5 Key Profit Indicators All Retailers Should Understand




“Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.” 
― H. James Harrington


Introduction: These are what we consider 5 very important metrics small and mid-sized retailers should have their eyes on to help them stay competitive in this constantly changing market and shopping battlefield.

Measures, Metrics & Indicators = Actionable information to drive your business

My son runs track for UNC-Charlotte and when he practices, the coach always has a stop watch to determine speed and improvement. Without it, it would be guess work and not efficient.

How Are We Doing?




 

FIVE METRICS You need to be looking at now:
      
        1 ~ GROSS PROFIT – Sales – Cost of Goods Sold = Gross Profit
                   This is a measure of PRODUCTIVE LEADERSHIP

In my time working at for Ed Bachrach, his message to me was simply , “Drive Sales, Control Costs”

To understand gross profit, it is important to know the distinction between variable and fixed costs.

Variable costs are those things that change based on the amount of product being made and are incurred as a direct result of producing a product.

Variable costs include :
1. Materials used
2. Direct labor
3. Packaging 
4. Freight
5. Plant supervisor salaries
6. Utilities for a plant or warehouse
7. Depreciation expense on production equipment
8. Machinery 

Fixed costs generally are more static in nature. They include:

1. Office expenses such as supplies, utilities, an office telephone etc..
2. Salaries and wages of office staff, salespeople, officers and owners
3. Payroll taxes and employee benefits
4. Advertising promotional and other sales expenses
5. Insurance
6. Auto expenses for salespeople
7. Professional fees
8. Rent

Variable expenses are recorded as cost of goods sold. Fixed expenses are counted as operating expenses (sometimes called selling and general administrative expenses.

While the gross profit is a dollar amount, the gross profit margin is expressed as a percentage. It’s equally important to track since it allows you to keep an eye on profitability trends.

This is critical, because many businesses have gotten into financial trouble with an increasing gross profit that coincides with a declining gross profit margin.

            2 ~ PAYROLL – Total Revenue / Total Payroll
                               Set a target of 18%-19%
                 This is a measure of PRODUCTIVE STAFF
It’s not enough to simply look at your payroll. In order to get an accurate sense of your total labor costs you must view labor as a percentage of sales. To calculate this, simply take your total revenue from sales and divide it by your total payroll, being sure to include the cost of any benefits packages you company offers as well.

Do this for each sales staff member to understand who is performing and who is not. How are you working with the under performers. What training is in place?
               3 ~ INVENTORY TURN – Sales /Inventory
          This is a measure of PRODUCTIVE INVENTORY

What happens when the raspberries start selling or start getting old? They need to be replaced with new raspberries or a different fruit. Don’t let your inventory look old or picked over . 

Inventory turn is a ratio showing how many times a company’s inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or “inventory turnover days.”


Generally calculated as:

                    Sales
=           —————-
                  Inventory

However, it may also be calculated as:

             Cost of Goods Sold
=           ———————–
              Average Inventory

Things to remember – 
– A low turnover is usually a bad sign because products tend to deteriorate as they sit in a warehouse or on the sales floor.
– Companies selling perishable items have a very high turnover.
– For more accurate inventory turnover figures, the average inventory figure  ((beginning inventory + ending inventory)/2) is used when computing inventory turnover. Average inventory accounts for any seasonality effects on the ratio.

                    

               4 ~ TRANSACTION ANALYSIS 
  – Units Per Transaction  (Benchmark range : 3.0-4.0)
  – Average Transaction Value (Benchmark range : $125-$175)
  – Number of Transactions

This is an EVALUATION OF CUSTOMER EXPERIENCE

Your customers vote with their dollars and loyalty! If they’re not spending with you, you can usually look at the transaction data and see a customer experience program that is not working properly. 

                 5 ~ INVENTORY SHRINK  – 
The difference between your physical inventory and your inventory in stock
This is a measure of DISCIPLINE AND PRECISION

The stats aren’t very encouraging, but we should learn from them!
                                         10-10-80

10% of your employees would NEVER steal from you.
10% of your employees will ALWAYS steal from you.
80% of your employees WOULD steal from you if you gave them a reason (“I’m underpaid”, “I didn’t get a raise”, “They don’t appreciate me.”) or an opportunity (no processes, no accountability, no followup, no inventory counts.)

Benchmark: Industry average is around 2% (but that is high!) You should target an Inventory Shrink of less than 1% and conduct a physical inventory ONCE A YEAR.




Thank you!








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