Managing by the Numbers Often Leads to Really Bad Numbers!
Let’s face facts, somehow along the way, the accountants have taken over much of our business. In some organizations they are calling most of the shots these days without having a basic understanding of what drives the business. Instead of assuming their more traditional role of an internal service provider, most now are setting the direction for the business, sending out mandates, rules, and budget templates, everything on their timeline!! If I can continue the whining just a bit more, we marketers now must “cost justify” everything we do, even though much of marketing is based on qualitative relationship building, sponsorships and community involvement….etc, etc. Marketing Armageddon is here!!
As means of full disclosure, I am a business-marketing major that suffered (and I do mean suffered) through three mandatory finance and accounting classes some years ago at Indiana University. In each of those classes I was painfully weary that someday I would need to remember the how to read a P&L sheet or understand the concept of “net present values”. But it was my fervent hope that those “accounting” moments would be few and far between.
But when it came time in my business career to interact with these accounting and financial tools, it became immediately evident to me that these numbers and techniques were actually very useful to a marketer or the care-taker of the brand. Much due to the fact that there are now means and metrics to measure most of the marketing efforts. In fact, armed with customer data, I was in better shape to analyze and decipher program results and promotional investments than anyone in the organization. But it also became very clear to me that how companies prioritize and position these tools and their metrics, has everything to do with what type of company they become…..or if they even survive!
Let me explain. When companies are led by their finance and accounting department’s generated sales goals, margin
rate requirements, etc.. in many cases these spreadsheet projections do not reflect the competitive landscape, nor the aggregate goals of each part of the business. In this top-down budgeting model there is little empathy for the economic impact of customer service, marketing, sponsorships, pricing, and all the other components of the brand affect those numbers. When sales are built from a list of financial requirements, bad decisions are almost always the result.
I call it the Retail Law of Unintended Consequences (RLUC). The essence of the law is …..
“For every positive manipulation of numbers on a spreadsheet to improve profit and grow sales there is VERY STRONG potential opposite negative impact that could damage customer service, employee morale, and the shopping experience”.
While short-term minded accountants, financial gurus, and efficiency consultants often dismiss these effects as necessary pain points to reach financial obligations or objectives, they (more often than not) find themselves wondering why their manipulations do not result in the intended profit gains prognosticated by their spreadsheets.
The answer to this dilemma is spelled out in the (RLUC) It is well understood by good, long-standing, profitable companies everywhere. Cutting expenses, managing labor numbers, reducing store hours, without regard to the aforementioned consequences, will chase customers away, reduce sales and ultimately put the enterprise in a worse, not better financial situation .
But there is hope. Good senior executives, even some controllers and CFO’s are learning to ask the right questions before advocating and implementing any alluring spreadsheet maneuvers. Some of these questions are;
- Are your financial goals reasonable given your marketing position in the marketplace, your competitive environment. etc?
- Are your margin rates tenable given your competition and the shopping experience you offer and the lingering down economy?
- What effect does the service or offering that is to be cut or eliminated have on sales? Does it negatively impact a competitive advantage?
- If expense reduction is advocated, how could this reduction diminish the “value proposition” you have with your customers, your trade partners, and your employees?
The list could go on for several pages, but the gist of the message is that even the smartest of retailers can sometimes become infatuated with consultants who make their living off of shaving expenses and the promise of enhanced EBITDA (on paper at least). While some of these expenses could represent real savings and true efficiencies, many represent real opportunities for damaging your brand and suppressing sales.
Someone smarter than I told me a long time ago the best way for a retailer to “take more money to the bank” is by growing sales and customers, thoughtfully….not cutting services, hours, amenities, etc. But as in most things retail, a balance between more “artful” sales and customer-driven investments and the spreadsheet efficiencies is the optimal environment. Also important is having the right checks and balances in the organization so that financial-based decisions are properly examined and vetted before being put into play.
This is my experience speaking…..love to hear from you.