'The Magnificent Seven': Rx for Prospering in a Down Economy
It's easy to expand your store and profit when business is good. But when the economy sours, only strong businesses survive. Like cream, they rise to the top - while weaker businesses drown in deep yogurt! How prepared is your store for the recession? Allow me to share with you what I call my "Magnificent Seven" strategies for strengthening your retail business in difficult times.
First, don't deny reality. Business cycles - both good times and bad - are unavoidable. They contribute to one grim statistic: the average company's lifespan is only 7.5 years. So, if your business is not eight years old, the odds are it will never be.
You should constantly plan for the next recession. Don't wait for bad times to force you to correct sloppy decisions or habits that unintentionally take root during boom times. These bad habits include overstaffing, overspending and overextending on everything from marketing to administrative overhead. They also include the failure to enlist customers as loyal patrons who will return to you in good times or bad.
Second, review the seven strategies I detail in this article. You can leverage their power, so that you thrive - not just survive - in this down economy. The best measure of a business' worth is whether it flourishes in bad economic times, not just in good.
I know it's easier said than done, but try to never run out of cash. Cash is king, and it can be a merciless tyrant. Just as a car dies without fuel, a business - whether it be a mom-and-pop carpet store or a Fortune 500 company - can't run without cash.
Every year, thousands of good-sized, first-rate companies go bankrupt for one core reason: the owners/managers ignored cash flow. They failed to match the amount and timing of their expenses to their receipt of cash. The result? The company ran out of fuel.
How does cash flow differ from cash? Cash flow measures the amount of cash flowing into the business as well as the amount flowing out. Cash flow is the difference between those two flows as measured over a monthly, quarterly or annual period. At the end of a period, if you have cash on hand, you have positive cash flow. But, if you've emptied your cash bank (like a gas tank) before you arrive at the end of the period, you have negative cash flow. Just as you can't pretend to run an engine without fuel, you have to borrow cash if you experience a shortfall - or die.
Floor covering stores don't run on profit, nor do they run on volume increases. They run on cash. Your best hope is to project the most realistic prospects for the future. Then, industriously collect enough cash to pay the bills.
You become a pro-active manager when you project your cash flow. Failing to project makes you reactive.
This month, project how much cash you expect to flow into your business, and then project how much will flow out and the dates when it must flow out. Follow up by monitoring the flow to prevent your running out of cash. Doing so leads you to the second strategy of the Magnificent Seven.
Monitor your break-even point on a daily basis. Do you know yours? Break even is the volume of revenue you need, at your current gross margin, to pay your bills (see equation 1).
For example, suppose your fixed expenses (rent, salaries, telephone, insurance, etc.) total $20,000 per month. And assume your average gross margin, including labor and freight, is 35% of sales. Also assume that your variable expenses (sales-related costs such as commissions and advertising) are 6% of sales. Therefore… (see equation 2).
In this example, only after you've sold $68,966 will you earn your first dollar of profit for the month. Daily monitoring of your break-even point leads you to Strategy 3, which directly enhances Strategy 2.
Monitor expenses on a daily basis and eliminate waste. As Benjamin Franklin said, "Waste is worse than loss." A dollar saved is a dollar earned, because every dollar saved from current operating expenses goes directly to your bottom-line profit.
You'll see profits grow if you screen - and justify - every expense every day, every month and every year. Eliminate nonessential expenses the moment you identify them. Start by examining your five largest expense categories. Are you getting the maximum return for each dollar spent? Then, look for wasted time. Time is money, and eliminating time-wasting practices saves you money.
When you misspend one dollar, you have really wasted two - the dollar you misspent and the dollar you could have spent well.
Strategy 4, which I'll cover next, improves the effectiveness of Strategies 3, 2 and 1.
Monitor your gross margin every day. Business is not a game of volume. Business is a game of margins.
If you keep your gross margins at the low end of the range, you limit your choices. For example, if your sales produced a 35% gross margin, and if you wanted to offer a 10% discount, you must increase your revenues by 81% to earn the same profit.
That's a stiff ratio. In bad economic times, storeowners who don't know their gross margin percentage and their break-even point are tempted to increase ad expense and lower prices in hopes of gaining sales. But before you do that, run the figures. Would a 10% discount draw enough customers to nearly double your volume? If not, pick a different strategy. If you're going to go broke anyway, why go broke tired? Go broke rested!
Strategy 5 builds on Strategy 4.
Monitor and measure the productivity of your sales force each day. Your store's reputation is shaped by the customer's personal experience with your people. When performance is measured, performance improves.
Coach Pat Riley once took an average NBA team to the league finals. He achieved that, in part, by measuring what other teams didn't bother to measure.
Hopefully, you get my point. So, what should you measure in your retail store? I suggest the following:
1. Monitor daily sales and the gross margin for each sale. Establish systems that encourage salespeople to sell higher-margin floor coverings.
2. Monitor the average sale. Challenge all salespeople to increase theirs. (It's like asking a fast food customer if he wants French fries with his hamburger.)
3. Monitor the average closing rate. (That's determined by comparing the number of prospects they talk to vs. the number who actually buy.)
Do they get the name and address of everyone they talk to?
Do they follow up with thank-you notes or phone calls to the people who don't buy on their first visit to the store?
4. Monitor how often each salesperson asks for referrals from a satisfied customer.
5. Monitor how much your sales force produces during their times in-between customers.
Monitor your accounts receivable on a daily basis. Some salespeople blithely offer credit to customers when they fear they'll lose the sale. Stop that today! Withdraw their authority as "lending officers." Your store is not a bank.
Establish a cash policy and stick to it. For retail sales, you should have zero accounts receivable. Offer a private-labeled credit card instead. Not only will it increase your average sale, it'll make your customer more loyal. Credit customers buy more, buy better and feel more loyal.
Monitor inventory turnover. Don't buy more than you can afford. Here's a rule of thumb: project your cash flow. Then fix your open-to-buy formula.
1. Determine the gross profit percentage for any inventory you are considering buying.
2. Multiply that gross profit percentage by 360 days.
3. Ask yourself, "Will I probably sell this item in that number of days?" If so, you can afford to buy it. If not, you can't.
The secret to thriving in a down economy is discipline - specifically the discipline to monitor these seven key drivers. Most of us think that working harder and selling more is the answer. Ironically, that often worsens the problem. The real answer is doing what yields better results.
If you're thinking you're too busy to apply these Magnificent Seven strategies, you are working against your interests. You are imperiling your store and, in fact, may be heading downhill into bankruptcy!
Have you ever played the game, "Remember the Carpet Mill?" Do you want your store to become an answer in the game, "Remember the Floor Covering Store?" Or do you want to flourish in bad times, as well as good?
It's wholly up to you!