In mature retailers, commercial finance and merchandising work well together, each applying their skills at the relevant stage of the business calendar and level of the hierarchy to challenge and ratify fiscal expectations and results.
Finance and Merchandising are separate and distinct skill sets which approach the business from very different standpoints.
Key areas Commercial Finance interact with Merchandising
The Commercial Finance team should be looking at the macro-economic climate: the reality of P&L costs, the size of the market, the performance of the whole business, and, in public companies, the market expectation of performance – in order to drive out challenging and realistic targets for the Buying and Merchandising (B&M) teams.
Whilst senior management may be held to full P&L performance it is critical that B&M are focused on the KPIs they can influence – sales, stock and margin. Finance takes account of the true costs of running a business and work back to what the sales and exit margin need to be, sharing those with B&M at the beginning of strategy for the next half/season/year.
B&M teams then look at their history, trends, ranges, performance, suppliers, competitors, etc, to build up the sales, intake margin and markdown (in retail method) or sales and profit (in cost method) at a lower level of the product hierarchy to see what the potential is in the reality of the product, market and supply base.
Coming from two different angles – the financial and the B&M- ensures that the requirement is deliverable. Whilst Finance will – and should – be challenging, B&M has to agree that the target can be delivered. This reconciliation of the different viewpoints is of huge value.
On a happy path, B&M’s sales number will be higher than Finance’s, demonstrating confidence in product and performance. When it’s lower there is a need for serious debate about the right course – pushing ahead with a bullish number B&M don’t believe they can deliver is a recipe for over stocking a business and harming profit.
Different drivers and aims
In many businesses, Finance hail from accountancy backgrounds. They are trained to focus on what has happened; to ensure that what is declared is exactly what happened, that it includes all the costs in the business, and is to the required legal standards.
This approach comes from a different angle from merchandising.
Merchandisers are future-focused. They are looking at what has happened today in the context of:
- What can I impact in the future?
- What is my lead-time back into a product?
- If I missed sales this week, how can I potentialise them in the future?
- What products should I grow and decline next half/season/year?
They are seeking to understand the story behind the numbers in order to make informed decisions. They often act on partial information and constantly manage the risk to maximise the commercial return and minimise costs.
When businesses try to apply the former to the latter there are many unintended consequences.
5 reasons retailers need Finance and Merchandising
The following examples are from the real life of a 30-year career in merchandising and consulting, some of them seen multiple times! And I hope they bring to life what is so different about the skills and exactly why it is so important that retailers do have both finance and merchandising.
Difference in KPI drivers
In buying and merchandising, future profit it is often calculated using sales, markdown, and intake margin – the KPIs with B&M’s control.
If a Finance team, who are inexperienced in B&M, set the targets with no respect for commercial activity needed, it becomes exactly that: a calculation – to drive a profit of A, sales must be X, margin must be Y, and markdown must be Z.
But these are not just numbers, there is a whole set of decisions, possibilities and limitations behind them.
For example, if you are already sourcing as cheaply as possible and have pushed the selling price as hard as the market will allow, then the intake margin is not going to increase significantly.
Pushing a B&M team to do that would risk either unethical behaviour with the supply side or drive uncompetitive market prices. Both of which are likely to lead to stock problems which are counterproductive to the original intention.
Activity in B&M is focused on the how, the implications, and making the very best of the market reality – not setting a mathematical target. It is about fully understanding the connection between the KPIs and the art of the possible.
Misaligned Business Calendars
Like everyone else, Finance understand the deadlines in their own function and are driven by them.
For themselves, Finance do not need to set the budget for a specific half/season/year until just before it starts. But in many product categories, the lead-time of product is many weeks or months, so unless the budget is set before the product is bought, the buy and the budget will not be connected, and the effect is to invalidate the budget.
The purpose of the budget for B&M is to drive out the Open to Buy (OTB) for the different product groupings, pre-season. In season, it is to assess performance and drive out actions.
For example, if you are missing sales against plan, you know you have to find a way to cancel or promote stock because you have enough stock to hit plan. It is always about action. When does a decision need to be taken and what information do I need to have considered before that decision?
The retail cycle of each business needs to be based on the lead-time of the product being bought not the internal specific function deadlines.
Breakdown of the calendar year
Finance typically work to a “true” calendar month, and to the finance calendar relevant to the country of operation.
But when a business is customer-facing, it is critical to put that customers’ behaviour at the centre of operations. This means that Commercial take each year to be 52 weeks, each half to be 26 weeks, each quarter to be 13 weeks, and then agree the monthly pattern – e.g., 4 weeks, 4 weeks, 5 weeks.
Commercial decisions are made easier when working on a weekly rhythm for a number of reasons:
- Ensures all comparisons to last year (LY) are on a like-for-like basis with the same number of weekends or weekdays
- Provides consistency and predictable periods which end on the same day of the week, helping identify trends and provide insight
- Ability to plan and forecast in standard weekly groups of data
- Facilitates weekly reporting, with data always pulled at the same time for consistent periods
- Inventory metrics are always measured on the same day of the week, improving inventory control and decision-making
- Operating cost can be managed on a weekly basis to aid work shift, rostering planning
It is therefore common for the finance teams in retailers to adapt to the commercial calendar, but if any adjustments are needed, they should be confined to Finance. The commercial teams need data gathered in logical, customer-driven structures in order to make ongoing decisions to drive sales and profit.
Understanding of category growths/declines
All categories of product are not equal. Some are more wanted by customers than others, and that will change each half/season/year, so some will increase, and some will decrease.
Because finance work at the top of the product hierarchy, this is often missed. And because the company is going for, e.g., a 10% increase, each category is planned at the same flat increase. This will result in best sellers being under-potentialised, and worst sellers being over-bought – both of which will constrain sales.
It is the bread and butter of a Buying & Merchandising team’s job to understand performance at a granular level: to know how trends will land with their customer, and to build ranges which are appropriate to the changing demands of the half/season/year. They will understand where they lost sales last time, where they over-bought last time, what would have worked had it been cheaper, what quality problems there were, etc, so the plan they put together will be much more nuanced and complex than a simple flat % increase.
Achieving trading potential
Finance acting as Merchandising will almost certainly control the buying. They will set limitations – often at a very micro level – to ensure that risk is minimised, and stock levels do not get too high at the macro level.
What they are very unlikely to do is maximise the opportunity, whereas a commercial merchandiser is constantly balancing risk and opportunity, driving stock into the areas that are trading well, and pulling back on areas that aren’t working. Only then do you reach the maximum sales and profit.
The merchandisers will be trading today and planning the next half/season/phase, applying the lessons learnt to the future, and the forecast and OTB will be moving accordingly. The skill is in staying within a reasonable total stock level that is appropriate to the timing whilst flexing the components of that stock both in planning and trading.
Finance have their own job to do, so they are not reviewing sales in detail each week and therefore not applying the lessons. This means the forecast becomes static and control becomes limiting, not only on the commercial teams but on the performance of the company as a whole.
Balancing the organisational structure
Whatever the retail type, it is important that the skills needed are understood fully and deployed appropriately. Only then can a business reach its potential.
Each business will need a different balance of functions and skills to ensure its organisational structure is appropriate. It’s why we usually begin projects by agreeing a High Level Operating Model with the client’s leadership team, facilitating agreement on and understanding of:
- Which functions will drive certain decisions
- How the functions will interact
- In what order tasks and decisions will flow
Together we can then create a plan which assesses the current capability, builds on those existing skills through recruitment and/or training to establish a commercial organisational structure that is fit for purpose and delivers results.
Head over to our Retail Training and Retail Consulting pages to find out more about how we can help.
