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How Today’s Retail Environment Is Changing The Loss Prevention Budget Process

Posted on 12/13/11 9:30 AM

Like many readers of our blog, I have faced the annual ritual of preparing, presenting and finalizing budgets with concern and trepidation. By definition the budget process is a very important strategic function that defines how your department is perceived by the rest of the organization and therefore requires great care and planning. How has today’s economy and advancements changed how you develop your budget?

As a former Director of Loss Prevention I would usually start this process in early October hoping to have approval by mid January, just prior to the start of the Fiscal Year (which in my case was February 1st). At least that was the timeline in practice but the outcome was greatly influenced by what was happening within my company overall. The other major factor influencing the budget were the goals and objectives I defined for the loss prevention department; essentially our mission statement. The mission statement was generally outlined in terms of shrink reduction and the corresponding positive impact to earnings. I would suggest that today’s budget process for loss prevention is much more complicated and has significant implications beyond traditional shrink reduction goals.

Some years the process was a proverbial fire drill and budgets were finalized based on an overall percentage of sales, with each department receiving its marching orders based on whether they were up 5% or down 2% compared to the prior year (LY), weeks into the new fiscal year. Not always lots of fun and in some cases it meant sacrificing important initiatives, which could take the wind out of your sails in terms of department morale.  As a result of these more difficult years with the budget process it became very tempting to simply present the previous year’s detailed budget with slight adjustments up or down based on store count and comp. sale performance and hope for the best. But this was long before loss prevention departments had the sophisticated technology and software tools available today as part of detailed budget line items.LP Budget

The advancements in technology (hardware & software) and the resulting data now available has changed the decision making process involved in building a budget.  It no longer is based on intuition or what it looked like last year, but now is fact based decision making supported by empirical analysis for the purpose of not only improving earnings by reducing shrink, but also the added benefit of improving sales. The rapid pace of change in technology and how it can be applied is an effort that should be given a fresh perspective each year. Mainly because as technology has improved, the data derived from this technology has a broader application beyond traditional loss prevention goals. An example of this technological change is the ability to integrate remote video application with POS data and exception based reporting applications that just a few years ago operated independently of each other. The resulting data from these systems can more quickly identify employee fraud and help reduce shrink. It can also be used to help drive sales with data from customer conversion rates, customer dwell times at various display and checkout areas and customer flow patterns to name just a few. Video data can be easily aggregated across districts, regions and virtually any other user defined markets for the purpose of analyzing behavior on a more strategic level, which can be applied to the entire enterprise. This is just one example of the exciting integration of available technologies within the loss prevention budget that have benefits beyond traditional loss prevention goals.

Today’s Loss Prevention Leaders must approach the budget process as a strategic initiative that defines their goals, objectives and mission statement.  Creatively utilizing all available technologies, data, professional services and payroll with a detailed return on investment, supported by a fact based decision making process. The LP Budget must also be aligned with overall company goals and objectives and define its contribution through improvements in shrink, earnings and ultimately the incremental improvement to top line sales. Not an easy task but a very necessary effort in order to demonstrate that loss prevention department is not narrowly defined by how many shoplifters are apprehended, the number of dishonest employee confessions and corresponding recoveries, the number of robberies and break-ins responded to, the number of ORC events identified or any of the other myriad of tasks it performs.  Ultimately the loss prevention budget needs to be defined by actionable data, which the loss prevention team identifies.  This data can be used for the benefit of loss prevention, store operations, finance, and marketing and is truly an enterprise wide solution.

The reward for completing the hard work of defining the overriding mission of the LP Budget in terms of improved sales and earnings is a budget that is not a cost model but a profit model. Clearly with this approach Senior Management will recognize the important contribution the loss prevention team can make to the most critical business objectives. It also demonstrates the reason why loss prevention should not be relegated to the sidelines as a necessary support function that is a cost of doing business.  But more accurately the loss prevention budget value proposition is a critical strategic function that can drive sales and improve earnings!

Written by Steven May, President and CEO of LP Innovations, Inc.

Topics: Loss Prevention program and development

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