Don’t let your eyes glaze over… talking about financial information can be a little bit of a yawn for some people. Just because it’s not your cup of tea doesn’t mean you can ignore it. Lack of financial knowledge is one of the biggest factors in business failure, and like it or not the responsibility for understanding how your business is tracking rests with you. Financial advisors can give you guidance, but it’s not an area you want to abdicate financial responsibility for.
I often like to compare running a business to 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! Sadly many business owners are frantically feeding water in the top only to have it leak out the bottom at an even faster rate. You need to plug up those holes if you don’t want to be wasting your time and energy.
This analogy also applies to your business. When you compare how much you are selling against how much profit you have left at the end of the day you need to be aware of this ratio, or how much water there is left for you to use. Although these figures are never the same, you expect to see a correlation between sales made and profit retained, and as a percentage across the industry you would expect these figures to be consistent with other stores.
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. An item purchased for $5 and sold for $10 will obviously show a gross profit of $5. Controlling gross profit and margin, through increasing mark ups and reducing discount, will have an immediate impact on your profitability.
Beneath this level comes your overhead, all the other associated costs you have with running a business and getting an item in from a vendor, and back out to a customer. Keeping these costs under control is one of the key factors in helping your bottom line. Every $1 saved at this point is an extra $1 in profit. That said it can be false economy if the cost you save is something that can add $2, $3 or $10 to your 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 with staffing costs where a reduction in staffing levels (or hiring of cheaper, lower performing staff) can be a false economy.
Of the overhead costs there are 3 main ones that absorb the majority of this gross profit money - rent, staff and marketing. Rent is not controllable on a day by day basis, so lets look at the other two listed.
Of the two, staff is almost always the highest cost for a business to endure, and not just in terms of outlay on wages and training, but also the hidden costs of lost sales and profit if inexperienced, untrained or unsuitable staff are placed in the position of making the sale. This figure is harder to quantify but it’s predicted it can be a significant percentage of the wage bill, and for some businesses with the wrong staff the cost of lost sales may be even greater than the wage bill being paid! Hiring staff is certainly not a decision to be taken lightly.
A regular review of your wage bill is important – generally 15-20% is the normal percentage of sales spent on wages for the average store. Measuring the timing of your sales (busiest days and hours) and having a door counter can help you minimize your staffing levels for those times that are quiet. Look at your rostered staffing relative to how busy you are, particularly for opening and closing periods that can often be quieter.
Have you reviewed your marketing costs lately? 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. If you haven’t reviewed these contracts, don’t let them continue from habit. They can often be an easy out - the business owner doesn’t have to think about where they will advertise, and in some cases what they will advertise. But abdicating this decision to the media will not be in the best interest of your business. 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.