Have you ever tried to work someplace where you had no light? Have you ever entered a strange room and fumbled for a light switch? As a child, I had a scary and scaring experience with my father. We were trying to find our way back to the car after fishing at a remote lake. The night was moonless, so we could see nothing. We tripped over boulders, and walked into bushes and trees. I wondered if we would be lost forever. Fortunately, we found our way out, but I vividly remember this harrowing experience. Working in the dark can be both scary and dangerous. Yet, many retailers choose to do just that.
Working in the dark means not knowing how well your business is doing and where you stand compared to other retailers. Working in the dark means running a business by the seat of your pants. One of my clients called me for help. He said he was busy; had lots of work, but couldn't pay his bills. He wanted my advice. I told him to "Turn on the light." He was puzzled. Then I explained that you can't fix, improve, or change anything until you know where you are and how you are doing. Whether it is walking through the woods or running a business. You need to turn on the light.
To be honest, I should be the last one to preach this. I ran my store for ten years in the dark. I didn't know how to read a financial statement. I felt I was doing okay, because I could pay my bills and there was money in the bank. Operating like that is like feeling your way around a dark room. Sometimes you make it out okay. Sometimes you stub your toe, bang your shin, or maybe something worse.
In our consulting practice I have found that those who watch and monitor key financial numbers are much more successful. The key to improvement and change is understanding your current position. That's why "feedback is the breakfast of champions." When you turn on the light, you get feedback. Keeping score at an athletic event or getting feedback from a coach gives you awareness. Once you are aware, you can change.
In a retail business that's means monitoring the key numbers. The first number you look at is your break-even point. It comes when you have sold enough to cover your variable costs (like Cost of Goods Sold) and have enough left to pay your fixed-costs (payroll, mortgage, utilities...) for the year. You don't earn a nickel of profit until you hit breakeven. If you don't know your breakeven, turn on the light and calculate it.
To determine your current financial status, the fewest numbers you need to monitor is 13. You should have these 13 figures by the 5th of each month.
From your Statement of Cash Flow (SCF), monitor two numbersCompare your actual Cash-Flow to your forecast (Yes, you need to forecast your cash-flow.) Turn on the light.
Compare your actual Cash-Flow to the prior period. You should track your cash-flow on a chart that helps you compare it from one period to the next. (If you e-mail me at firstname.lastname@example.org, I will send you a chart for monitoring your numbers.)
From your Balance Sheet, monitor four numbersCompare Accounts Receivable as a Percentage of Sales to the prior period. Accounts Receivable are key cash drivers. When you increase them, you decrease your available cash. Can you afford that? Turn on the light.
Compare Inventory as a Percentage of Sales to the prior period. Your inventory likely costs you 2 - 3 percent of its value each month. Thus, for every month you carry flooring inventory, you need to increase its sale price by 2 - 3 percent, to cover your carrying costs. Do your sale prices yield you enough return? Turn on the light.
Compare Accounts Payable to the prior period. You want to pay each on the last date when you can still pay the least for goods. Did you know that you can add two margin percentage points to your bottom line simply by taking your cash discounts? Turn on the light.
Compare your Current Ratio to the prior period. Current Ratio is Current Assets divided by Current Liabilities. It reflects your ability to pay your bills. You should have $2 in Current Assets for every $1 you owe in Current Liabilities. Do you know your current ratio? Turn on the light.
From your Income Statement, monitor five numbersCompare your Sales to your forecast and the prior period. If you are not growing your business, your banker thinks that you are probably going out of business. You growth rate needs to be as close to double digit (10 percent) as possible. In the past 12 months, the average retailer in the country increased sales by 9 percent. Are you average?
Compare Sales per Salesperson to prior period. Examine the Closing Rates for each salesperson, and the size of each one's Average Sale. Monitor employee productivity.
Compare Sales per Employee to prior period. How does the productivity of your employees compare to industry average? If you don't know, turn on the light.
Compare Gross Margin as Percentage of Sales to prior period. Gross margin affects breakeven, is a major cash driver, and reflects your value proposition. What's your average gross margin? Are you above or below the industry average?
Compare Expenses as Percentage of Sales to prior period. Expenses should be viewed as a necessary evil. Monitor them; keep them from rising too fast. Also, find the cost of every mistake. When you spot a mistake, find the cause. Then, change your work-system, so you don't repeat the mistake. (Our consulting services offer systems for avoiding mistakes.) Every dollar you save goes directly into the Profit drawer.
From the Income Statement and Balance Sheet, numbersCompare your Return on Total Assets to prior period. Return on Total Assets tells you how much return you are making on your investment in the business. Would your money have earned you more, if you had invested in the stock market? Turn on the light.
Compare Inventory Yield to prior period. Inventory yield will tell you how effectively your inventory produced Gross Margin. Do you know your Inventory Yield? Turn on the light.
It may seem little a lot of information to digest but it is your business. When you know each of these numbers by the 5th of the month, you can work in the light. Take it from me, an experienced dark-worker: turn on the light. Run you business by the numbers. You won't stub your toe as often. But, more importantly, knowing where you are will keep you from walking over a cliff in the dark. Where there is light, you can see where you are.