As a re-cap, the five steps to success are:
You are right to be concerned about the ecomony. Whether the economy is GOOD or BAD, the retailers who will do well are the same ones. They are those retailers who keep their inventory under control either by use of a formal Open-To-Buy or some other means, keep their expenses under control by use of a formal budget and have a motivated selling staff. These retailers are also not carrying an excessive debt load, with it’s accompanying interest expense. If you are one of these retailers, congratulations. I do not doubt that you will come out of this current recession doing well.
However, if you have too much inventory, expenses that are too high, too much debt, and a selling staff that just stands around waiting for a customer to come in the door, you are in trouble. Unless you change the way you do business, and do it quickly, you might not be around for the business turnaround that is sure to come.
Do you know where you want your store to be 12 months from now? I'm sure you would like to increase your bottom line - - But, do you know exactly how much you want to increase it to? Do you know how are you going to do it? By increasing sales? By decreasing expenses? By increasing gross profit through better merchandising?
A formal, written business plan will help you to focus on these questions so you can determine the best way for your store to reach its goal. Unless you write down your plan on paper, refer to it often to see how you are doing, and make changes as needed you will never reach your goal.
If you have never done any formal planning you may be asking yourself how anyone can possibly plan for the future. There is no crystal ball to help anyone accurately foresee the future and there are many uncertainties that are impossible to foretell. Strikes, fires, new decisions by competitors, shifts in the economy - - these all have the potential to upset your company's plans. However, by using all the information that you do have available - - your store's historical figures, the news, trade organizations, other retailers -- you can develop a good set of plans.
Well-developed plans help set the direction the company will take in the future and provide the opportunity to change direction if needed. By comparing actual to planned figures you will be able to highlight trouble areas and make needed changes so the adverse effect on the bottom line is minimized.
A good plan must be realistic, achievable and encompass every facet of the business. When working with my clients there are several tasks I require them to do every year. They are:
1. Prepare an annual Gross Margin Plan
I am going to give you a very brief summary of each step at this time. In coming articless I will go into more detail with each step listed above.
Gross Margin Plan
The Gross Margin Plan contains a lot of information. Included, by classification, are annual sales, sales contribution % when compared to the total company sales, Initial Markup % that you believe you can achieve, Markdown % plan, Stock Turn Rate goal, average inventory, Gross Margin %, Gross Margin dollars and something you may not have heard of before, the Cumulative Gross Margin. This is all very useful information to the store owner and buyer to use to review the performance of each classification - - before the Open-To-Buy is set up and before the pro-forma Income Statement is developed.
Once the Gross Margin Plan is set to your satisfaction, the data included is then used in the preparation of the Open-To-Buy and for the company’s budget (pro-forma Income Statement).
The Open-To-Buy is a tool. It is not something etched in stone. That is why, when working with my clients, I recommend revisions during the year as needed.
Pro-forma Income Statement (budget)
Once the Cost of Goods Sold section has been completed to your satisfaction, it is time to plan expenses. Expenses are not hard to plan. I usually recommend that clients start with their actual numbers from last year. Then, you can look at current conditions and adjust the numbers as needed. For example, you may have heard on the news that your electric company will be increasing rates by 15%. That means that when you plan this year you will want to increase last year’s numbers by 15%.
Once all the numbers are in place it is time to put them together and make sure you are planning a profit. If it shows a loss it is time to go back through your expenses to see which ones can be decreased or even eliminated.
Cash Flow Projection
The method I use is to start with Net Profit and make adjustments as needed to convert it to cash. For example, depreciation is an expense but does not involve the use of cash so that is added back to Net Profit. In the same way, any payments to loan principal do not show up on the Income Statement (only interest does). So, any payments of loan principal need to be deducted from Net Profit.
Sales Staff Productivity
If you are interested in improving your success as a retailer, please see our other aricles in this series.