Budgeting and Financial Planning

As the previous section indicates, it is important to have a well thought out budget or plan for the current fiscal year. Most larger retailers have a series of financial plans. These include a five-year outlook, a three-year forecast, and annual and seasonal plans. Naturally, the forecast accuracy increases as the time horizon gets closer in.Why have a five and three year plan? These are used to set expectations on market expansion, profit margins, capital expenses and cash requirements. Retailers looking to grow their company make extensive use of this long range forecasting. The five year outlook may only look at a few KPI’s such as Sales, Margin, Inventory and Expense expectations. A three year view will include additional KPI’s and often add more detail lines to each. Annual and seasonal plans involve more levels of detail and decreased margins of error. A main function of annual planning is to establish budgets for payroll, inventory, shortage, operations expenses and other headings. Additionally, these financial plans are used as the basis for creation of lower level store and merchandise plans.

As strategic planning becomes more ingrained into the core processes of retailers, many retailers are realizing other issues arise. Issues relating to plan ownership, version control and data inputs become vital to producing optimal plans. Modern software solutions can integrate strategic plans with merchandise plans as well as utilize the same sales and financial data as other core merchandising systems. When developing financial budgets, it is extremely valuable to be able to examine the last two or three years financial performance at the detailed level and identify trends in, for example, gross margin %, staff costs percent to sales, occupancy costs percent to sales, etc. Once a plan is built, the resulting percent to sales figures should be compared to prior year results to check for sensibility. Good accounting software solutions can generally provide this capability.

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