Overcoming Financial Planning Challenges in Retail
Allan Saffy, Executive: Financial Planning and Analysis, Decision Inc.
South African retailers face numerous macro-economic, socio-economic, political, and operational challenges. In a world where finance departments are driving to be business partners inside the organisation, the ability to facilitate relevant operational and financial plans is as necessary as having products on the shelf.
Understanding the strategic adjustments retailers are making in this environment reveal the changes finance teams must do to support the business. For example, the growth of mobile as an e-commerce platform has resulted in the need for multiple channel financial reporting and planning. Retailers still struggle to understand the precise financial effect that this has already had and still might have on the business.
It is also difficult to quantify the financial impact that e-channels have had on in-store sales as well as how to best understand the return on capital invested per channel. This implies being able to accurately derive the net profit per channel, something most retailers still struggle to do.
Better Insight, Better Training
It is a common trend that store presence, coupled with higher degrees of store accessibility, have a positive impact on revenue. This has seen most retailers increase their store numbers and reaching more consumers. But even though this is a fundamental retail principle, the processes of modelling and planning new store viability are often cumbersome and time consuming.
The process of multi-user input, alongside the multi-driver adjustments, is often flawed within the current technologies that finance teams use. An example of this is relying on complex spreadsheet models that not only fall short in their accuracy but also time-consuming and limited in their adaptability.
Adding to the complexity of this is the growing challenger of increased customer expectations around exceptional service, product quality, and availability. This is becoming even more of a threat as we move to an age where consumers have more choice than ever and can access any number of suppliers to purchase products that will best suit their needs. One of the many ways to combat this is for retailers to differentiate themselves through more effective front-line sales staff.
Planning this shift from an HR perspective includes strategies to move to more permanent employees, reduction in high staff churn (usually between 200%-300%), and increased training investment. Too often, planning such an HR roll-out is disconnected from the financial impact it has and, as multiple iterations of budget cuts are rushed through the organisation, the financial view deviates more from the intended HR strategy.
But there is no reason why adjustments made at the operational level to the intended HR strategy cannot showcase an immediate view of the impact it will have on the group profits and loss for both the short-term and long-term. With the right planning processes and enabling technology, limitations on business decision-making of this nature can be eradicated.
A Qualitative Approach
Another planning challenge is the quality of the plans that business management teams produce at critical times throughout the year. In most organisations, remuneration is linked to budgets. And the likelihood that budgets will only be approved based on adequate growth determined by the latest applicable forecast, sets the scene for the start of the traditional ‘budget games’.
This often results in a process that leaves the business with a shallow Q4 forecast, soft budgets, and an executive team that struggles to sell the future of the business to stakeholders. Furthermore, each side attempts to anticipate the others’ next move, protecting against too much internal stretch and having as much budget as possible to operate the business the same was the year before while being able to cash in on expected remuneration.
The problem is that this means budget is 80% internally focused and built for individual preservation. The external market, benefits of innovative change, and achievable opportunities are often deprioritised to ensure a safe budget.
Most CFOs must unpack whether the last forecast before the budget cycle commences is being manipulated to produce a low budget. There are several processes and technologies available to finance teams that allow them to test the likelihood of business units achieving their forecasts relevant to both prior year and current year trends. This enables them to challenge forecasts with system generated probability assessments and ensure an accurate view of the year-end forecast in the final quarter.