Calculating an Advertising Budget

You budget your money for groceries, bills, and for vacation because without a budget you will most likely overspend.

In the business world, every company has a budget, whether it be by department or the company as a whole. For our purposes here today, we’d like to spend a little time on advertising budgets. Defining how much to spend on advertising can be a daunting task; here is some help to get you started.

On the most basic level, advertising budgets generally constitute 5-10% of gross sales earned. For other industries, such as real estate development and home building, your budget could be 2-3% of gross sales amortized over the construction life of the project.

Entrepreneur Magazine recently printed an article that takes the setting up of a budget one step further by taking into consideration markup and rent. They recommend a budget of 10-12% initially before taking into consideration markup and rent. Markup is the difference between the cost of goods or services and its selling price. To calculate markup, you divide gross profits by cost. For example, if you have a profit of $1 million and cost of sales of $600,000 your gross profit would be 40% or $400,000. If you divide that number by $600,000 (your cost of sales), you end up with a markup of 66%. Therefore, you end up with a 66,000 budget on the low end (10%) and $79,200 on the high end (12%). Subtract from that number your annual rent and you’ll end up with their recommended annual advertising budget.

But no matter what you spend, whether it’s $20,000 or $2 million, the key is to figure out your budget and stick to it. Massage your media mix if necessary but don’t abandon your advertising and marketing budget for even in tough times, good advertising will help you garner your share of the marketplace.