(If you like this article and wish to pass it along to someone else, please use our on-line form)

When you’re hot you’re hot, and when you’re not, why?

Are you being attentive to your business?

Remember early March 2020? Life was good and so was business. The recession of 2008 was a distant memory and spring was upon us. There was something in the news about a medical challenge in China, but it was only a mention in the daily news.
Then everything changed. There were businesses - dry cleaners and restaurants as examples – whose business went to near zero. Other businesses found themselves with an abundance of business as everyone’s work, social, and private lives shifted to focus on people staying in their homes – alone.

If you sold a product that would relate to a person being at home, your business was experiencing a tremendous sudden growth. Bicycle shops sold more because people would not take public transportation. Kitchen supplies sold because you ate every meal at home. Liquor stores sold a lot more because… well, you understand.

There was not so much the issue we experienced in the past year with rising costs and product shortages, as there was simply a demand for what you sold. Your business was hot!

The challenge was that many business owners became very sloppy. With sales booming, and all that extra cash in the drawer, owners did not mind using money on additional staff and bulking up their inventory. The amount spent on operating expenses grew simply because all the focus was on the additional sales and expenses were left unmonitored.

When you are monitoring your business, instead of only looking at the top line – sales – and the bottom line – net profit – it is important to be aware of your gross margin and your expenses as they are stated as a percentage of sales. To that extent, we have created an online calculator that will allow you to compare your sales to date for this year and compare it to the year end total for each of the past three years.

When you utilize the calculator, compare your gross margin for each of the four years. If there is a variance in the four gross margins, do you know why that happened? If you think a diminished gross margin is because of a price increase in the cost of the inventory, why are the retail prices of items increased to compensate?

When you look at the expenses in this calculator you will see they are arranged in a unique manner. All of your expenses dealing with advertising and marketing are grouped together. All expenses that are a part of payroll (payroll, taxes, workman’s compensation insurance, any health or life insurance, incentives and bonuses) are grouped together. The same is true with all the expenses related to your business occupying the building. And the last group of expenses are all the remaining expenses that do not fit into one of the three previous groupings mentioned. Beneath these four groupings is a line that shows the total operating expenses for each of the three previous years and the year to date.

Examine each of the four areas, and the total operating expenses as a percentage of sales. Is the percentage number consistent? This is the true comparison in a business. If one year your payroll is 17% of sales and 24% of sales in another year, it will be easy to see that the payroll was not carefully monitored.

Whether we are experiencing a pandemic, endemic, recession or a period without any description, gross margin, advertising, payroll, occupancy, other expenses and total expenses, should have a degree of consistency. This is not to say you should not be trying to improve each; just that these percentages should not be bouncing up and down because of a lack of attention to detail.

When you are hot, you should be hot in all aspects of store management. And if you are not, you are going to pay for it when you look at the bottom line.

There is also the concern of inventory. It was later in the pandemic that many retailers began to experience a shortage of product availability. We spoke with a retailer recently who adopted a policy of ordering 50% more of everything they wanted with the expectation there would be sizable shortages.

Such a buying strategy works if there are sales to support that strategy as well as the appropriate product shortage from vendors occurs so that the business does not receive too much inventory.

Maybe your business does have too much inventory right now. It does not matter what you did or did not do, to cause the situation. The issue is there is more inventory sitting on your shelves than you need.

If you have found yourself having to borrow money, or worse yet having to pay for inventory with a credit card that charges 18% or more interest, this is the issue that requires your immediate attention.

Think back to the article from earlier this year, “The do’s and don’ts of inventory” in which we discussed dead inventory. Most likely your issue is not inventory sitting on a shelf because it was not the right selection. Instead, you may be experiencing a situation of just too much inventory. There is a difference.

When this retailer was a child working in the family business, I remember my Dad telling me the advantage of being a retailer over other types of work. “When you make a mistake in retail, you can usually get your money back and buy something else”, was his observation. It can be good advice today.

A second observation comes from a retailer we spoke with who found a “good deal” at a trade show. However, a good deal is only good if the retailer can sell all that was purchased. Clearly, this retailer bought as if the manufacturer was going out of business.

With a bit of calculation, the retailer was able to see that a few months from that ill-fated purchase, there was going to be a sizable cash shortage with the store. The answer did not come as a complete solution. Instead, the answer moved the shortage from unmanageable to manageable. It did require the retailer to talk with other retailers they had met at the trade show.

When the goal is to diminish the loss, it is fairly easy with items having an average cost of $20 to sell them for $17. Yes, you are losing money. But you do have to consider the cost of a loan for that inventory that might take multiple years to sell.  And, the second consideration is having that money freed so that you can invest in inventory that does sell at a normal rate.

And when you buy that new inventory, just remember that when you are hot you are hot. And when you are not, don’t buy so much.

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:

This article is copyrighted by Tom Shay and Profits Plus Solutions, who can be reached at: PO Box 128, Dardanelle, AR. 72834. Phone 727-823-7205. It may be printed for an individual to read, but not duplicated or distributed without expressed written consent of the copyright owner.