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B2B e-commerce has considerable potential for growth. What distinguishes it from B2C?

When it comes to presenting our e-commerce business, we often highlight our references in the luxury, fashion and retailsectors i.e. our B2Creferences. It makes sense as they are better known and more impressive. However, in the field we are seeing growing demand from B2Bcompanies of all sizes which want to have an effective e-commerce website. I have identified 3 major areas which characterise B2B e-commerce projects.



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A digital strategy concocted by SQLI

More than seven SEB Group products are sold worldwide every second. The Group is known for its many successes, such as its pressure cooker or the Actifry no-fat fryer, and it is therefore determined to achieve a successful digital transformation in order to meet consumer expectations and remain a leader internationally. To do this, SEB has designed an e-commerce system with SQLI which improves the user experience (using the SAP Hybris platform) while also enhancing the branding associated with products. These systems are currently being rolled out in more than fifty countries at a very fast pace.


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In the previous article., Finance for Technologists: Part 1 - The budgeting process, I discussed the intimidating process of presenting a budget to the company board and the type of questions each executive may ask you. With those questions in mind we take a closer look at what you need to consider when drawing up a budget and then using your budget wisely to successfully deliver a project.

 

Prioritisation of budget items

The budget process should not be looked at as fearful or mundane exercise. It’s a tool to quantitatively validate your thoughts and strategy and how you intend to spend the money. It can highlight areas where you may be overspending or underspending or areas you haven’t considered at all. Each line item must speak for itself with easily understandable notes and dates and prioritised using MoSCoW prioritization (must have, should have, could have, won’t have). Budgeting is also a process of negotiation and compromise. You won’t get everything you want so prioritization is critical to discussions.

 

Drawing up a budget

When drawing up the budget, there is the temptation to double or triple the budget estimates and then cut back to what you actually wanted. The problem with this approach is that the people sitting on the other side of the boardroom table are no fools and will likely see through this approach when picking apart the costing of each line item. Your budget should rather reflect the vision of you plan. Each line in the budget should be aligned to your plan and how this is going make or save money or reduce risk. Ensure you include contingency clearly for unknown but anticipated expenditure. Then the budget will require tweaking rather than completely rehashed.

 

Approaches to funding a project

There are broadly two ways of funding the project, either Operational Expenditure (OpEx) or Capital Expenditure (CapEx) or combination of the two. An accountant can elaborate on the benefits of one over the other as there are tax and financial management and reporting implications. Further, there is a growing trend to finance significant portions of IT projects through OpEx instead of CapEx because of pay-as-you-go cloud solutions. OpEx via cloud solutions also has the advantage of being scalable with business needs. CapEx usually is longer term and results in an asset, for example, a new website and servers which have value for the next 5 years. OpEx is shorter term, for example, the cost to operate the company on a day to day basis for the year.

 

Considerations behind allocating budget

Despite your snappy presentation to the board and defending each line item, you will likely only be granted part of the funding and your natural response is “How can the execs be so naïve?!” You planned everything meticulously and cutting back seems ridiculous. This is where you should see it through their eyes and that you may not be privy to all the factors behind the decision. If this endeavour is going to require too much capital investment or they just do not have the appetite for exposing the company to too much risk and the company does not wish to seek funding through one of several financial instruments (eg: additional shares, loans or bonds) then something must give. The board has to cut their cloak according to their cloth and prioritise spend of which yours is only one of many put forward. Simple financial management ratios (see addendum) will highlight very quickly that the company has potentially over extended itself and that could result in some challenging discussions with the shareholders.

 

Managing budget spend

With the budget allocated, you have the responsibility to manage it. It’s imperative you do not overspend. Going back to the board to grovel for more money (CapEx extension), whether your fault or not, is not a pleasant experience. The reverse is true: don’t fail to spend the budget allocated. I’m talking about saving money by negotiating a better deal or selecting a cheaper option, I’m talking not doing anything with the allocated budget. Negligent underspending is extremely poor management of resources. The company has opted to invest its hard-earned money, resources and reputation in your capable hands to use wisely instead of investing in 1 or more alternative options, or reducing spend in other areas. There is an opportunity cost for investing in your proposal instead of alternatives.

