search. There are other resources for you to check, just ask your librarian the best place to look.
Another place to look for competitors is by contacting your Chamber of Commerce. The Chambers have lots of information on the business area. National trade and professional associations publish newsletters and magazines that not only predict trends, but also tell about current businesses.

Market Intelligence/Competitive Intelligence

The gathering of information on your competition can be an exhaustive effort. However, this effort never stops. You are always looking for information from magazine articles, industry newspapers and financial analyst reports about your industry no matter how mature your business is. Not only are you keeping track of the competition and any innovations they may be developing, but you are also keeping track of your targeted consumer. What is he doing now and how are his buying habits changing in view of the happenings in the economy and the environment. Is he nesting because he feels that going to the movies is too expensive and he would rather rent a movie and watch it at home on his wide screen HDTV theatre?