We all understand the commercial pressure derived from declining revenues, declining gross profit margins, wages push and aggressive landlords. The intuitive reaction must be to change. The famous football coach Wayne Bennett has been quoted to say when times are tough– “don’t get bitter, get better”! In my opinion, lessons derived from sport can often be applied to business.
We acknowledge that change is required to improve. But what should we focus upon? The five drivers of most retail businesses are:
- Gross Profit Margin
When you can effectively manage and control these drivers there are fewer nasty surprises, profitability can be confidently achieved, and thus the business is sustainable. We can detect problems earlier, identify areas for improvement, and hopefully future successes can be identified and celebrated! These days POS software helps us manage inventory levels, report on sales and gross profit margins, analyse category performance, identify top sellers and poor performers etc. Similarly accounting software can produce reports confirming sales, gross margins, business expenses and the bottom line net profit. But, is very important to recognise the effect of “garbage in, garbage out” when it comes to tracking profitability.
Common problems with POS reports originate from errors in inputting data, typically because the cost price, retail selling price or quantity of goods received or sold are incorrect. It doesn’t take many errors to corrupt the integrity of the information produced. So many times business owners say “you can’t rely on the reports from my POS, it has a glitch and I’m too busy to spend time fixing it”. But these days, you can’t afford NOT to get it right.
The infinite monkey theorem states “that a monkey hitting keys at random on a typewriter keyboard for an infinite amount of time will almost surely type a given text, such as the complete works of William Shakespeare”. In other words, even an untrained party can get it right sometimes. The “infinite monkey theorem” can apply when it comes to your internal bookkeeping! These days, there is easy accessibility to powerful yet reasonably priced bookkeeping/accounting software. MYOB, Xero, Banklink to name a few. The software can produce profitability reports, monthly BAS, payroll, accounts payable data among others. Those reports usually appear in a format that is professionally prepared and compatible to most requirements. However there is a significant issue if those responsible for the preparation of those reports have limited accounting experience, or are not up to date with recent rulings for both income tax and GST.
Unfortunately not all bookkeepers are the same, and whilst some may have experience in the field generally, there can be a wide gap between their tax knowledge, and sometimes attention to detail. Thus when a report which appears to be prepared to a high level yet have material flaws in the way they have been prepared, incorrect interpretations can be made and thus poor management decisions implemented. You must make inquiries as to how suitable your future bookkeeper is for your business.
Assuming you have outsourced your internal accounting to a reliable source (or undertaken formal training yourself) and your POS system is reliable and accurate, you now have the ingredients to track your profits carefully each month. Problem is, the volume of reports available is almost endless, but you have a limited amount of time to invest in analysis of the data. Hence, the need for a “dashboard”. Every business needs a simple yet effective method to track performance, where the data is easy to access and collate – otherwise it is easy to lose patience with the process. The results from the analysis must be recorded in a timely basis and be reported in a consistent format each month, to be genuinely useful.
There are four types resources which need to be tracked on your dashboard which include Cashflow, Inventory, Staff, and Floorspace. The end result of our reporting analysis should be focussed on measuring and managing those items specifically. A typical layout of dashboard of key factors includes the following at the close of each month:
Average $ sale
Stock Purchased/(Cost of Goods Sold)
Inventory on hand
Once the data is collated into this template each month, it is simple to perform basic analysis and comparisons and identify trends as they happen. It also allows ratio analysis such as Gross Margin Return on Inventory, Floor Space and Labour which are some of the most important indicators of the financial performance of a retail enterprise. This expresses the relationship between mark-up on your inventory, and the effectiveness of the way you manage your practical resources.