Budgeting for Small Business Advertising – It is entirely up to you, the business owner-manager, to determine how much should be invested in increasing sales through advertising and how that amount should be distributed.
Advertising expenses are entirely under control. Budgets for advertising are the means of calculating and managing this expense and judiciously allocating it among departments, lines, or services.
This guide outlines numerous approaches (% of sales or profits, unit of sales, objective, and task) for calculating an advertising budget wisely and offers ideas for allocating budget amounts to produce the desired results.
How to Calculate Advertising Budget Appropriations
Every method for determining an advertising budget has drawbacks in addition to advantages. For all kinds of enterprises, neither a single approach nor a set of ways is ideal.
Here, ideas from various conventional budgeting techniques have been integrated into three fundamental techniques:
- Amount of revenue or earnings
- Sales unit
- Purpose and duty
If you choose any approach or ways, you must do it with discretion and good judgement.
Percentage of profits or sales
Using a proportion of sales as the foundation for your advertising budget is the most common approach. Advertising should be proportional to the amount of items sold since it is an expense of the firm on par with, instance, the cost of labor.
Some of the issues that arise when utilizing earnings as a base are avoided by employing the % of sales method. For instance, it might not be the fault of sales or advertising if profits are poor during a particular period. However, if you continue using the same percentage, your advertising budget will be automatically reduced. There is no getting around the fact that 2% of $10,000 is less than 2% of $15,000. If earnings are declining for other reasons, such a reduction in the advertising budget may very well result in additional declines in sales and profitability. Further cuts in advertising spending will follow because of this, and so on. By reducing advertising costs, a business owner may temporarily increase profits, but such a move may have negative long-term effects on the company’s bottom line. The percentage-of-sales approach allows you to maintain a constant relationship between your advertising and your sales volume, which is what your advertising should be primarily affecting. If your advertising budget is used effectively, gross margin should also improve, especially over the long term (Advertising Budgeting; Media Budget Allocation; Marketing Budget Allocation).\
What percentage?
Finding out what other companies in your line are doing will help you decide on a proportion of sales. Within a certain company category, these numbers are generally stable. This ratio of advertising costs to sales in your industry can be easily determined. Examine trade publications and organizations. These percentages are also included in reports from the Internal Revenue Service and the Census, as well as in publications from financial institutions including Dun & Bradstreet, Robert Morris Associates, and the Accounting Corporation of America. Knowing what the ratio for your industry is will help to assure you that you will be spending proportionately as much or more than your competitors; but remember, these industry averages are not gospel. Depending on your specific circumstances, you could need to advertise more or less than your rivals. For you, average might not be sufficient. You might wish to our market your rivals and be prepared to sacrifice short-term income to do so. It takes money to grow.
No business owner should allow a certain strategy to restrict them. The percentage-of-sales method is advantageous because it is quick and simple. It makes sure that your advertising budget doesn’t exceed what is reasonable for your company. It’s a reliable strategy for secure markets. However, you’ll generally need to employ a higher percentage of sales than the industry standard if you want to increase your market share.
Sales? (Budget for Business Advertising)
You can calculate your advertising budget as a percentage of past sales, projected future sales, or a combination of the two:
- Previous Sales The sales from the previous year or the average of several recent years can serve as your base. However, keep in mind that alterations in the economy could cause your estimate to be either too high or too low.
- Expected sales in the future. As a percentage of your projected sales for the upcoming year, you can determine your advertising budget. The most frequent mistake with this approach is to think that your company will expand indefinitely. You must constantly be aware of overall business trends, particularly if there is a potential of a slump, and objectively evaluate the trends in your sector and your own business.
- Previous sales data and projected future sales. Combining both is the middle ground between a frequently conservative estimate based on last year’s sales and a frequently overly exuberant prediction of next year’s. In times of shifting economic situations, it’s a more practical approach. It enables you to make predictions with a little more confidence and to attentively study trends and outcomes.
Measure of Sales
According to your expertise and industry knowledge regarding the amount of advertising required to sell each unit, you set aside a specific amount for each unit of product to be sold when using the unit-of-sale approach. In other words, if you want to sell 100,000 cases of canned veggies and it costs two cents of advertising to sell a case, you’ll probably budget $2,000 for advertising. Does selling a refrigerator cost X dollar? If you want to sell 1,000 refrigerators, you’ll likely need to allocate 1,000-time X. Simply put, you’re establishing your budget based on units sold rather than money quantities.
Some individuals view this strategy as merely a percentage-of-sales variant. However, since unit-of-sales is based on what experience shows you it takes to sell a real unit, rather than an overall proportion of your estimated gross sales, it probably allows you to create a closer estimate of what you should aim to spend for optimal effect.
