Joshua Warren  0:00  
I think especially with 2023, no one knows for sure exactly what's going to happen financially in 2023. And so I think it's really important that you're tracking your budget and just watching it throughout the year. And again, not just your expenses, but also your revenue, your cash flow, looking to see if you need to make adjustments. It's also important, you know, we're focusing a little little on the doom and gloom, but at the same time, it's also important to consider what if you just blow past your revenue projection on one of the year ends up being a lot better than you think. And what I've seen some companies try to do is they say, Hey, we can we can squeeze a lot of profit out of E commerce.

Darin Newbold  0:46  
Good day, and welcome to e Commerce today. We have a very exciting and a bit heady kind of topic for you today. Now I know we've got a nother episode that is in the works around the trends of E commerce for 2023. But now we're really getting into the fun stuff. So I didn't introduce myself. This is Darren, I'm the host of Commerce today. And we have as always our fantastic guide, Josh here to walk us through everything we need on commerce side, but here we go, we're going to talk about the setting your 2023 ecommerce budget. So wow, may the force be with us as we as we strap in for this one. So Josh, maybe kick us off? Let's kind of kind of what's that kind of look like the budgeting for that? 2023? Yeah,

Joshua Warren  1:34  
so I know that budgets, it's very rare that a person who excels at and is super interested in managing an e commerce Store and working in E commerce usually isn't the same person that really likes dealing with Financials. So I know this is a topic that many of my friends that are ecommerce directors, ecommerce managers kind of complain about that it is not their favorite part of the job. Definitely the hopefully the one time a year that you end up talking with your CFO and your financial folks. There's also just a lot of questions that people have just ended in any year of what should we budget for what are other companies budgeting what is a healthy budget or normal budget, but I think this year, especially looking at all the uncertainty and some of the trends that we are seeing going into 2023 Just see more questions, more people wondering kind of how can they effectively budget

Darin Newbold  2:26  
kind of brings in definitely some budgeting challenges that we really need to really need to take a look at. And I know you've got some some information right from the Harvard Business Review that that can help us out. So what are some challenges for as we're looking at budgets for next year?

Joshua Warren  2:42  
Definitely. So I'm still on the fence of exactly where the economy is gonna go next year. I think there's a lot of you and everybody else. Yeah, but I think I think pretty much everybody it feels like that has a microphone, or a typewriter or a typewriter with a keyboard. Hopefully, raising yourself. Oh, man, I'm feeling old. It's all this this financial talk. But anyway, I mean, everybody that has tried to get your clicks, I'm trying to get your attention to say in 2023 is gonna be the worst year ever, and there's gonna be a recession and everyone's gonna go out of business. And I'm not so convinced that that is the way it's gonna go. I think that's kind of a hot take to get, like I said, to get the clicks. But yeah, Harvard Business Review did actually cite some interesting research on that where four out of five turnaround and restructuring, experts expect a recession. Now, you'd kind of think they're, they're almost hoping for one because they're going to have some good business Exactly. But then also three out of four expect there to be major shakeups in key industries. So and I do think we're gonna see that. And so yeah, I think that 2023 Definitely could be a challenging year, I think it could also be a year for recovery and growth. I think either way it goes, when you look at it, no matter what the larger economic forces are doing. The companies that are best prepared and best, just ready for it, that plan will always succeed and always end up growing. And so for 2023 kind of some key challenges and some key considerations with all that uncertainty is to not just look at forecasting your revenue and cost, don't just budget those also start looking at cash flow, the timing of your cash flow. And then one thing that I think a lot of E commerce directors and managers aren't aware of, but that CFOs are definitely aware of and CFOs definitely get excited about their weird bunch is assets and is the impact that the money you're spending has on the value of your assets. And what a lot of ecommerce professionals don't know is that websites are often basically depreciated out like an asset and treat it like an asset interesting. So that way, if you have a big project plan for 2023, and you make sure your CFO realizes, hey, this you can say I'm asking for $200,000 in this big Project and you can say, this is going to be a capital improvement to our website, it's going to increase the value of our website, then that can make the balance sheet look stronger. And that can make, again, kind of the financial types a little bit happier, for sure.

