Doctor, doctor give me the news

What are your numbers telling you?

It is the time of year when you go to the doctor for your annual checkup. They use a stethoscope and a host of other devices to probe and examine. Some of us have an EKG and perhaps an EEG. After a barrage of questions and a review of any medications you are taking, the doctor begins to keystroke on their desktop. In a minute, the doctor hands you between one and five pieces of paper which are the instructions to the lab regarding the blood work to be done. Wait a week or so and there is a follow up visit or call with the doctor.

“Doctor, doctor, give me the news”, is not only a song by Robert Palmer, it is the essence of your question. The challenge is the doctor begins to give the results of the lab work and other tests using numbers and words that only another doctor can understand.

Being in front of a doctor can be intimidating. Some of us have the skills necessary to get the doctor to explain the results, and give the necessary guidance and instructions, in terms we can understand and respond to. Others leave this follow up visit knowing as little as they did when the first visit started.

There is a strong similarity in the experience with a doctor and the occasion when a store owner is looking at financial information about their business. Having all those numbers in a financial statement from your accountant or point of sale system, additional information from your point of sale system, and even having an accountant that you like, is still not enough to get you and your store to the point where the numbers work to your advantage.

The most important, and missing at this moment, is the owner and their ability to understand, interpret, and make decisions based on all this information. With this article we will help you to become the owner who can move their business forward; see problems and know how to solve them; and rest comfortably at night because you are in control.

We begin by explaining not all the numbers you will want and need are contained in the documents the accountant prepares for you. We will also stress the value of partnering with an accountant. Not just any accountant, but one that has a strong understanding of retail.

The numbers you need not shown on a financial statement are the square footage of your store; not just your sales floor but the entirety of the building. You need to be tracking the number of items sold in your store as well as the number of transactions. These numbers, in conjunction with those from your financial statements and point of sale are going to tell you a lot about your store.

Let’s start with dividing your total sales, for a month or year, and divide the sales by the number of transactions occurring in the same time period. The answer is the size of your average sale. You want to continually track this so you determine if you are getting better at having the products your customer wants.

The second statistic we want to examine is your average line count. From your point of sale system we need to know the total quantity of items sold for the month or year, and the number of transactions for the same time period. Divide the number of items sold by the number of transactions to get an answer which is your average line count. What does this tell you? If your answer is very low, it is indicative of your salespeople not doing their job.

The customer came in your store to look for something and purchases it. If your employees are not suggesting additional items, your average line count is low. Obviously, your employees are nothing more than cashiers. Hopefully you hired them to be salespeople. This low answer implies you need to be teaching your staff how to sell.

Our third and fourth bits of information we want to share are closely related. They are the sales per employee and the personal productivity ratio.

Payroll is often the easiest expense to get out of line as a percentage of sales. Sizable stores can make the mistake of having too many people performing tasks that are not sales oriented.

Sales per employee is calculated by taking the total number of hours worked over the course of a week. The number of hours will include yours if you are an active owner. Divide this number by 40 which represents a “full time week”. Divide the sales for a week by the answer from the last calculation to arrive at amount of sales per employee.

Tracking this number on a weekly basis can be a tedious chore. Most people will track the number on a monthly, quarterly or annual basis.
Hopefully, you have spoken to your employees about “upselling”. You advertise a special price on products with the hope of customers coming into your shop to see that item. Of course you stock products that are more expensive and of a higher quality. You make more profit on these items. 

The personal productivity ratio tells if your comments to your staff have affected them.

The math for personal productivity ratio starts with the total of payroll for a year and dividing it by the gross profit for the same time period. The answer is then multiplied by 100.

We used the term “gross profit” in this calculation which requires our taking a side step and sharing how it is calculated. Getting to gross profit is going to require us to also look at “cost of goods sold”.

The gross sales is usually the number at the top of your profit and loss statement. The cost of goods sold is usually the next line with the gross profit being the third line.

The gross sales represents the total of sales for whatever period of time the profit and loss statement covers. Hopefully you are having a profit and loss statement created each month. Surprisingly, while you might think gross sales is an easy number to calculate, we have seen some variations.

We like to think that gross sales should represent the total of the cash, credit card, gift cards, house charge accounts, and checks that get into your register. It would be net of any discounts or sale prices. Even when a check from a customer bounces, or a credit card sale turns out to be a stolen card, the sales should be diminished to reflect what are the true sales.

