Budgets and Forecasts, it's a love hate relationship
Budgets and Forecasts – you either love them or loathe them! Most of us will at some point in our careers have been exposed to them, managed our roles to them, or been accountable for creating them in their various guises, shapes, and forms.
Whatever your involvement, safe to say, we all know why they exist. But sadly, every month we see the lack of this acumen and skill within businesses, and lack of desire to manage businesses to them. They are the basis of all good business decisions and operating one with out them is nothing short of irresponsible and is in our minds, dereliction of duty.
In the world of e-commerce and online business, the same rules apply – budgeting is an essential ingredient to success. Budgeting and forecasting comes in many shapes and sizes, from pure sales budgets, margin budgets, stock holding budgets, digital marketing spend budgets, and importantly, the meatiest of them all, the profit and loss budget. The list goes on!
Profit and loss budgets for an e-commerce channel are crafted quite uniquely as say compared to a bricks and mortar organisation. Over the years we have perfected our financial forecasting models for e-comm businesses that are able to provide a level of granularity in providing a great deal of transparency of those drivers and levers that underpin a successful e-commerce channel or business.
The process of crafting your own PnL forecast requires significant data analysis and some basic excel skills, but the end result is a “roadmap” that will give you something meaningful to work towards. As they say, you can’t manage what you don’t measure! Dynamic PnL's give you significant flexibility in conducting "what if" analysis - being able to understand the impact of a specific strategic initiative before committing to one is a great idea. Having a PnL: model built up at the granular channel level also allows you to create KPI targets for digital marketing agencies and other partners, not just your internal teams. Showing your agency partners how you've created you PnL shows them you mean business!
One “pro-tip” is that truly great PnL forecasts and models at a revenue and expenses level should be built from a “channel” level – channel meaning those unique sources of both revenue and expenses e.g. email, direct traffic, social, paid search, affiliates etc. Proving out methodically how your business incurs revenue and expenses at the channel level, coupled with building a dynamic model with some basic smarts that allow you to manipulate the drivers on the fly, will allow you to gain greater insights into the interplay between numbers, for example, how adjusting your click thru and conversion rate for revenue in the email channel, possibly coupled with decreasing your average order value, by month will affect your overall businesses revenue and expense lines. It will also allow you to pinpoint with absolute accuracy where the potential for risk may come.
There's also the question of "how conservative do you go"? Well, this one is totally business dependant. That said, there is nothing stopping you from initially creating a "baseline" model that may be minimum level of requirement, then building up 2 or 3 more versions that are less conservative aka more risky, and set these as stretch targets.
Simply taking a macro level approach to budgeting with finger in the sky guesstimates and no robust thought behind where your sources or revenue and expenses come from will simply end up providing you with an unjustifiable and unrealistic budget or forecast.
Like to know more or to talk to us about crafting a financial model for you? Contact us now!