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Category: Financials

How Many Customers Does it Take to Change a Retailer?

Two numbers every retailer should track are Number of Transactions and Average $ per Transaction. (Yes, if you know the first number then you can calculate the second).

Number of transactions is simply how many times you rang up someone on your register. Did that number go up or down? If it went up, life is probably pretty good. You can skip the rest of this post and wait for the next one talking about the Average Ticket.

If it went down, read on…

There are two reasons for your number of transactions to go down:

  1. You didn’t get enough traffic through the doors

  2. You didn’t convert that traffic into purchases


YOU DIDN’T GET ENOUGH TRAFFIC

There are a number of reasons why you might not have as many people coming through the door. Here are the most obvious ones…

The market shrank. The population in your area decreased or at least the population that shops your category decreased. We have seen a decline in births in county for four straight years. Since we sell baby products it is not surprising that the number of transactions has declined. Fewer babies being born means fewer people buying cribs.

You can get population information from your local government. They track things like foreclosures, house sales, rental property availability, unemployment claims and taxes to determine what is happening with the local population.

In a similar vein, did your market dramatically change? Was there road construction outside your door? Was there a major shopping center constructed somewhere else (even if they didn’t have a competing store)? Was there a fundamental shift in traffic patterns? all of these could have an effect on the amount of traffic coming through your doors.

The competition increased. Did a new competitor come to town? Did a current competitor step up their game? Although I often tell retailers to focus more on what you can do than on what your competitors are doing, you still have to watch them. In 2010 Toys R Us opened a pop-up temporary store in our market. It only took a small piece of the pie, but in our shrinking market every crumb counts.

Your advertising did not work. Did you cut back on your marketing efforts? Did you change your message? Did you forget to change your message? If you cut back or made major changes to your message you may have caused the drop in traffic. (Not sure what your message should be? Download this free eBook “Understanding Your Brand”)

YOU DIDN’T CONVERT TRAFFIC INTO TRANSACTIONS

Two main reasons why this happens:

You didn’t have the right products. When there is a hot product in your market and you don’t have it, you’ll get plenty of lookers, but no buyers. Nothing cures more retail ills than having the product everyone wants. Did you have a bunch of calls or requests for a particular item? I know one store that has a daily worksheet that all the staff fill out including what requests were made to which they had to say NO. From that worksheet she often finds new products and categories to carry. Her rationale? Customers come in thinking she should have it. Why disagree with the customer?

Your sales staff wasn’t up to par. How much did you commit to training? How much did you work with the staff on what great customer service looks like? How much did you leave to a manager to do? Does the manager care at the same level as you care? Not only does a poorly trained sales staff cost you in conversions, it costs you in average ticket (which we’ll explore in the next post), and it costs you in repeat business (traffic coming through the door).

More than likely, if your transactions are down it is a combination of many of these factors. The two you can control the most are your Advertising and your Sales Staff Training. Get working on those right away. In fact, even if you had a good year, you can still raise the bar in both of those categories.

And that will make it a Happy New Year for your business.

-Phil Wrzesinski
www.PhilsForum.com

PS One other thing that could happen… Your POS could change the way it tracks transactions. Our new release of our POS software did just that. Took us two months to figure out why our number of transactions spiked all of the sudden. Got that figured out so now we’re comparing apples to apples again.

Statistics Falsified for Your Benefit

I love December!

The statistical anomalies are so much fun.

Most businesses look at their sales in comparison to last year. And most businesses compare Thursdays to Thursdays, Fridays to Fridays, etc. This comparison works great right up until December 1st.

As you know, you only get 24 days in December prior to Christmas. Those 24 days are extremely important. So you might be tempted to compare December 1st to December 1st for this month to see how you are doing instead of Thursday to Thursday.

Just to show you how misleading those numbers might be…

If I compare day to day for Thursday 12/1 and Friday 12/2 to the correlating Thursday & Friday from last year (12/2/10 and 12/3/10), my sales are down 21%.

But if I compare those same days this year to 12/1 and 12/2 from last year, we are up 11%.

Being an optimist, I’m going with up. Two days down, twenty-two to go.

Keep smiling and keep making memories. Those are the numbers that really count.

-Phil Wrzesinski
www.PhilsForum.com

PS No, there really isn’t a lesson in this post, unless you want to take away from it that the most important thing is to keep a positive spin on everything this time of year. There will be time to evaluate how you really did when the season is over.

How Much Would You Pay for This?

I’m working on a project that would be a comprehensive guide for all those funky financial terms with which our accountants bombard us at the end of each fiscal year.

I wrote a simple explanation that I published here (free download). This new guide will be in far more detail.

The question today is…
Would you be interested in a guide like this and how much would you pay?

