May 28, 2014
Copyright (c) 2014 Ted Hurlbut
In my last post, I introduced 6 tips to help you manage your retail business expenses. Here are 6 more tips to help you manage specific expense categories:
1. Purchases (versus Cost of Goods Sold): Purchases is the value of inventory coming into the store, at cost. Cost of Goods Sold is the value of inventory being sold out of the store, at cost. Cost of Goods Sold is what is shown on the Profit & Loss, but Purchases is what you pay for. If Purchases exceeds Cost of Goods Sold inventory is going up and cash is going down, which is not sustainable. Thus, effective inventory control is the first and most essential piece of effective expense control. Aligning inventory coming into your store with planned sales going out will keep inventory levels in line, and align vendor payables with anticipated cash flow.
2. Payroll. Payrolls that are weighted toward full-time – whether hourly or salaried – are more fixed than variable. There’s not a lot of flexibility in how payroll expenses can be managed. On the other hand, payrolls that are weighted toward part-time employment are more variable than fixed. There may be a lot of flexibility, but there may not be the stabilizing presence that full-timers provide. A good balance between full-time and part-time employment results in the stability and consistent customer experience full-timers can provide, with the flexibility of part-timers, and the ability to manage payroll expense at a sustainable percent of sales.
3. Rent. The structure of your lease agreement reflects your risk tolerance (or, unwittingly poses unseen risk). A rent structure made up of primarily flat rent caps your rent expense, but can create financial stress during periods of weak sales. A rent structure with a low base but significant percentage rent clauses may protect the downside scenario, but allows your landlord to participate in any upside growth. A well thought out blending of flat rent with percentage rent can minimize and control your exposure across a range of possible sales levels.
4. Advertising/Marketing: Traditional advertising, aimed at attracting new customers, has become increasingly ineffective, as traditional media loses its predominance, while still remaining relatively expensive. In this new environment, however, it is far more effective and efficient to focus marketing efforts on existing proven customers, via email and social media. The objective is to deepen and strengthen relationships, increase the frequency of visits and the average ticket, and leverage those existing relationships to reach new potential customers. And, these new media are far, far less expensive than traditional media.
5. Interest Expense: Many small retailers have emerged from the worst of the recession carrying significant amounts of debt. The best way to think about this debt is that it’s a long-term problem that requires a long-term solution. You can get in trouble pretty quickly if you feel compelled to throw every available dollar at that back debt. It’s far better to re-finance that back debt – as well as any credit card balances – with a term loan, with sustainable re-payment provisions. Further, seek out an appropriate line of credit to finance seasonal working capital needs. Lenders are becoming increasingly willing to lend if you can show that you are operationally throwing off consistent positive cash flow.
6. Travel, Entertainment and Meals: All too often, I run into situations where clients have been mixing business and personal expenses. They feel they’re ahead if they can run things like travel, entertainment and meals (among other things) through the business so they can be deducted as business expenses. When that happens, however, they end up sacrificing discipline and control over an expense category that can quickly add up. Separate your business finances from your personal finances. Run your business as a business and maintain good financial discipline in running it. Your business is not an ATM.
In the world we now live in, financial success requires a commitment to proven retail business fundamentals, operational discipline, and a heightened attention to detail. Further, financial success requires a commitment to continually enhancing managerial capability, including the ability to manage your retail business expenses. Follow these tips, and you’ll find that it’s easier to keep expenses under control, and generate consistent positive cash flow!
About the Author
Ted Hurlbut is a retail consultant, coach and speaker who helps independent retailers increase sales, profitability and cash flow by leveraging his deep expertise in the core retail disciplines. To learn more about how you can benefit from Ted’s proven retail know-how, visit his website at http://www.hurlbutassociates.com or download his report “The 16 Essential Elements of a WINNING Independent Retail Strategy”.