Darin Newbold  5:13  
Well, always good to always good to keep the CFO happy as you're, as you're moving forward no matter what. So, so with that we kind of hit some of the challenges, but we want to kind of go the next step into tell me about the kinds of benchmarking that data and and how does that look? Yeah, so

Joshua Warren  5:34  
one thing that is always asked is, you know, what's, what's the right amount to budget for my ecommerce presence? And for our E commerce project? I tell everybody a million dollars on Yeah, well, unless they're a $500 million company. But anyway, I get this question a lot. And I get it, I get this question in a way usually kind of the, either the unstated or stated next question is, and how do I convince my company that that is a fair budget. So we actually went through, and we did an in depth analysis of publicly traded ecommerce brands, and looked at the most recent two fiscal years. So that's 2021 and 2020, for most of them. And we looked at what their what I'm calling their non marketing e commerce spend. So we're not including Pay Per Click advertising, we're not including affiliate marketing and things like that. This is really talking about your core e commerce platform, the development support of that. So looking at those companies, they was spent on average one to 5%, of sales, on their ecommerce spending, the average was about 3%. However, it gets really interesting when you look at it as a percentage of gross profit, which is how most of them do kind of break it out. And their e commerce spending ranges from around 4% to around 20%, with an average falling right at about 10%. Now, when you look at those, those are some pretty big retailers, some pretty big companies. So even with a relatively low percentage of sales, they're spending a million of 14 million a year on their e commerce investments. So yeah, definitely more than a million. And so I also took a look and kind of broke out what are the smaller retailers doing and in this case, I say smaller, but we're still talking 10s of millions of dollars in revenue. And with those, it tends to be closer to 15% of gross profit that they're investing back into their e commerce business. And so kind of my, my recommendation to the people that I'm working with is it really you got to look at the scale of your business. But for the most part, somewhere between 10 and 15% of your gross profit being what you set aside for E commerce works, the one case where you probably are gonna end up having to go higher than that is if your replatforming is moving to a new platform making a major technology investment like that. It's just going to require a higher percentage.

Darin Newbold  7:54  
Just as a quick question around this, Josh, do you? How does this or how or does this differ at all, with companies that are both brick and mortar and E commerce versus a maybe an E commerce only.

Joshua Warren  8:09  
So from, from what I've looked at what I've seen, there's not a huge difference just because basically, either way, you're investing the same amount in your ecommerce presence, you just might be spinning in a slightly different direction. So for instance, if you're, if you're a big brick and mortar and omni channel retailer, then you're probably not just putting it all straight onto your website, some of this money, some of this investment is going into things like the buy online pick up in store experience, whereas if you're a pure play online only retailer that is going 100% kind of into that features and functionality for the the online experience. Okay,

Darin Newbold  8:46  
okay, that definitely makes sense. All right. Well, let's kind of take that next step. I think everybody's wondering, all right, you gave us a little bit of background here and some benchmarking and those things. So all right, what's it take? Let's set our ecommerce budget.

Joshua Warren  9:02  
So the first step is, honestly the hardest step and the one I get the most resistance to and that is go talk to your CFO, or whoever is in charge. It's funny, some of the bigger omni channel companies that I've worked with, I think their e commerce team doesn't even know where their CFOs office is. And I think strategically sometimes they are very far apart. I think the furthest is once they were in neighboring cities, so but definitely don't, don't be afraid. And it may not be your CFO, it's whoever is responsible for your budgeting process. Because we're gonna give you some advice and some guidelines here, but every company is different. Every CFO is looking for something different. And if you take the time and kind of ask them, What are they looking for what makes it easier for them to understand your budget requests, things like that. If it comes down to they have a certain amount of money to allocate and it's either you or another department that hasn't asked them that didn't put it in the form that maybe is easiest for them to review and approve, then you can went out. And so definitely take that time get to know them build that relationship. So once you've done that, definitely use whatever you learn to kind of temper the rest of the advice and the process that I'm gonna outline. But then, really, unless you are, or hopefully you are given kind of a projection from the CFO of where the company wants to be in the next year, as far as revenue goes, And so based on that benchmarking data, I would start with that 10 to 15% of projected gross profit and say, Okay, this is what our total ecommerce budget for the year is gonna be.