Critical to successful management of your budget is managing cash flow (cash going out versus cash coming in). Many very profitable companies have gone bankrupt because they have not managed the flow of cash in and out of the company and ended up not having the cash to service their debt. Further, you won’t have a big bucket of cash to tuck into at will. The budgeted amount may be funded entirely via operational revenue that is brought in to the company rather than dipping into its cash reserves or investment. So plan accordingly. One scenario where management of cash can be particularly tricky is in consulting - do you hire in the anticipation of work to be better prepared and trained or do you hire only once the work is signed? The views of IT and Business are completely juxtaposed as to how to approach this point and compromises need to be made on both sides such that the team is adequately prepared without putting the company at risk. It’s a tough call because you don’t know with absolutely certainty when the work is going to kick off and when the new hires will start making money rather than eating away at the cash reserves. The money spent with the new hire on the bench is wasted and it can end in disaster very quickly if not managed carefully. I’ve personally experienced scenarios where projects with firmly established start dates are suddenly delayed, project budgets slashed or cancelled altogether, all for perfectly valid reasons beyond my control.

 

Warning: Trap of hidden costs

A final word of warning: be careful of hidden costs that you may not have taken into account. For example, have you accounted for sundry roles such as account manager, system administrator for deployments, seniors assisting juniors, initial environment setup costs, bug fixes, QA to write up test scripts, drafting reports, customer meetings? These are just a few examples of some of the sundry items which can easily come along and destroy a well thought out budget and plan. Business do not necessarily understand these hidden or unforeseen costs and will give you a tough time when you have to present this unexpected expenditure.

Money doesn't grow on tress In closing managing finances is very complex and IT should give Business credit for the tough job they have on their hands. Business decisions may not always seem rational in the eyes of IT, but Business have to weigh up where to invest the company’s money and attention and which opportunities to go for and which, no matter how promising they may seem, let slip by in order to ensure the longevity of the company at that point in time. Before judging a business decision as irrational, always remember best intentions and that you may not be aware of all the factors behind the decision. Money after all does not grow on trees

Addendum – some useful terminology

Financial statements

  • Balance sheet – the financial position of the company at a given point in time. It comprises what it owns (assets) vs what it owes (liabilities) and the value of the business to its shareholders (equity). Also known as the statement of financial position. The basic formula is Total Assets = Total Liabilities + Shareholder Equity
  • Income statement – reports the company financial performance over a given period in terms of revenue and expenses where net profits are income less expenses. It reflects how the company has earned and spent its money during this period. There are 2 parts to it; the regular everyday operating expenses and revenues generated from that (operating items) and revenue and expenses from non-operating activities such as investments or sale of assets. Also known as Profit and Loss or P&L Statement.
  • Cash flow statement – analysis of the cash moving in and out of the company over a given period. It comprises operating activities, investing activities and financing activities. “Cash is king” as the old saying goes. If you run out of cash you can’t pay your staff or your creditors and you will be in serious trouble.

Balance sheet ratios

These balance sheet ratios are used to measure the risk in a business. There are many ratios to analyse the financial position of a company, 2 of which I mention below. If these ratios show a decline, the company may be in for trouble:

  • Current and quick ratios – how easily can the company service its debt through liquid assets, i.e., how easily can the company meet its debts without going bankrupt in the event of a financial crisis?
  • Debt to equity ratio – how much debt does the company have versus the shareholder equity. This determines how much money a company can borrow and at what rate and gives an indication of the company’s ability to survive over a long period

P & L statement ratios

Similar to the balance sheet ratios, the income statement ratios derived from the P & L statement focus on revenues and expenses and how effective the company is at turning revenue into profit.

  • Margin: ratio of the income from sales vs the cost of producing goods
  • Net operating profit (EBITDA) - how much profit did the company make taking into account the revenue less cost of producing goods and all associated operating and administrative expenses but ignoring interest, tax, depreciation and amortisation.