The unit-of-sale method is especially helpful in industries where the amount of goods produced is constrained by external factors, such as the impact of weather on crops. If it applies to your company, you should first project how many units or cases you will have at your disposal. Then, you only use as much advertising as your expertise says you is necessary to sell them. Therefore, you should have little waste in your advertising costs provided you have a fairly accurate sense of how many units will be offered in advance.
This approach is appropriate for specialized products like washing machines and cars, but it can be challenging to implement when you need to spread your advertising over a variety of products. In sporadic or irregular marketplaces, as well as for fashion goods, the unit-of-sales technique is not very helpful.
Objectives
The objective-and-task technique is the most challenging (and least used) strategy for calculating an advertising budget. However, it’s the most precise and effectively completes what all budgets ought to:
- It connects the appropriation to the needed marketing task.
- To prevent earnings and reserves from being depleted, it links the advertising appropriation over the long term and under normal circumstances to the amount of sales.
You need a coordinated marketing program with clear targets based on an in-depth analysis of your markets and their possibilities in order to set your budget this way. While the task method first specifies what you must do to attain your objectives, the percentage-of-sales or profits technique first establishes how much you will spend without giving much thought to what you want to achieve. Only then do you calculate its cost. You should establish precise goals, such as “Sell 25% more of Product X or Service Y through gaining the business of teens,” rather than general ones like “Increase sales.” Decide which media best reaches your target audience, and then calculate the cost of running the number and types of advertisements you believe are necessary to achieve that increase in sales. This procedure is repeated for each of your goals. You have your predicted budget when you add up these expenses. Naturally, you might discover that you can’t afford to market as much as you’d want. It’s a good idea, therefore, to rank your objectives. As with the other techniques, be ready to adapt your strategy to account for reality and suit the resources at your disposal.
How to Distribute Your Marketing Budget
After you’ve established your advertising budget, you must choose how to distribute your budget. You must first choose whether you will conduct institutional advertising or merely promotional advertising.
You can divide up your promotional advertising in a variety of ways after setting aside money to develop your image (if that is your aim for the year). Among the most typical groupings are:
- Departmental spending plans
- Total spending
- Calendar months
- Media
- Sales regions
Department wise Budgets
The most popular way to distribute marketing funds is as a percentage of sales. The budget is allocated based on which departments or product groups generate the most revenue. The same proportion can be applied consistently throughout a small organization or when the selection of products is constrained. Otherwise, it’s prudent to base each decision on the typical industry figure for that product. By breaking down the budget by departments or products those goods that require more promotion to stimulate sales can get the required advertising dollars. You can further divide your budget into various product categories.
Total spending
Integrated departmental or product budgets may have an impact on your overall budget. Your departmental budgets, which are based on various percentages of sales in each area, may be reduced if your company has established a maximum for advertising spend %. The overall budget may be the only one established in smaller businesses. it too, should be divided into merchandise classification for scheduling.
Calendar Periods
Most small business executives schedule their advertising on a monthly, if not weekly, basis. Even if your planning period is longer, you should still compute your budget for these shorter time frames. It will give you better control. When deciding how much money to distribute over different time periods, the percentage-of-sales approaches are also helpful. Matching sales with advertising spending is the norm. So, if February makes up 5% of your sales, you might allocate 5% of your budget to it. In some of your months with higher sales, you could choose to reduce your advertising budget allotments to increase it in some of your months with lower sales. However, you should only do this if you have solid evidence that shifting the timing of your advertising will boost sluggish sales, such as when your competitors’ sales trends diverge significantly from your own.
Media
The quantity of advertising you place in each advertising medium, such as newspapers, radio, or direct mail, should be decided by prior performance, industry standard practice, and suggestions from media specialists. It makes sense to use the same media that your rivals do. Most likely, that is where your potential customers look and pay attention.
Sales regions
Spending your advertising budget where your clients already shop is one option; the other is to try to spark new markets for sales. It’s advisable to keep conducting the majority of your advertising in familiar spaces, just like when dividing your appropriation into time intervals. Typically, creating new markets is more expensive than maintaining existing ones.
A flexible budget for advertising
Your advertising budget can be created and allocated using any combination of these strategies. You might need to use all of them, or just one, to achieve your marketing goals. Whatever method you choose to use to create your budget, it must be adaptable and able to be changed to reflect changes in the economy. The length of your planning and budgeting period is determined by the type of business you have. You’ll find that your advertising can be more adaptable and that you can adjust strategies to reflect current trends if you can employ short spending periods. You should have a contingency fund to deal with unique circumstances, such as the launch of a new product, specials available in local media, or unforeseen competition situations, to ensure advertising flexibility. Always be on the lookout for what your rivals are doing. Don’t blindly copy your competitors but analyze how their actions may affect your business – and be prepared to act.
Getting Going
The first budget you create will be the most challenging, but it will be worthwhile. You can analyze the effectiveness of your advertising with the aid of the budget. You’ll have a more solid factual foundation for budgeting by the start of your next fiscal year. Each budget you create will increase the effectiveness of your plans.