Moving from retail to e-com to omnichannel, sound financial budgeting is ever more important for brands today. In this article we share some key learnings to help your teams plan better during the upcoming budget season.
Brand Financial Budgeting Complexity Has Increased
The financial budgeting process for brands has become significantly more complex over recent years. In the past, one would have planned wholesale and – in a smaller part – retail top-line and bottom-line figures. Half of the year’s figures would already have been ‘locked-in’ because wholesale has already gone to market and retail has bought the merchandise for the first half of the year. Fast collection cycles, a larger share of retail and, more importantly, an increased share in e-com and availability of customer (loyalty) data have changed the way brands plan their budgets today.
Finance and Controlling Teams Plan More Than Just Financials
With the overall top-line and bottom-line determined by the board, it’s at the business unit level that Finance Directors need to decide which KPIs to plan and which targets to set into next year’s budget. It is important to focus on planning for those KPIs that both reflect the business performance but can also be directly influenced by Retail-, Operations- or E-com Directors. A Finance Director would, for example, be more conservative on the forecast traffic in store, whilst being more ambitious on in-store conversion or basket size. Both KPIs can be directly influenced by the teams and have a similar impact on top-line. On the operational side, one would focus more on the percentage of labour costs rather than rent, which is typically fixed for several years.
Leading Brands Plan Around the Customer Journey
The challenge of having to divide budgets across different channels is not only relevant with own retail and e-commerce, but also when having close partnerships with wholesale (e-com) platforms. To what extent retail and e-com sales can be joined together in an omnichannel budget depends largely on the technical devices and infrastructure in store that allow to connect an e-com transaction or store transaction to a specific customer or area – typically by identifying the customer during the transaction through a loyalty programme.
While leading brands are experimenting with loyalty programme P&L budgets, I don’t expect this to be the norm anytime soon, given that loyalty programme shopper identification is still a big challenge. And given the increasing share of partnership e-com net sales with platforms like Zalando, which make use of a brand’s e-com distribution infrastructure and brand assets, there is good reason to budget both wholesale e-commerce and own e-commerce together.
Teams That Understand the Value Chain Are More Effective
Many finance teams are good at planning operational KPIs but struggle to fully understand the interdependencies with other KPIs. One example: Increasing the e-commerce sales budget for the month of December by a large percentage may require significantly more headcount in the distribution centre and also an increased service level of the logistics service provider (LSP). The cost for this will already be seen in October, where the distribution centre manager will start to hire and train additional staff to cover the expected December sales periods.
One way to mitigate this, is to let the finance and controlling teams spend a few days across operational teams prior to starting the budget season: Following the customer acquisition of an order with the e-com digital marketing team provides good insights into SEA, conversion and basket size. Continuing with (warehouse) operations in picking and delivery raises awareness for cost drivers like peak capacity and picking time per parcel. Having insights into the value chain also gives finance teams the opportunity to ‘break the silos’ between e.g. marketing and operations, which can both drive sales and have a positive impact on customer satisfaction.
Communication Is Key to Secure Everyone’s Buy-In
One activity that often doesn’t receive due attention is the communication with stakeholders after the budget has been finalised. Spending time with the management teams allows finance and controlling managers to both clarify the budget and explain the expectations for the coming year. It’s also a moment to point out flexibility with regards to the next forecasts: Signalling to Digital Marketing Directors that there are possibilities to raise the forecast marketing spend versus budget can ensure that sales potential exceeding the original budget is not missed.
These team sessions are also a good moment to explain the value chain impact of KPIs throughout different departments, resulting in more collaboration across the brand organization.
About the Author:
Maximilian Gellert has been responsible for setting up both retail and online financial and operational KPI budgets for >4000 FTE in very high growth environments. Combining consulting experience with industry functions in premium apparel and online grocery, he supports retailers and etailers in their digital challenges and last mile innovation. Read more of his work here or connect with him on LinkedIn.