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Knowing how to measure business success
Imagine a baseball game in which the batter swings at a pitch and hits a ground ball into right field. The batter begins to run the bases as the ball travels all the way to the fence. The right fielder has chased down the ball, picked it up and thrown it toward the catcher. The batter slides toward home plate in an effort to avoid being tagged out.
To make the call, the umpire moves to have a best view of home plate. He observes as the catcher catches the ball with his glove and makes the swipe to tag out the batter. As he makes the tag, the umpire raises his hand and holds up three fingers. With a loud and clear voice he states, “Third down.”
The question we ask at this point is, “How are we keeping score?” Perhaps this is the same question that you would like to ask about your store. If your director has ever asked you about the goals you have for your store, this may be the question you would like to be asking them.
If you were a part of a chain store the first thing someone would look at would be your gross sales. They would look at what you have done for each of the past several years and want to see how this year compares to the previous years. However, as a museum store your situation is likely to be different. Most museum stores do not have an advertising budget. For whatever the reason, your store does not advertise to attract customers to come in and see the merchandise you have.
Instead, you are dependent on the traffic that the museum attracts. Therefore, if the museum has a decrease in the number of visitors – be it because of the economy or because the museum decreases it’s advertising – your store is likely to experience a decrease in sales.
While increasing gross sales would be a desirable goal for any business, your store may not be able to accept that as a measure of whether or not you have had a successful year. Yet your director would be remiss if he or she did not impose upon you a requirement that you establish goals for the coming year. With that in mind, let’s look at ways that you and your director can determine if you are having a successful year.
A first measure would be average ticket size. This measure is calculated by taking the total of the sales for a year and dividing it by the number of sales during that year. The answer tells you how much money the average person spends when they make a purchase in your store. As you improve the sales skills of your staff, you will see that the average customer walking into your store will spend more because your staff has done a better job of suggesting merchandise to the customers. Regardless of an increase or decrease in the number of visitors to the museum, increasing this measure says you are doing better with the number of customers that visit your store.
Another measure would be the closing percentage on sales. This second measure is calculated by dividing the number of sales that occur during a year by the number of people that walked into the museum store during a year. As you work to make this percentage increase, this is an indicator that more of the people walking into your store are spending money. This increase is a compliment to your efforts to create displays of your merchandise so that they better attract the attention of the customer. And after having gotten the attention of the customer, an increasing percentage of customers are making a purchase in your store.
The third measure is the percentage of store visitors. This measure is calculated by dividing the number of visitors to your store over the course of a year by the total number of visitors to the museum. Increasing this percentage indicates that regardless of the number of people that visit the museum, you have done an excellent job of getting more and more of the people visiting the museum to take the time to visit your store.
This improvement has likely occurred because you have succeeded in making the entrance to your store more attractive. The displays that are visible from outside of your store are drawing people into the museum. Perhaps you have created a brochure or coupon that is given to people as they enter the museum inviting them to visit the museum store. In the case of some museums, you have done an excellent job of placing suggestions throughout the museum to suggest people purchase a memento of their visit to the museum. With some museums, the docents may be wearing or using an item that comes from the museum store.
Gross margin is another good measurement of a goal for your store. On a single item, the gross margin is calculated by taking the retail price of the item and subtracting the cost of the item. The answer you get is then divided by the retail price. This second answer is stated as a percentage and is referred to as the gross margin. This same phrase refers to the sales as a whole for the year. If you have increased your gross margin from one year to the next, this is an indication of your skills as a buyer. This indicates that you have found goods to sell in which the costs have either diminished or the selling price has increased.
Turn rate refers to how many times a year you have sold the total of the merchandise you have. This is calculated by taking the “cost of goods sold” which is a number that appears on your profit and loss statement, and dividing it by the average amount of inventory you have at the end of the month. Getting this number to increase indicates that you have had sufficient inventory on the shelf when customers have come to buy yet you have not had too much inventory. And as the turn increases this is a compliment to your ability to manage the assets that have been entrusted to your store.
Days of inventory on hand is a calculation that provides a number indicating that if you were to stop ordering merchandise, how soon would you have an empty store. With a smaller number, it indicates that your inventory is not very old, and that more of it is in saleable condition. It also represents a store that is in a more liquid position financially.
Days of inventory on hand is calculated by first dividing the cost of goods sold by 360. Then divide the current inventory by the number you have just obtained with the first step.
If your museum has a paid staff, sales per employee is an excellent measure of the productivity of the people working for you. The measurement is calculated by totaling the number of hours worked in an average week in your store by all employees and dividing this total by 40. This answer tells you how many “full-time” employees your store has and is likely to have two digits to the right of a decimal point. Divide the annual gross sales by the full time employee number and you have the annual sales per employee. As you increase this number over the next year, this indicates that more of your people are actively involved in selling merchandise to customers and less time doing support work.
Our last measurement is the sales to inventory ratio. This ratio lets you know how well your inventory is producing sales. To get your ratio requires a two-step process. The first step is to calculate the average monthly inventory. Take the sum of the end of the month inventory for each of the past 12 months and divide that number by 12 to get the average inventory. The second step is to take the annual sales of your business and divide that number by the average monthly inventory (shown at cost). The answer is your sales to inventory ratio.
As you increase your sales to inventory ratio, you are demonstrating that as a buyer you know what items to stock and how much of each of the items you should have on your shelf.
These measurements produce statistics that are indisputable. There is another measurement that we did not mention. It was saved for last because the results are subjective. That measurement is customer service. You could create a customer survey and ask customers to rate you using a one to five scale on various aspects of their experience with your store. However, the one true question you would like to ask customers is, “What one thing could we do to make it easier for you to do business with our museum store?”
With regard to setting a goal, perhaps Lewis Carroll said it best in Alice in Wonderland.
“Would you tell me please which way I ought to go from here?”
“That depends a great deal on where you want to go”, said the cat.
“I don’t much care where”, said Alice.
“Then it doesn’t matter which way you go”, said the cat. Set the goals, take the measurements, and next year can be a great one for your store.
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This article is copyrighted by Tom Shay and Profits Plus Solutions, who can be reached at: PO Box 1577, St. Petersburg, Fl. 33731. Phone 727-464-2182. It may be printed for an individual to read, but not duplicated or distributed without expressed written consent of the copyright owner.
Profits Plus Solutions, Inc.