To give you an idea of what you would find in the guide, here is a sample:

Cost of Goods Sold: Cost of Goods Sold (COGS) is a measurement of what you paid out to buy the products you sold in your store. Most people think COGS is calculated by subtracting Profit Margin from 100, but the formula looks like this:

COGS = Beginning Inventory (at cost) + Net Purchases – Ending Inventory (at cost)

The formula is done this way to take into account any merchandise that has disappeared (been stolen, marked out-of-stock for store use, etc.) or any extra discounts you may have received that were not registered in your POS. If you have major inventory adjustments because of theft or loss, your COGS will go up.

Another factor that sometimes goes into this calculation is Freight-in. Some accounting systems include Freight-in as part of the Net Purchase. Some consider Freight-in as a separate Selling Expense. If you include your Freight-in with your Net Purchases then your COGS will be higher. If you do not, then your COGS will be lower.

Although most POS systems will calculate your profit margin based on the cost you paid per item sold, COGS is a more accurate reflection of what you spent on the merchandise you sold because it accounts for those inventory and cost adjustments. Typically accountants will first calculate COGS and then subtract that from 100 to get your true Gross Profit Margin.

A typical COGS for a (insert industry here) should be around (insert industry standard here) (with Freight-in as a separate expense). The higher your COGS, the less money you are making for the products you sell.

If your COGS is much higher than the average store in your industry these are the five most likely reasons:

1. You are including Freight-in in your Net Purchases.
2. You are not marking up your retail prices as high as the typical store in your industry.
3. You carry a heavier load of product lines that traditionally have much lower profit margins than the typical store in your industry.
4. You lost more inventory to theft or store use than the typical store in your industry.
5. You are offering more discounts off your regular prices than the typical store in your industry.

If your store is making a comfortable profit and has ample cash flow, then you do not need to worry about getting your COGS in alignment with other stores. But if your profit or cash flow is not where you want it, you should evaluate those five reasons to see where you can improve or look at ways to increase your Inventory Turn Ratio.

Now imagine an explanation like that for every line of your Balance sheet, your Profit & Loss plus a few other calculations like GMROI, Inventory Turn Ratio, Current Ratio, and a whole bunch of other terms that you only vaguely understand.

Interested?

How much would you pay?

-Phil Wrzesinski
http://www.philsforum.com/

PS You can simply leave a comment or send me an email. I would love to hear your responses.

Stats Lie, Trust Your Own Numbers

The only numbers that really count are yours, the ones you make, the ones you manage.

The weather service says Jackson County has only received 3″ of rain (as of May 27) yet my dad had a bucket of 8″ of water from just the previous week (including evaporation).

The various reports have retail sales up, down, or flat, so many different ways that you could get dizzy trying to follow.

Even Winston Churchill says, “The only statistics you can trust are those you falsified yourself.”

And as Seth Godin pointed out in his last post, none of these reports on the economy really matter.

The only economy that counts is your local economy. The only statistics that count are the numbers you create and measure.

Are you tracking Customer Counts? This is a good sign of the health of your marketing campaign.

Are you tracking Average Ticket? This is a good sign of the ability of your sales staff?

Are you tracking Gross Margin Return on Inventory? This is a good sign of the ability of your buyers.

Are you tracking Cash Flow? This is a measure of the ability of your company to react to changes in the local economy.

Those are the numbers that count.

Phil
www.PhilsForum.com

PS Need help in understanding those numbers? Help is available in the Freebie section of my website. Need more help? Send me an email. You can be successful in any economy when you track the right numbers.

Are You Working ON Your Business or IN Your Business?

Morgan Freeman’s character “Red” said it in The Shawshank Redemption, “You either get busy living or get busy dying.” Never have more truer words been said about retail.

So what are you busy at right now?

Are you busy coming up with new ways to market your business?

Are you busy evaluating your inventory mix to make sure you have the right items, the right amount of items, the right prices?

Are you busy measuring your financials to make sure you have enough cash flow, are keeping expenses in line, and building profits for the future?

Are you busy training your staff, teaching them how to please your customers and make their experience both memorable and worthy of talking about?

If you want to get ahead, you have to spend just as much time working ON your business as you spend working IN your business. Maybe even more.

Here are some simple things you can do to find more time to work ON instead of IN.

  • Don’t waste your time stapling, folding, cutting or hole-punching. If you don’t have a staff person in need of a simple project, give it to your kids or grand kids. (And if that isn’t an option take it home with you and do it while you catch up on your favorite show).

  • Don’t micromanage. Train your staff how to do it. Then empower them to do it. Even encourage them to come up with their own ways to do it better.

  • Don’t ever say or think “it would be quicker for me to do it myself.” The first time, you’re right. But if you teach someone else how to do it, the first time will be your last time.