Darin Newbold  10:40  
All right, so then what about kind of the isn't there's kind of some major areas that you want to be commerce budgets, put it focus on and and go into kind of four major areas? Maybe five, if you're moving to an econ new platform and stuff is that is that something we need to, we need to make sure we hit on here?

Joshua Warren  10:59  
Definitely, definitely. So as you're putting your budget together, once you have that 15%, you want to break it down into four different categories. And these categories, basically, in order of what we see is typically most highest investment to lowest investment. There's going to be projects and initiatives. So basically major improvements, your website, that's number one, number two is going to be licensing and hosting costs. And depending on your setup, that one may actually be number three for you. Hopefully, it's not number one, the next one, the third one is maintenance and updates. So this is things like security updates, software, patches, things like that. And the fourth one is one that everyone always forgets. And that's technical debt.

Darin Newbold  11:40  
Yeah, you got it. I saw this one. You gotta tell me about that. What's that mean? Yes, I have debt, I have debt. I don't know that I have technical debt. So help me out. Yeah.

Joshua Warren  11:47  
Luckily, you're not an ecommerce retailer. But if you were you would have technical debt, whether you realize it or not, every website out there has it. And that basically means the little technical things on the site that aren't working quite perfectly, but they weren't good enough that you never really addressed them, you never really fix them. And so sometimes this is even, there may be things where everything looks fine to the customer, everything looks fine to you. But behind the scenes, there's errors being logged. And no one ever looks at those logs, or they look at them, and they say, oh, we'll fix that later. We'll fix that later. And those are the things though, that as you start to grow, especially if your brand starts to grow rapidly, and you haven't resolved that technical debt, that is going to make all of the other categories cost more money. And so you want to set aside, you know, this area, we usually see a very small percentage set aside for it, if anything, but set aside something for technical debt.

Darin Newbold  12:39  
Wow, very important. Very important. All right. So kind of is following up here, we kind of start with about a estimated percentage of projected gross profit. And then we look at those four categories and kind of break it out in the ways that it needs to. So all right, let's, is there an example maybe you can kind of walk us through that might might make this helped to be a little clearer. And I understand that, obviously, working some of these numbers, with microphones with no visuals here might be a little dicey. But what might that look like Josh?

Joshua Warren  13:13  
Oh, yeah, let's let's go and put everybody to sleep, I read all the numbers out to the both decimal points since everything, no, we are going to have a guide that you can download that will have these example numbers in it. And so I'm not going to hone in too much on those. But I will kind of walk you through what that looks like and how you get to those numbers. So basically, we mentioned start with that 15% of projected gross profit as your total budget, then generally, your licensing and hosting costs, you're gonna know those for the next year, you're gonna know a pretty good estimate. So and those aren't things that you're always able to vary very much like, you know, hey, we're in a contract with our ecommerce platform. This is what they're going to charge us next year.

Darin Newbold  13:57  
Now, just real quick on that, just to give you a quick pause, but could it be if we're projecting maybe maybe some significant growth, or changing that that is it possible that that we need to budget and be prepared that that's going to go up or could increase because we might need more, whatever servers bandwidth, it's available to be able to process.

Joshua Warren  14:18  
And it really depends on what platform you're using. Some of the platforms are fairly generous with their contracts and already have that built in and others they're going to nickel and dime you for everything. So depending on your platform, if you are with one of the ones that's nickel and diming you as you're entering this process, start talking to them and saying, Hey, if we were to do this, if traffic levels hit that, what's it gonna cost us? Because you want to get that number as accurate as possible? Because the way I work out these example budgets is you take that gross profit, you take 15% of that you subtract out your licensing and hosting costs, because again, those are relatively fixed and it's the other three areas that you can kind of play with. That gives you kind of a remaining budget number and then from that that you can experiment with different percentages to allocate to projects, updates and technical debt. And the example that we worked through in our guide, we use a guideline of 80% of that remaining budget goes to projects 15%, goes to maintenance 5% goes to technical debt. And that very quickly kind of gives you a sense of, okay, at a high level, in some fairly big buckets, this is what we'll be looking at spending next year, you can then basically take those numbers, compare them to what you spent in the last year, compare them to what's on your roadmap, and kind of what you're thinking about doing and, and just reality check them. And definitely, I'm not saying that every company out there needs to use these exact percentages. So use these as starting points, and then go through and kind of tweak them as you go. And as you just think about the coming year.

