Budgeting for Advertising

At the outset, the business owner must decide what percentage of the anticipated sales revenue will be spent on advertising. The percentage will vary with the financial condition of the business, the amount of competition in the market area, and the nature of the products or servic­es sold. Multiplying the total anticipated sales for a year of operation by the percentage allotted for advertising, a dollar amount can be assigned to the advertising program for the year.

Some business owners determine how much to spend each month by correlating the percentage of advertising dollars with the percentage of total sales that each month contributes. For example, if June contrib­utes 12 percent of the annual sales, then 12 percent of the advertising budget is spent for June sales. Some months are naturally high-volume sales months, however. Christmas sales in a flower shop are an example. The sales for the month of December may be 35 percent of the annual sales, yet only 20 percent of the advertising budget may be needed to generate the sales.

An advertising budget should also allocate funds to special, nonre­curring public relations or promotional events such as the store’s grand opening, historical commemorations, or the sale of an entire truckload of plants obtained at a special price. Special-event advertising should be added to the regular advertising budget to arrive at the total allocation.

The United States Small Business Administration, in its Advertising Guidelines for Small Retail Firms, recommends that a monthly record of advertising expenditures be kept to determine if the advertising budget is being spent as planned. The chart in Table 22-2 can be used to keep such a record.