Operating ratios

These ratios look at how efficiently the company makes money (revenue) from its assets and how effective it is in converting sales into cold hard cash. An example is the Return on Assets which shows how much profit is made versus the value of your company’s assets. DuPont Analysis is a common method of measuring the performance of a company in terms of its use of assets based on their gross book value.

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Internet Of Thins

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Difficult to overlook: the IoT world (Internet of Things World) has arrived. A geeky trend, technological prowess or the coming world of tomorrow? Will our future be governed by drones, the interconnection of our objects and robots? This article was written so that we remember this moment, when we are all witnessing this consumption (r)evolution.

Connected objects are the current commercial and marketing trend, and this trend involves a quantum shift in the product development strategy of brands.


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In the previous article, Seeing eye to eye, I set the scene – you’re an engineer overseeing a large IT project that requires raising funding from the company board and for which you will be responsible. In this article I jump a little ahead in the process in that I discuss presenting the budget to the company board so that you can understand the type of questions they are likely to ask you. In the article that follows, I take these questions into account when discussing the drafting of the budget.

The principle objective of a company

Keep in mind the number 1 reason for a business’ existence: sustainably make money for its shareholders. Even an NGO has a duty to its funders to ensure they operate financially responsibly. If your project is not going to have a reasonable return on investment and it does not aid another area of the business to make/save money or misses the strategic vision of the company or reduce company risk, then the sensible thing for the business to do is rather take that cash and put it into an interest-bearing account until they come up with a better idea.

The budgeting process

The problem with our scenario is that you’re already too late to the party. Budgets for this financial year have been allocated and usually 3-5 years’ worth of budget forward planning is done and dusted. This explains why when a project runs over people are not just annoyed about overspent budgets, missed deadlines, placing other areas or even the entire company under stress because the current budget needs rework. The budget forecast for the following financial year may be affected too and have long term ramifications. This does not make CFO’s very happy campers.

Key questions from the executive team

So you’ve missed the boat and now the project is pushed out to the next financial year as all spend has been allocated for this year. To secure funding you’ll need to present a budget to the board and defend it with a business case. The single most important question you have to answer is “How much is it going to cost?” There are other very important questions to answer but those are secondary. If you present a seemingly flexible or “agile” response such as “It depends on what the business want as we progress” (which is not Agile) expect to be packing your desk or at the minimum have your ears ringing from a grilling from the CFO and CEO. Be prepared – you’re in for a grilling regardless, which is good. The board has a duty to its shareholders and staff to thoroughly question such investments. It could have serious consequences for the company. Below is a (hardly exhaustive) sample of the different types of questions key decision makers will ask and how differently they view the situation. Try see it through their eyes:

  • CFO: How much is it going to cost? How much is it going to make and/or save the company and over what period, i.e., what is the return on investment (ROI)? How did you come up with these figures? Explain budget line item X’s spend. What are the future costs? What do you have allocated for unplanned expenses (contingency)? What are the payment terms? Did you negotiate discount? How long will it take to implement?
  • CIO/CTO: A whole lot of technical and governance related questions.
  • COO: How are operations affected? Yet another set of systems to look after and maintain!? Swapping over to new system is going to have down time and require training. Has this been factored in? What is your plan? What are expected operational costs? How many operational staff will need to be involved in this project and how much time will they need to dedicate to it?
  • CMO: How are customers effected? How is it going to make us more agile as a company? Is it going to improve our image? Is it going to prevent our competitors from taking some of our market?
  • HR: Will jobs be affected? Will we need to make people redundant or upskill or hire new staff with specialist skills? Are you planning insourcing with contractors or permanent, or partner with consultancies to deliver? How is this going to be supported going forward, how is that going to be resourced?
  • CEO: What are the key problems this will resolve? Does it fit in with the corporate vision and strategy going forward? What is the risk if we do it? What is the risk if we don’t do it? How will the shareholders respond? What’s plan B and C?

The important point to take from this is that each executive will see the budget from a completely different perspective. When preparing your budget and delivery plan you need to take these perspectives into account so that you can adequately address their concerns. In the next article (Finance for Technologists: Part 2 – drafting and managing your budget), I’ll discuss what you need to consider when drawing up your budget so that you're able to defend it when presenting it to the board.


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