Darin Newbold  15:48  
Okay. And then as always, once you have kind of these numbers, it's always good to be able to put in a kind of a narrative summary so that there's a story behind it. Because, yes, talking about numbers is can be boring. And yes, for the CFOs that are listening, I know you love the numbers, and that's fine. But also being able to have a narrative. So others that may look at this can can really see where it's going and what's going to be happening with it. All right, we created our budget, Josh, and now how do we manage this? How do we make sure that we stay on budget throughout the rest of the year?

Joshua Warren  16:22  
Yeah, that's always the fun part. And so I think, especially with 2023, as we mentioned, at the top of the show, no one knows for sure, exactly what's going to happen financially in 2023. I think especially the last half of 2023 is kind of a mystery to all of us. And so I think it's really important that you're tracking your budget, and just watching it throughout the year. And again, not just your expenses, but also your revenue, your cash flow, looking to see if you need to make adjustments. It's also important, you know, we're focusing a little little on the doom and gloom, but at the same time, it's also important to consider what if you just blow past your revenue projections? What if the year ends up being a lot better than you think. And what I've seen some companies try to do is they say, Hey, we can, we can squeeze a lot of profit out of E commerce. If we hold our budget the same even though our revenue is you know, 50% higher than what we projected. Don't do that, that almost always backfires. Because systems that worked well, your projected revenue, probably aren't going to work well if suddenly blow past it by 50%. So definitely, if you start seeing a trend like that, start having conversations with your CFO, your financial team explained to them that if you want to keep that trend going, if you want to see 2024 grow just as fast, you got to keep those customers happy. And so you're gonna have to increase your investment than the last thing just because, again, it's it's an I feel like we've been saying this for what, three years now. But it's historic times unprecedented times. So 2023 is a year that I think we're all going to learn quite a bit about the budgeting process and kind of how to manage with uncertainty. So I would definitely recommend before you start thinking about your 2024 budget kind of this time next year, sit down and review how your 2023 budget worked out how this process served you maybe some things that you wish you had known or done when you first started the process, just go through almost like an after action review on your budget, and use that knowledge to set an even better budget for 2020. For

Darin Newbold  18:24  
now, that sounds fantastic. I was gonna ask one quick question, kind of with some of that uncertainty, would you consider? I mean, in the in the example, obviously, it was at 15 and five, and I get that because it broke down perfectly. Would you potentially, maybe carve out five 10% of that budget for for uncertainty? And say this is the I wouldn't want to call it a slush fund, per se, but have it as an uncertainty variable?

Joshua Warren  18:51  
You definitely could. We didn't cover everything in this episode that we cover in the guide, because we don't want to put y'all to sleep. There's a lot of information in there. But one of the things that we actually talked about there is also considering scenario based budgeting and saying, Hey, we want to budget based on three budgets, one based on our awesome projections, one based on our awesome projections minus a small downturn. And then the last one are awesome projections minus a severe downturn and kind of look at those three scenarios, look at the differences in them. And that might even help you understand okay, what do we need to budget for uncertainty? Or maybe you could even go to your CFO and say hey, I have these three scenarios. Knowing that it's uncertain times which one would you prefer a budget towards now that's

Darin Newbold  19:37  
great. Well guys, Josh, this has been fantastic information and definitely want you all to download the rest of the guide and so you have all of the pieces of it. As always, we appreciate you being here and enjoy and being with us here with commerce today. Please feel free to follow us and rate the show and we definitely want to hear your feedback as well. So as always, thanks a bunch calm Today we will talk to you again soon