Body Glove - A Budgeting Case Study

During my MBA I had the opportunity to review a case study on the watersports brand Body Glove.

Body Glove was founded by Bob and Bill Meistrell taught themselves to swim in rural USA before moving to Manhattan Beach in the 1940’s. Bob & Bill found that they really enjoyed the ocean, becoming friends of other California surfing stars including Dale Velzy and Greg Noll to create the Manhattan Beach Surf Club.

In 1953 they along with others developed the Dive N’ Surf retail store, totally focussed on surfing and diving, while continuing to surf every day. In time they expanded their business to offer full lines of surfing and diving equipment, classes and fashion across a number of shops.

This practise of testing the boundary and innovation that they developed as kids lead to the discovery of a new insulating material called ‘Neoprene’ and invented the first wetsuit that allowed surfers and divers to surf or dive all year round, even in the depths of winter. Some of the early adopters were top surfers including Greg Noll & Mickey Munoz . The suit “fitted like a glove” and Body Glove was created.

The case study was about budgeting and how it occurs at Body Glove. The main learning from the case study was that budgets have multiple purposes which go beyond being solely financial. I also learned that as budgets can have multiple purposes, it is extremely important for managers to be involved in the budget process as they can influence the direction of the business.

The key points from the case study are:

• There is a 5 year strategic plan
• Sales had doubled in recent years
• Heavy reliance on marketing to generate foot traffic and sales
• Bottom up budget process
• Demand forecasting principals

1. Budgets have more than 1 use

In a number of businesses the budget is used to control costs as well as driving sales performance. For some organisations this ethos is used to drive 10% sales lift with a 10% decline in expenses (10 from the top & 10 from the bottom), but this isn't sustainable over the long term.

In my experience budgeting can be used to:

• Via sales targets to drive staff towards sales achievement and achievement of their targets through rewarding their performance with both monetary and non-monetary rewards
• Controlling costs, especially at a frontline level to ensure that margin is perserve for the business and to enable a sustainable distribution network.

Body Glove use their budgeting to attain their sales goals combined with controlling their costs to maximise the return to shareholders and stakeholders within their business.

2. The best approach to sensitivity analysis

Sensitivity analysis enables the best way to react to market changes or changes to fashion trends. Being in the 'fashion' business means that Body Glove needs to adapt quickly to market trends whether this be fashion or financial based. As we have seen during the GFC many surfing brands have struggled as they are a 'luxury item' and not essential for day-to-day living.

Sensitivity analysis allows Body Glove to try out what if scenarios as a part of the budgeting process to determine where to invest the organisations scant resources to maximise return & ROI.

3. Bottom up budgeting

Just recently I have spent considerable time working up a 'guessimate budget' at my organisation. This has been a top down approach and to be frank, it doesn't work.

Bottom up budgeting is the best way of catering for local area issues and considerations. Little items can affect a budget such as the number of Saturdays in a year for staff overtime, what day does Xmas fall on as well as local area issues and marketing activity. By allowing staff to budget from the bottom up you get a real understanding of the local needs and where to spend your money for the best return. It also gives you buy in.

To make bottom up budgeting work you need to give your people boundaries eg maximum 3% increase and incentives for budgeting effeciently and finding ways to reduce costs. This is why Body Glove uses this approach, it gives buy in and creates the most accurate forecasts

4. Communication

You got to talk about the budget process and outcomes in order to have your people buy into the process. My normal cycle is:

• Brief the team on the criteria for the year, the key initiatives and the timeframes
• The team meets together in regions or departments to discuss the key rules and activity
• The budgets are created by the team and anything that is over CPI needs justification
• Regional Managers review the budgets, make adjustments and then submit
• Review by myself (Sales Manager) to ensure compliance to the criteria and questions about activity. Any calibration is made then submitted to the Executive/Board for approval

Once the budget is approved to issue the contents to the teams and then to monitor it on a monthly basis.

Body Glove has adopted this approach, inclusive of sales target budget and it has helped to drive performance as the teams have bought into the process and help set the budget.

Travel is one of the key products that I manage at our firm and in 2009 we were experiencing falling sales due to the GFC. Travel is split into two sections – Road Travel and Travel Agency. Due to the economic downturn customers have reduced spend on travel and this had been affecting our results. Road Travel was down just 4% which is a great result. This suggests that people are still having holidays, but are staying closer to home. Travel Agency, which is mainly the international market, was also down, but not as much as competitors (most competitors are down 30%+). Until December this business was positive but in January revenue was down 40% and 23% in February. Future bookings into 2010, however, were looking very strong.

Due to this result I prepared a paper for the Executive on the reasons for the downturn and the actions we are taking to reduce the loss during the next few months, while still allowing us to be in a position to capitalise when customers want to travel again in the next 12 months.

I made a series of recommendations to increase sales and reduce costs but I did not use sensitivity analysis. If I had used sensitivity analysis I could have added value to this report by including:

• Several ‘what if’ scenarios including increased sales, reduced sales, reducing staffing and the impact of each on expenses.
• Strategies could have been developed for each ‘what if’.
• The organisation would therefore be better prepared in future months to react quickly to either a further downturn or an increase in business.

If I had done this then I would have been in a better position in January to manage the downturn in this business, rather than reviewing it in early March.

A goal for all businesses is to consider sensitivity analysis within the Finance area and determine whether the organisation should consider a move to an integrated budget in the future as this tool would be very useful for many businesses in managing budgets and sales performance.