  • Hire somebody. Let them do all that day-to-day stuff that bogs you down. Not only does it free up your time, but it forces you to work ON your business just to find the money to pay them.

And if you aren’t sure where to begin working ON your business, think about it as a three-legged stool.

  • The seat of the stool is the products. Without the seat there is no need to prop it up.

  • The first leg, then, is the marketing. What are you doing to get people in to see your products?

  • The second leg is selling. How well trained is your staff? Do they know the benefits of the products?

  • The third leg is the financials. How is your cash flow? Profit? Inventory levels? Expenses?

Pick the wobbliest leg and get to work. (Let me know if I can help).

-Phil

Can You Read Your Financial Statements?

I know for years I could not.

Sure, my dad would try to explain everything to me. My grandpa helped, too. Even the accountant would chip in from time to time. But it always seemed like they were speaking a foreign language.

Let’s face it, most independent retailers have little or no accounting background. And accountants & bankers speak in a tongue very few understand.

If we want to be successful, we need to know what those statements say and what those numbers mean.

Here’s some good news…

I have finally broken the code!

I have deciphered the two biggest financial reports your accountant gives you and translated them into language we all can understand.

It’s all in the FREE downloadable eBook Reading Your Financial Statements.

Think of it as the Rosetta Stone for accountant-speak.

A HUGE shout-out goes to Frances Schagen who helped me tremendously in finally understanding the relationship between Assets, Liabilities & Equity, and for making sure my numbers all looked right. Thanks, Frances!

As Frances says, “What gets measured gets managed.” May this help you better manage your finances this year.

Cheers!

-Phil

PS This is just one of many FREE downloadable eBooks for Retailers you can find on my website – http://philsforum.com/.

What Should Your Sales Be?

Thinking about opening a new store? Wondering what your sales might be?

Here is the easiest method for estimating expected sales:

Market Potential
First find out how much business can potentially be done in your market. To do this you only need to find the national sales figures for your industry (note: for some industries this is easier said than done).

Take that national sales figure and divide it by the US population. That gives you sales per person.

$22.1 billion divided by 308 million people = $72
Then simply multiply that result times the number of people in your expected trade area.
$72 x 150,000 people = $10.8 million
Now you know what the Market Potential is. Your expected sales will most likely start in the 3-5% range, maybe higher if there is no indie competition, maybe lower if there is indie competition or you are saturated with highly effective big box stores.
What Size Store?
From this figure you can get a good estimate of how big a store to build. You just need two numbers… Lease Rates in your area and/or Sales per Square Foot for your industry.
Lease Rates: To be profitable you have to be working for yourself and not the landlord. If the rent for the year is more than 10% of your expected sales, you’re working for them, not you. You basically have three options:
  1. Look for a smaller space
  2. Look for a cheaper space
  3. Look for a different market
But be careful of those three options. The cheaper space is usually in a bad location and retail , like real estate, is all about location, location, location. The smaller space might work, if you have room to show enough product to justify the sales.
That is why knowing the sales per square foot for your industry is helpful. Let’s say your Expected Sales are $500,000. If your industry average for sales per square foot is $200, then a 2500 sq ft store should work fine. Only lease a bigger store if it is both affordable and in a great location.
Everyone thinks your store “would be great in our neighborhood.” Yes, great for them. Do the math and you’ll know if it will be great for you, too.
-Phil

Could an Accounting Class Help?

On my website I readily admit that although I can help you in almost every aspect of retailing, if understanding your financials is your weak spot I’m not your guy. So you can imagine how I’ve been over the last few weeks.

Our accounting software finally bit the bullet. We’ve been using the same software since 1998, even though the software became obsolete in 2005 and the company disappeared in 2006. Hey, if it ain’t broke, why fix it? But the software wouldn’t allow dates beyond 12/31/10. Time to make the change. I spent December 27th and 28th with my accountants updating everything to the new software.

Our fiscal year is about to end. More meetings with the accountants are on the horizon.

While my accountants are absolutely nice and wonderful people, why must they insist on speaking in a foreign language? I still struggle to remember if I add debits and subtract credits or is it the other way around?

Most independent retailers I know have the same struggles. Reading financial statements like the Balance Sheet and Profit/Loss is like reading a Chinese road sign. But in my quest to always improve myself, I have made it my goal to grow my understanding of all things accounting in the retail world (with the exception of taxes – I’ll tackle that next year).

I could take an accounting course, but all my friends who have done this warn me that it is backwards. Bank accounting – on which these courses are founded – is opposite of retail accounting. Huh? How stupid is that?

So instead I’m going to learn it the way most entrepreneurs do – self-taught one chunk at a time. And, yeah I plan to share what I learn right here. So look for a little more on the financial side of retail this year. Together, we’ll both become experts.

You with me?

-Phil

PS Credits are added, Debits are subtracted (I think)