Congratulations! If you're reading this, that probably means you survived the past year in ecommerce - not everyone did. The fact of the matter is that next year probably won’t be much easier, and as we close out the holiday season and turn our attention to the new year, I’m sure many of you are scrambling around trying to get management / board meetings together to solidify your plan.

In this article, I am going to take you through the process of how to produce multiple annual scenarios [plans] in a way where you can methodically think through the pros and cons of each one and how your goals may influence which plan you ultimately choose to execute.

First, the annual plan is manifested as one single deliverable: a financial model. If you don’t have someone who can build a financial plan, you should hire at least a freelancer who can build a sound & balanced financial model for a couple different scenarios. Feel free to hit me on twitter and I can send you someone who can help

Step 1: The Financial Model

In my opinion, you should build these forecasts (we can get into how to do that in another module) in order to triangulate 3 key numbers for each plan:

• Total Sales for the year

• Total Profits / burn for the year

• End of Year Cash Balance 

Your financial model will consist of the following forecasts (moving down the P&L and ending through the cash flow statement):

1. Revenue 

• For DTC & Amazon

  • New Customer Acquisition (a.k.a your growth marketing plan)

  • Returning Customer Revenue (a.k.a how many of those customers will come back)

• Wholesale Revenue 

  • Units per store per week by account

2. Expenses

• When budgeting for expenses in your financial model, there are a few different ways you can approach it, described simply below:

  • Incremental budgeting = last year, +/- some %

  • Activity based budgeting = starting with a revenue goal, and doing a ‘top down’ style budget to decide what you would need to to support that revenue goal

  • Value prop budgeting = analyzing each line item in the plan and allocating budget in a more methodical way, perhaps ROI driven.

  • Zero based budgeting: This is the most time consuming by far, but is also generally, in my opinion, a very healthy exercise for startups. Zero based budgeting is the practice of justifying every single expense over every period of time. In other words, every department starts from scratch, regardless of historical figures, and comes up with a brand-new budget.

• COGS

  • This can be a top-down plan that will also help you with demand planning

    • I.e., each SKU is going to be X% of revenue by month, so therefore I can expect to sell Y number of units

• Marketing expenses

  • This will actually be mostly informed by your new and returning customer models in revenue. 

• SG&A

  • This should be a bottoms up build as well. You will have each member of your team, how much they cost, which software you use

3. Balance Sheet

4. Statement of Cash Flows

The balance sheet and statement of cash flows are more or less outputs of the P&L for budgeting purposes, and so you should mainly focus on the P&L and its components as I’ve outlined. 

Do so 3 different times for 3 different scenarios: Base Case, Bull Case, Bear Case.

Bull and bear come from the classic Wall Street nomenclature for ‘upside’ and ‘downside,’ respectively. Your base case should be the most realistic outcome for the year that you expect with regards to sales and expenses, and the bull/base case can be +/-10-20% or higher depending on if you have some big questions during the year (i.e., launching new products or retailers etc) that can cause more drastic swings in performance.

For our purposes in CPG, the main lever for growing or thinking revenue, cash, and profits (a.k.a our 3 main metrics we are trying to achieve) is going to be ad spend on a dollars basis. CPM, CAC, CTR, and all other advertising funnel metrics will change as we adjust our spend, but really these are outputs in our model driven by how much we are spending across the digital advertising ecosystem. We can play around with a few different spending plans and see how our northstar metrics change with each one.

 Step 2: Executing the Plan

Once we have a couple different scenarios modeled out for the business, you should get all key stakeholders (C-suite, BOD) into a meeting to discuss the feasibility of each one. Does this bull case seem achievable? Is it in line with our organizational goals? Are we more concerned with ending the year with maximum cash, or do we want to demonstrate a strong growth year?

Once key stakeholders are aligned, it’s time to execute.

Perform monthly variance analyses against the budget to determine where things are going right/wrong, and don’t be afraid to re-forecast the budget if things change materials - the budget is not supposed to be set in stone if there are externalities affecting the business (think COVID, iOS14.5, etc). 

In Review

The new year will reward teams with plans that are thoughtful and flexible. A good financial model gives you clarity on what really drives your business, helps you have more productive conversations with your team and board, and keeps you from flying blind when things inevitably don’t go exactly as planned. 

If you take the time to think through a base, bull, and bear case, get aligned on what you actually care about (growth, profitability, or cash), and revisit the plan as the year unfolds, you’ll be in a much better spot than most. Next year might be messy, but having a plan and the confidence to adjust it goes a long way.