Discussing financial matters can be a bit of a yawn but ignoring them will achieve nothing.
Lack of financial knowledge is one of the biggest factors in business failure. Like it or not the responsibility for understanding how your business is tracking rests with you. Financial advisors can give guidance but this is not the area for abdicating responsibility.
Running a business can be compared with filling a bucket with water. It’s great to pour water in the top, but there’s little point if the bucket is leaking just as quickly out the bottom! Retailers must first attend to the holes if they don’t want to be wasting precious time and energy.
Just as the objective in that above analogy is to leave with a bucket full of water, businesses should be expecting to see a correlation between the sales they make and the profit they retain, and these figures should be consistent with those of other stores across the industry.
RETAINING PROFIT
The process from sales to profit goes through a number of stages – the bucket has to lose some water along the way. The first is
gross profit, where one determines how much they make on an item net of its purchase cost.
Of course, an item purchased for $5 and sold for $10 will obviously show a gross profit of $5. Increasing mark-ups and reducing discounts, practices that will have an immediate impact on profitability, can control both gross profit and margin.
Beneath this level come overheads, all other costs associated with running a business, from getting an item in from a supplier to sending the item out with a customer.
Keeping these costs under control is one of the key factors in helping bottom line, and every $1 saved at this point is an extra $1 in profit. That said, it can be false economy if the cost saving adds $2, $3 or even $10 to sales.
Marketing is a great case in point as many business owners see this as an expense rather than an investment that can
generate profit.
Likewise staffing costs, where a reduction in staffing costs – hiring cheaper, lower-performing staff for example – can be a false economy.
THREE MAIN overheads
Of the overheads, there are three main ones that absorb the majority of this gross profit. These are rent, staff and marketing.
Rent is not controllable on a day-by-day basis so it’s best to look at the other two for now.
Of staff and marketing, staff is almost always the highest cost for a business to endure and not just because of the outlay on wages and training, but also because of the hidden costs of lost sales and profit if inexperienced, untrained or unsuitable staff are placed in sales positions and fail to deliver.
This opportunity cost figure is harder to quantify but it’s predicted it can be a significant percentage of the wage bill, and even higher than the total wage amount for businesses with the wrong staff. In a nutshell, hiring staff is certainly not a decision to be taken lightly.
A regular review of the business’ wage bill should reveal it as 15-20 per cent of sales. Measuring the timing of these sales to ascertain the busiest days and hours should be able to assist businesses to minimise staffing levels during quiet hours.
BETTER ROSTERING
Assess the roster against these busy hours, and take into account that fewer staff are generally needed during opening and closing periods.
Moving onto marketing, many stores tend to market by habit, holding down annual contracts with media that they have used for years, often without testing the results of their outlay.
All promotional avenues should be up for review as they can often be mistakenly used as a promotional shortcut – the business owner doesn’t have to think about where they will advertise, and in some case, what they will advertise, which can lead to laziness and ineffective marketing expenditure, neither of which are in a business’ best interests.
Only you know your business best. Take the time to make the important marketing decisions yourself, and avoid the unnecessary costs of these commitments just because you don’t want to have to think about it.