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I'm writing this article in December on a snowy day in New Hampshire, and I suspect all of you on this very day are busy selling lots of product, making all the registers ring and sing. More! More! More! Just one more sale and we'll be on our sales plan. Let's beat the plan!

Did it happen? I hope it did for each and every one of you reading this article.

It's February as you read this, and you should be asking two questions. Have you completed the store's pro-forma budget for 2008? Have you reviewed and adjusted your five-year plan? Do I have all yeses? Actually, I doubt it. As an industry consultant, I regularly see this as the one project that never seems to be completed on time. In some cases, it does not get done at all.

In fact, your pro-forma budget for 2008 should have been completed in November of 2007, and then during the first week of January 2008, adjustments made for December 2007's performance to the 2008 plan. The road map for the New Year is now completed and you can get busy making it all happen by being sure sales goals are met and costs are conformed to, in order to guarantee making the profit goals you've set for fiscal 2008.

In the September 2007 issue of The Gourmet Retailer, I devoted an entire column to the art of Sales Forecasting. Hopefully, you took notes or saved the article so putting together the top line or sales forecast of the 2008 pro-forma budget was not too difficult.

Cost of Goods Sold
The next most important number is the Cost of Goods Sold (COGS). The best way to estimate this number is to review your 2007 Profit and Loss (P&L) number, establish its percentage of sales, then add to it the freight percentage of sales number. The sum of these two numbers will represent the percentage that should be used in the 2008 budget for your calculated COGS budget. If the store is brand new or has a limited history - less than one year's sales history - I recommend using a flat projection of 55 percent of sales as the COGS number for the 2008 budget. In all likelihood, with strong management and constant performance reviews, your actual COGS number will come in lower than the 55 percent budget number. But, I prefer to always lean to the conservative numbers in forecasting sales and expenses. I would rather exceed my budget, especially if a financial institution backing exists and monthly or quarterly financial performance reporting is required as a loan covenant.

Gross Profit
Gross profit, the next number in our pro-forma budget, is a calculated number and is derived by taking sales and deducting from it our projected COGS number.

Now we are down to the real detail and the hardest part of the budgeting process, which is projecting expenses for the year and spreading them out over our 12-month pro-forma budget.

All of this work, by the way, is best accomplished by using an excel spread sheet in which you total all budget numbers horizontally by budget item and vertically by month so that a balanced plan can be verified at the end of the process.

For ease of reference, I like to alphabetize my expenses. However, there are two types of expenses - fixed and variable. For larger stores with a more sophisticated chart of accounts, expenses can be divided into direct expenses and occupancy expenses.

Fixed expenses will include rent, CAM, utilities, depreciation and perhaps an insurance account called "Other" for miscellaneous items.

Variable expenses will include owners'/officers' salary, payroll, bonus, payroll taxes, insurance, supplies (office & store), postage, advertising (net of co-op), business expense, maintenance/repairs, credit card/check fees, equipment rental (computer/vehicle), travel & entertainment (T&E/show travel, be sure to separate this expense account into non-meals and meals), professional services (accounting, consulting, legal), donations, dues and subscriptions, corporate taxes (federal and state), freight out, and e-commerce/Web site.

Enough! Enough already! Whew, what's in this for me?

If you are running the store prudently, 10 percent of the gross sales should be allocated for the owners'/officers' salary. Yes, on sales of $1,000,000.00 annually, the draw/salary should equal $100,000.00 before taxes. If it is anything less, you should evaluate whether working for yourself, especially in the retail industry, is worth the time and effort being put into the project. The percentage earned may shrink slightly if sales are lower than $1,000,000.00, but please be honest with yourself in evaluating what earnings can be generated by working for yourself or someone else. Be sure to include the total hours needed to earn the salary.

Key Operating Expenses
Here are the percentages or ranges I like other key operating expenses to fall into as a percentage of sales: Rent: 8-10 percent including CAM; Salaries including owners'/officers' and payroll taxes: 15-18 percent, with the combination of the two not exceeding 25 percent of gross sales. This goal may be difficult with a new store. The owners'/executives' salary must take the hit here if rent and employee salaries push these overall percentage numbers. But, 25 percent of sales is the maximum number to allocate to these expenses. A 2-3 percent lower number is preferred and may make the difference between a 4 percent net profit and a 6 percent net profit at the end of the fiscal year.

Check/credit card charges can be excessive especially if you are dealing with a local institution. It is safe to assume up to 80 percent of your total business will be check/credit cards. The target cost to do this business should be 1.8-2 percent. To achieve this, it may be necessary to have the company self-insure checks.

Advertising is another major expense and is an important part of doing business. Chances are, if none is done, it will affect the overall performance of the store. If the store is located in a mall, less advertising may be required as a result of an active association advertising plan. But, in general, these association efforts are weak and produce minimal activity unless there is a major mall event. Most stores are probably located in strip malls, downtown venues or stand-alone locations, and advertising is essential in these locations. A new store, particularly a stand-alone or destination store, should be spending 5-6 percent of gross sales net of co-op. A mature store (five years in business) probably can operate with a 3-5 percent of gross sales budget, net of co-op.

Store supplies can be a huge expense, especially if gift-wrapping is to be offered. Generally, to contain this expense, I recommend an imprinted store name box with a simple but elegant pre-made bow/ribbon tied into store logo colors. When this expense account starts pushing 0.75 to 1 percent of sales, red lights should come on.

Travel and entertainment expense should be about 1.2 to 1.6 percent of sales. If at all possible, both the International Home and Housewares Show in Chicago and the Gourmet Housewares Show in Las Vegas should be attended. Each one has something to offer the independent retailer. Not attending shows and relying entirely on sales representatives to call on your store is not going to foster good business growth. Networking with retail store peers and knowing vendor personnel makes show attendance important. Writing orders at the show is not the most important reason to attend - seeing and looking for new products and trends is. Be sure to check if seminars are being offered that may be of interest to you.

The remaining expenses I have not discussed are all small percentages of sales and most are subject to individual store needs, age of store, and local market pressures. The bottom line, though, is using the percentages of sales provided for the accounts mentioned and, assuming a 45 percent gross margin, the percentage of sales left to spread over these expenses is 5 percent of sales.

Once we add in the additional expenses, our target net profit should be 4 to 8 percent, with probably 5 or 6 percent being the average store performance. This is asking a lot of a housewares retail store but volume will get this bottom line projection. This is why sales are important.

The company must be run as a business, not a hobby. If the reason you got into this business was because you like to cook, the logic is not very sound.

Robert F. Coviello is the founder and president of HTI Buying Group, an organization of independent housewares specialty store retailers and industry vendors. He is also president of Housewares Tabletop International, a consulting firm that provides innovative solutions to strategic challenges facing companies in today's dynamic housewares and tabletop industry. Bob has more than 35 years of experience in the industry and is an acknowledged industry expert in the housewares field.

Comments? mmoran@gourmetretailer.com