Smart Merchandising

Merchandise Financial Planning: A complete guide for your business
  • 7 March, 2024

Merchandise Financial Planning: A complete guide for your business

In the complex retail landscape, success hinges on more than just offering quality products; it requires meticulous assortment planning, buying, the right allocations, in-season replenishments and markdowns, and strategic financial management. This is where Merchandise Financial Planning (MFP) comes into play, serving as the compass guide for retailers through the complex journey of inventory, sales, and profitability.

What is merchandise financial planning?

Merchandise Financial Planning is the strategic process retailers employ to orchestrate and manage their financial resources effectively for buying new merchandise for the upcoming seasons, specifically concerning the selling of merchandise. 

At its core, this planning involves a comprehensive approach to budgeting through forecasting sales to ensure that the retail business meets customer demand while maximizing profitability.

MFP is the starting point in the roadmap that enables retail merchandiser to align their financial resources with the ever-changing demands of the market. It encompasses a series of interconnected activities aimed at optimizing the inventory, streamlining costs, and ultimately ensuring that the right products are available to customers at the right time. 

However, Merchandise Financial Planning doesn’t exist in isolation; it’s deeply intertwined with various aspects of retail, which we have discussed below.

Key components of merchandise financial planning

Let’s explore the crucial components of MFP and how businesses can prepare for them.

1) Budgeting and open-to-buy planning

Budgeting involves allocating financial resources to different merchandise categories while considering product costs, vendor terms and expected sales to create a structured financial plan. And when combined with OTB planning, it can be really powerful as merchandisers can ensure that they do not overstock inventory and instead focus on allocation and replenishment. It helps control expenses and ensures that financial resources are allocated strategically to maximize profitability.

2) Forecasting, planning, and inventory

The MFP should be derived from your forecasting and planning and should provide the agility to connect with your inventory management. leading researchers in merchandise planning agree that these two functions absolutely must be integrated and collaborative. 

3) Go to market speed

An integrated system with the capacity to collaborate, iterate, and visualize multiple plans will serve as rocket boosters in decision-making. Often, companies immediately blame their current technology as the barrier to speed. While that sometimes is true, we often find that process and role changes and/or tweaks in existing system configuration can have dramatic efficiency improvements—without the hefty price tag of a new system.

4) Alignment with the merchandising growth strategy

The state of merchandise planning in the industry, the need for structure, and ensuring there is room for newness and growth in the assortment means the MFP that is being made should include strategies like this and be ready for approval across different stakeholders as accountability for this growth and development is essential for your leadership team. Having multiple working plans of your MFP provides you the power to quickly sprint through this process

Challenges with traditional merchandising planning

Traditional Excel-based merchandise financial planning is time-consuming, prone to errors, and challenging to scale, especially as the volume of data increases. Manual data entry, formula errors, and other discrepancies can compromise the integrity and accuracy of the information, leading to flawed financial calculations that impact the reliability of the merchandise financial plan.

1) Handling large datasets and complex calculations

Excel may struggle to handle large amounts of information and complex calculations efficiently. This scalability limitation can impede the ability to manage the intricate aspects of merchandise financial planning for expansive product lines or across multiple channels.

2) Collaboration 

When multiple stakeholders work on different versions of a spreadsheet, it can result in version control issues, leading to errors in the merchandise financial plan. This lack of real-time collaboration can hinder communication between teams responsible for various aspects of planning.

3) Automation and integration

It can be challenging to streamline workflows with traditional Excel. Tasks such as importing data from different sources, updating information in real-time, and integrating with other business systems become manual processes. This can result in inefficiencies and delays in decision-making.

4) High turnaround time

High turnaround time remains a formidable challenge in the realm of traditional merchandising planning, posing significant obstacles to efficiency and adaptability in the fast-paced retail landscape. Traditional methods often involve manual processes, including data gathering, analysis, and decision-making, which are time-consuming and prone to errors. The reliance on legacy systems and outdated technologies further exacerbates this issue, hindering the swift response required in today’s dynamic market conditions. 

Businesses that are dependent on traditional financial systems for merchandise planning are bound to seriously lag behind their competitors in terms of efficiency and profitability. This will make it practically impossible for them to plan and analyze different scenarios and prepare for the rapidly changing retail landscape. When combined with the lack of meaningful insights and KPI tracking, this will hinder their ability to adapt to market shifts and make informed decisions quickly.

Top KPIs in merchandise financial planning

Key Performance Indicators (KPIs) play a crucial role in evaluating the effectiveness of merchandise financial planning. They provide insights into various aspects of retail performance, guiding strategic decision-making. Here are some top KPIs in merchandise financial planning:

1) Net sales quantity

Net Sales Quantity refers to the total quantity of goods or services sold by a company after deducting any returns, allowances, or other adjustments. It represents the actual number of units or items that customers have purchased and kept, excluding any items that were returned or subject to adjustments.

2) Gross sales value

Gross Sales Value is the total revenue generated by a company from the sale of goods or services before deducting any expenses such as discounts, returns, or allowances. It represents the overall monetary value of all sales made by the business, providing a snapshot of the total sales performance.

3) Discount %

Discount%, is the rate at which the selling price of a product or service is reduced. It is often applied to encourage sales, reward customer loyalty, or clear inventory. The discount percentage is calculated by dividing the discount amount by the original selling price and multiplying it by 100 to express it as a percentage.

4) ASP (Average selling price)

Average Selling Price (ASP) is the average price at which a company sells its goods or services over a specific period. It is calculated by dividing the total revenue generated from sales by the total quantity of units sold. ASP is a useful metric for businesses to track pricing trends and changes in customer buying behavior.

5) COGS (Cost of goods sold)

Cost of Goods Sold (COGS) represents the direct costs associated with producing or purchasing the goods or services that a company sells. This includes the cost of raw materials, labour, and overhead. COGS is deducted from the gross sales to calculate the gross profit. It is a key metric for assessing the profitability of a company’s core operations.

6) Gross margin

Gross margin is the percentage difference between sales revenue and the cost of goods sold. It measures the profitability of merchandise and helps assess the effectiveness of pricing and cost management strategies.

Achieve your merchandising goals with Increff Merchandise Financial Planning

Increff MFP helps businesses seamlessly align financial goals into merchandise plans, achieve precise projections, and leverage insights into demand patterns. It brings interactive dashboards that can be shared among team members for real-time collaboration. Businesses can also freeze and unfreeze inputs to analyze the performance of new and existing stores/channels while not affecting the old ones.

With Increff MFP, you can choose between multiple merchandising approaches (top-down, middle-out, and bottom-up) and decide what is right for your business. The sheer number of options will help you create multiple working plans and choose the one that aligns with your business goals.

Increff Merchandise Financial Planning also provides access to:

  • Pre-season & in-season planning: Create data-driven buy plans aligned with sales forecasts and financial goals.
  • Dynamic pricing & promotions: Optimize prices and promotions for both profitability and customer satisfaction.
  • Scenario planning & risk management: Test different strategies and be prepared for unforeseen circumstances.

Get on a call today with our experts to learn more about how Increff MFP can help your business!

Final Thoughts

Mastering merchandise financial planning (MFP) is no longer a luxury but a necessity guide for modern retailers. By embracing data-driven insights, streamlined processes, and strategic decision-making, you can unlock remarkable opportunities for growth. MFP empowers you to optimize inventory levels, maximize sales, and boost profitability, all while navigating the ever-evolving retail landscape. With the right tools and dedication, you can transform your merchandising game and achieve sustainable success. So, take the first step today, explore the world of MFP, and watch your business flourish!

Explore More