Sales tax should not be shown as a part of gross sales, nor should it be listed as an expense. The only difference in sales tax collected and sales tax paid to the state is the small dollar amount your state allows you to keep as the collecting agent.

Having any of these items appearing as an expense does not make sense to us. And, if your lease is one in which you pay rent based on gross sales, you are paying additional rent by having any of these items show up as an expense.

That second line we mentioned is the “cost of goods sold”; probably the most misunderstood and incorrectly calculated number on the profit and loss statement. Fortunately, it can be easily calculated.

If we are looking at a profit and loss statement for any individual month, the cost of goods sold starts with the inventory on hand at the start of the first day of that month. The inventory is calculated at cost.
The second step is to calculate the total of inventory received, at cost, for that same month. Step three is to total the inventory, at cost, at the end of the last day of business for that month.

Take the beginning inventory, add the inventory received, and subtract the inventory from the last day, and you have the “cost of goods sold” for that month.

Subtract the cost of goods sold from the gross sales, and your answer is the gross profit.

Now you have all the information necessary to calculate the personal productivity ratio.

The last measurement in this second group is called the operating margin per square foot. This is some of what can make numbers confusing as the margin is not a part of the calculation. Instead it uses the gross profit which is the same number we just defined.

This is not one of those calculations you may think the accountant determines just for the sake of throwing a bunch of information at you. The purpose of this calculation is to help you determine what inventory goes in each part of your store and how large each category of merchandise should be.

Think about items in your store that require a lot of space. You may sell a lot of them, but the price of each item is relatively low and the margin is also low. Shouldn’t you reconsider just how much space it occupies? Absolutely!

We need the total square footage of your building. This includes office, storage, rest rooms, and additional floors that you rent in the building. What if you do not use the second floor or the basement? They are still a part of the calculation because this is square footage you are renting, insuring, and perhaps heating, cooling and lighting.

You can now begin to see how these numbers are inter-dependent on each other as well as used in multiple calculations. However, this calculation is done on an annual basis.

Take the gross profit for a year and divide it by the square footage of the building. Multiply the answer by 100 to get the operating margin per square foot.

The final calculation in this article is the sales per square foot. This is most likely the number that is best known by retailers. Considering all the detailed information we have already shared, this is the easiest calculation to make because we have already defined how to determine all the components.

Take the gross sales for a year and divide it by the total square footage. The answer is the sales per square foot.

Once you have made the calculations for each of these we have shared in this article, there are likely two questions you will have. The first is, “What should my numbers be?” and the second is, “What can I do to make the numbers better?”.

The second question is easier to answer. Look at the calculation you want to improve. Look at the numbers used to make that calculation. As an example, look at sales per employee. While the two easy answers are increase sales and/or decrease staff, within the decreasing of staff you could also look at how much of your staffing is spent in non-sales hours.

That would include office staff, cashiers, stock room as well as looking at your schedule to see how much of your time is spent in the office and how much is spent on the sales floor.

The second example is the sales per square foot. In a similar fashion, you look at how much of the space you occupy is dedicated to stock room, office, rest room, and for those having a second floor or basement, how to transform that space into sales floor.

Many people expect the answer to the first question is going to be there because of some industry standards. Perhaps you expect your accountant to have the answers. Applying these questions only to the calculations we are discussing today, with any answer given to you there should be a concern for where the answer came from and how it was determined.

If the answer comes from “retailing in general” just look at all the types of stores this includes. If it includes convenience and groceries, their business model calls for a lower gross margin and higher inventory turn than most. If it includes ladies clothing and shoes, their business model calls for a higher gross margin and a lower inventory turn than most. That brings us back to what “average” is.

My father used to explain average by saying if you had one hand on a hot stove and the other hand on a block of ice, the temperature is average. Definitely not an “average” to guide you.

Most definitely you want to look at where your business has been for the past few years. Look at the past five years of our economy; it has been growing. Has your store gotten better over the past five years in each of these measurements? That should give you a guideline as to where you want to dedicate your efforts.

Next time we are together, we are going to look at the numbers from your profit and loss statement and your balance sheet. We will look at what they tell you and what you need to pay attention to. In the meantime, you have plenty of items to focus on.

If you would like to send this article to someone you know, please use this form to forward this page:

Your Name:	E-Mail:
Friend's Name:	E-Mail:
	Security Code: