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Managing by the Numbers
Why financial statements are important to use
How many of us have either asked ourselves, or heard another dealer comment that running a hardware store today is very different from what it was twenty years, or even ten years ago? Frequently, that statement proceeds comments about the paperwork that is now required. It may be OSHA requirements, MSDS papers, or government. More frequently it seems to be with the items which are now necessary tools for us to be profitable. Items that are often mentioned in under this heading include variable pricing, price sensitive items, advertising plans, income statements, balance sheets, and hopefully cash flow projections.
We believe that part of the fun and the challenge of owning and operating a hardware store is our continued efforts to better control our expenses, increase our sales, and manage the information. It is true that the business management skills needed today are very different from those needed years ago, and it does feel like it takes many more skills to survive. Expenses are harder to control, much less decrease, and sale increases are a major accomplishment, not a given. And at the end of the month or year, have we made any money, and is there enough cash to pay the bills.
As we spend our time and energies on these three broad categories, we find it necessary to have an increasing amount of research material available to us, and an increasing mastery of skills to be able to produce positive results from our efforts.
One of the old business sayings was that it was easier to make a dollar by cutting an expense than by increasing the sales. But how can we know which expenses are out of line? Many wholesalers have cost of doing business surveys available, as does your regional hardware association. Expenses that we thought were necessary were given a second look after we found that their category of expense was much higher in our store than the national or regional average. And any category that we can manage to get to be one percent lower than anticipated, is one additional point for the bottom line of the income statement.
From the "increasing sales" side of the equation, few retailers are able to report that their overall margins have increased with the additional competition. And, we have yet to hear of the management guru that will suggest that the best way to increase sales (and profits) is by simply lowering margins.
Again, we have found a wealth of information to assist us with margins. We have available to us reports from our wholesaler that show us by department and fine line, their average margins, both nationally and regionally.
Again, we work to find pockets within our store where we can gain additional margin to offset the items that are price sensitive.
Price sensitive items have been around in our market for many years. The need to keep track of these items started when the mass merchants and warehouse stores began buying space in the newspaper like it was going out of style. There were more direct mail pieces than you would care to count. Prices on items that retailed for $20. were now going for only pennies above the best direct ship price you could get.
There seemed to be an ongoing contest to see who would sell for less, regardless of cost. In our market, one store won out, but in markets where the competition is hot, this price war strategy continues. It is interesting to note that when the battle does come to an end between the giants, the survivor has often began to raise their prices as he eliminates his competition.
In today's market, while the surprise is over, there is still the need to do our homework regarding pricing. Again, there is plenty of assistance and information from wholesalers. Surely, there are few hardware retailers left in today's market that are able to charge the full suggested price for his entire selection of general purpose batteries, and keep that margin everyday.
It takes a combination of finding the blind items and price sensitive items for a store to attempt to stabilize the margins. After over 10 years of work, we have found that the total number of sku's necessary for our price sensitive list is slightly over 400.
The third component we mentioned were the financial sheets. The balance sheet, income statement, and cash flow projections are the only way we are going to know if we are succeeding in our efforts regarding sales and expenses. The balance sheet will be affected each month by the amount of profit or loss, as well reflecting the change of any assets that we purchase or sell. It will also change as we make changes to any liabilities, such as a loan at the bank that we might increase or decrease. There will also be monthly differences in current assets (cash and accounts receivable, for example) and current liabilities (accounts payable) that will have changed.
While the income statement tells us of our profit or loss, we can gain additional information if our statement is arranged accordingly. We have rent grouped with our taxes, repairs, maintenance. Payroll is grouped with payroll taxes, group insurance, and our benefits. Grouping expenses like this causes us to examine areas as a whole, realizing that if we were to cut payroll there are several other expenses that we can expect to have decrease.
The most important is saved for last. The cash flow statement that we use, projects our cash needs and availability for the next twelve months. Unlike the income statement, we now track sales according to how we are paid. For our house charge accounts we will expect to see that money next month. As we track our seasonal ordering, we are able to determine when these bills will become due. Other expenses, property taxes, and year end rent overage, as well as other income, interest income and dividends, now come into play. A banker is more receptive when we are able to tell him many months in advance of our cash needs.
We all have many tools that we sell that are very important to the needs of our customers. These three areas of tools are very important to the existence of each of our businesses.
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.