Rusty Secrist, Director of Product Management
As many of us found out over the past 12 months, as important as it is to plan ahead for how you think things will go based on how they’ve been, it’s even more important to pay attention and change your plan when the past doesn’t point to the future anymore.
The importance of a budget based in part on past experience is obvious, but it’s critical to monitor how you’re trending against that budget to react very quickly when things start to change and not go as planned. It certainly doesn’t take a once-in-a-lifetime pandemic to make the point (although it does). In retail, many factors including technology, artificial intelligence, climate, alternate business channels, marketing strategies and new competition are all driving change faster than your budget may foresee.
Creating a budget is not easy. There is a lot to consider when building it out, and then even if you think you have built a perfect budget, something is bound to happen to cause changes. That doesn’t make budgeting less important, it makes it even more important. But the process of creating and managing the budget must be flexible to respond to whatever unforeseen events unfold.
In this series about the budgeting process, we will first understand the purpose of a good budget. With that context, we will then explore the key components of what constitutes a good budget in today’s environment, as well as the key attributes to look for in evaluating budgeting system functionality. Spoiler alert: If your company is currently managing the budget across multiple areas, with each doing their separate pieces in offline systems and with their own data, the good news is you have far better options.
The purpose of a good budget
So why is it important to have a good budget? As with a personal budget, it is vitally important to understand your financial objectives for the upcoming period—traditionally a year—by taking what happened in comparable prior periods and incorporating what you know will change. For retail environments those changes could be new stores, more competition, remodels, new programs and other major events that will have a significant impact on how much you plan to sell and spend. A systematic budgeting process allows sales expectations to align for the upcoming year.
In addition, there are many stakeholders in a retail environment that have a part in supporting a budget to produce sales, labor, promotions, gross profit and expense components. The involvement of finance, human resources, marketing, merchandising and other key teams in the budgeting process allows for a common set of assumptions and expectations. Harnessing the knowledge of these teams, and actively collaborating with them, will ensure that known changes—such as remodels, new program launches, merchandising initiatives, labor rate changes and productivity adjustments—are all incorporated into the budget.
And finally, at the end of the cycle, the budget process provides the mechanism that creates performance accountability amongst all the stakeholders, including individual stores and departments.
Budgeting needs to change
In recent years, we have seen many retailers move from a traditional annual budgeting process before the start of the fiscal year to a more iterative creation and refinement process. Some do a rolling six or eight quarters, others just refine the annual budget prior to each period or quarter. Most have seen the need to improve forecasting and to detail their budgets not just by period and store but by week and by department or subdepartment. Many are working to unify the budgeting into one shared budget rather than Operations creating a different plan than Merchandising or Finance or Warehousing.
No one is moving to more detailed budgets just to be more detailed. More efficient and cost-effective management of labor, inventory and promotional dollar resources requires it. In my next post, I will discuss key attributes of best-practice budgeting. Future posts in this series will explore the most impactful features you will want as you update your budgeting process and platform, and not just for the next pandemic, but to compete in the new normal and at today’s pace of change.