The Valas Viewpoint: It's a Numbers Game
When I ask most dealers “how’s business?” they’ll usually say “Great!” or “down about 3% from last year, but the last two months have been smokin’,” or “sales are ok, but margins are tough.” I’ve never heard anything like “inventory is down so turns are better,” or “sales per employee are way up,” or “even though I’m advertising more, as a percentage of sales, advertising is down.”
Almost everyone tracks sales volume—even compared to last month or last year—and occasionally, I’ll hear about coming close to making a budgeted goal. Most also know how much money they’ve made. But only the savviest—and sometimes most successful—understand the implications of productivity and balance sheet management.
Tracking sales per square foot, profit dollars per associate, sales per employee, and profitability by brand and category can dramatically improve business results.
Apple stores generate the highest sales per foot of any retailer—nearly two and half times more than average. In your store, you have some areas that generate more sales than others. Are those areas the most prominent? Best lit? Are the products in them best merchandised?
With sales per square foot in mind, a retailer I recently visited in Connecticut expanded his laundry products into what had been a video demo area. Although still committed to electronics and particularly to custom installation and networking, that space was more productive by expanding his appliance assortment.
If one associate sells more extended service contracts than another who consistently sells at a higher margin, which one is better? Trick question—the one who brings the most profit dollars to your bottom line is the best. Try looking at all your associates for the total profit they each generate.
Increasing the average number of items per ticket will reap great rewards. There’s bound to be more profit in sales with five or six line items—warranties, accessories and other add-on products—than one that just has the product the customer asked for. Compute the average items for each sales associate and coach those selling under the mean to get to that average. Each month you do this, your average will go up.
Nearly every retailer has faced a cash shortfall in a time of booming sales. Your promotions worked and store traffic was brisk. Associates did a great job in closing each prospect. Yet somehow you can’t pay your bills at the end of that same month. Where is the money?
The answer is in the balance sheet. Chances are your cash is either in inventory, fixed assets or accounts receivable. Close tracking of inventory turns, GMROI, and Current, Quick and Cash ratios will help you avoid the kinds of pitfalls described above.
There was a time when four inventory turns (annual cost of goods sold/average inventory) was the industry standard. But now, when most stores can get deliveries from appliance vendors every week and when CE prices are as volatile as commodities, it might not be prudent to stock that much product. Without know what your turns are on every category and for every brand, making purchase decisions is like throwing darts.
GMROI—Gross Margin Return on Inventory (annual gross profit $/average inventory)—computes the return based on both gross margin and inventory turns. If you have to buy a large quantity to get a discount on a product, it’s only a good deal if you’re going to get a very high margin to offset the slower turns. You’ll be paying warehouse costs, maybe finance charges and risk the merchandise getting stale or damaged. That risk may be worthwhile if the return is good enough. A return of $2 for every dollar invested would be a good goal to shoot for.
Liquidity ratios help you ensure that you can pay your bills. Current Ratio (current assets/current liabilities) gives you the biggest picture. You want no more the $1 in bills for every $1 you owe. The Quick Ratio (current assets – inventory/current liabilities) tells you how much you can raise to pay your bills if sales slow and inventory sits. The goal here is .50 in quick assets for every $1 of current liabilities. The cash ratio (cash/current liabilities) tells the real story. You should have at least .20 in cash for every dollar of bills you have to pay in the next 12 months.
Financial statements are like scales. If you weigh yourself regularly, you’ll know what kind of actions you need to take to stay financially fit. Track your productivity and balance sheet trends over time and you’ll have the information you need to run a profitable and stress-free company. •