Article provided by Sage
When running a small business, some expenses are obvious – electricity, rent and wages, for instance. Calculating advertising budgets, on the other hand, is a far more nebulous affair.
Regardless of how you feel about advertising, it is important to know how much to spend on this aspect of your business.
Doing so has a number of benefits, including showing you if you’re actually wasting money. It also has a tangible benefit, allowing you to calculate the return your advertising investment affords you.
There are several ways to calculate advertising spend, and the one you choose depends on your needs:
Ad spend calculating methods
The traditional method
This method simply calculates your ad spend as a percentage of revenue. The trick is, what percentage, and what revenue?
Using your industry’s average percentage gives a decent guide on that front. In terms of revenue, an average of your last years’ revenue and projected revenue over the next year will serve you well.
Unit-of-sales
Slightly more complex, this method determines how much it costs to sell a certain product, and extrapolates from there.
This requires you to know your industry. Once you have your per-unit figure, multiply it by the number of units you want to sell, and this will give you your budget.
Rent expenses
This unusual calculation works well for retailers: it’s fairly complex, so we’ll simply link to it in this case.
Task and objective budgeting
Despite the complexity of the rent expenses method, this way of finding out your budget is generally considered the most difficult.
However, the general consensus is that it’s the most accurate, so you may consider it worthwhile.
The reason this method is hard is because it requires a marketing plan. That means determining objectives – which you’ll rank in order of importance, in case you can’t achieve them all.
Essentially, you’ll be determining:
- Who you want to reach
- How frequently you want to reach them
- Where you’ll get the best exposure
- How much it will cost
Adding these figures together will give you your budget, which can be adjusted by reducing or increasing your objectives.
This may seem like an awful lot of effort, but the fact is that advertising is an important part of your business, and is needed.