Having Your Forecast and Meeting Your Labor Budget too – Part 3: Adopt a Continuous Forecast Regimen

by | Nov 13, 2018

In last month’s blog, we continued our deep-dive into the challenges of aligning “top-down” financial budgets with “bottom-up” operational forecasts, focusing on how to maintain store-level budget metrics within the constraints of the organization. This month, we drill into the next topic of establishing a continuous forecast process that works to keep store budgets better in sync with the operational realities on the ground throughout the year.

Adopting a Continuous Forecast Process to Inform and Maintain Budgets
Leveraging the tips and tricks we laid out in Parts 1 and 2 of this blog, you’ve done the work of establishing reasonable store-level annual budgets, but the work isn’t over. Keeping budgets relevant as the fiscal year progresses is often just as important as where you start, especially in today’s fast-changing retail environment. The goal as the year goes on is to incorporate as many new sources of information and nuances into the budget as possible, while maintaining the integrity of the financial targets your organization has committed to, whether by month, quarter or the whole year.

Retailers address this dilemma in multiple ways, but one of the most common is budget maintenance. Certain expense areas that occur periodically, like training or inventory, may not be planned at the store level in annual budgets. In these cases, it often makes sense to allocate these hours closer to their use or retroactively credit stores with extra hours once the tasks are executed. Sometimes this can be administered centrally through a semi-automated process and sometimes field leaders have a supplemental budget to account for these activities. Ultimately, the method your organization chooses depends on the level of granularity available in planning and tracking these hours in your workforce management system, as well as how much autonomy you decide to provide your field leaders in managing budgets.

Another example of ongoing maintenance comes in the form of discretionary budgets. While promotions and other recurring company-wide events are generally accounted for in advance, budget relief for local market impacts (e.g. competitor opening across the street) or one-time events (e.g. increased traffic from the Super Bowl in your city) are often managed by senior field leaders. Although some discretion should be given to the on-the-ground experience of regional leaders, farming this out without an audit capability can also lead to favoritism and unfair distributions. Therefore, we recommend tracking event-related allocations and establishing best practices for managing these budgets in a fact-based way.

The examples above represent reasonable rationales for budget maintenance, but there’s a third category that can be a thorn in the side of both finance teams and store operators. In cases where poor sales and/or payroll performance occurs early in the year, stores are often squeezed in the latter parts of the year in order to make up for the gap. And in many cases, this lines up with the busiest season and will be executed with the same kinds of haircuts we discussed in last month’s blog. None of this is good for the stores, but then again, missing the annual budgets altogether isn’t great for business either. While sometimes an operational necessity, budget maintenance has not always been associated with precision or proactiveness.

To limit or at least supplement the need for retroactive adjustments, we recommend adopting a continuous forecasting process throughout your organization. Routine bottom-up sales and workload driver forecasts at the store level can deliver an ongoing health-check to operations and provide more realistic data to finance to re-shape the trajectory of labor spend (if needed). This is enabled when store-level budgets are tied to a rate-based (e.g. productivity) or earned hours metric, rather than a fixed hours or dollar budget. In these cases, fresher and more accurate forecasts can directly influence what the stores schedule to, what they end up working, and ultimately how they are held accountable.

Employing this more flexible form of budgeting doesn’t come without risk. If forecasts aren’t accurate, there’s the potential to be over-extended when sales are significantly lower than expected or understaffed if sales take a surprising turn upward. Hence there is a need for regular forecast intervals to catch-up with new trends, positive or negative. To support this, we recommend managing a corporate forecast each month in relation to the overall goals for the year. This should push and pull with the weekly operational forecasts from your workforce management system or other forecasting tools. When deployed properly, this process will provide Operations with more control into the weekly labor allocations that feed scheduling – and deliver insights to help Finance avoid those painful budget adjustments during the busiest times of year.

Stay Tuned
There’s much more to come on advancing these capabilities with a collaborative end-to-end toolset next month in our fourth and final post. Should you have any questions about this post or the services we provide, please reach out to Al Asgarian at aasgarian@axsiumgroup.com or Luke Muellerleile at lmuellerleile@axsiumgroup.com.

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