Managing Your Finances And Data

Information is power and never before has so much power been available to benefit retail business owners in the form of data. From the Internet to Point of Sale (POS) systems, you have unprecedented access to the information you need to run a successful business.

It’s not enough to know you make money. You need to know HOW you make your money. Data and finances are inextricably linked in understanding and analyzing the best ways to grow small. Sadly, the vast majority of clients I work with do not use available data to their advantage. I get the “It’s all in my head,” answer a lot when questioning a client about their business. Sound familiar?

Think about that.

How can you possibly run a business without understanding the how, when and why of your customers and sales? This data is a gift. You don’t have to be a CPA or an MBA to understand and benefit from financial and operational data. You do need to recognize there’s a lot more to business than a profit and loss statement. You have to know your money. It’s your money! Know your customers. They’re your lifeblood! Know every nuance of your business. This is powerful stuff!

Here’s the most amazing part. By understanding this data, you no longer have to guess about what inventory to buy, what customers to target or when to schedule staff. The answers are sitting right in your computer!

Even if the thought of analyzing data evokes a strong negative emotion, work with me here and trust that once you do this, you’ll be hooked on the power this knowledge brings.

The very first thing I ask clients to do is track their Key Performance Indicators (KPIs). KPIs provide powerful insight that can help determine targeted marketing solutions, pricing strategies, scheduling and hiring needs, new revenue opportunities, inventory management and a host of other strategies that can easily result in increased revenue and decreased expenses.

KPIs are as easy to track as the push of a button provided you have a good POS system and input information regularly and accurately. You can pull daily, weekly, monthly and year-over-year comparison

reports. But first, you need to know what you need to know – and why.

Below are the most commonly tracked retail KPIs with a description of each and real life examples of how these numbers can help you.

While not all are applicable to every business, choose the ones that will benefit you.

Key Performance Indicators

Sales by time of day and day of week

By knowing exactly when you’re selling – or not selling – you can create strategies to improve business during non-peak times, know when to run promotions and when to schedule employees – resulting in better service and potentially decreased labor costs.

A pizza restaurant was offering a daily lunch discount on weekdays. Upon analyzing the numbers, we found that Thursday and Friday lunches were triple the volume of Monday through Wednesday. There was no need to offer the discount on those days. By eliminating discounts on Thursday and Friday, sales stayed the same but the owner realized increased profitability.

A clothing store, upon tracking sales by time of day, realized the restaurant next door was throwing off great after-dinner traffic. They began opening later to avoid labor costs during virtually non-productive morning hours and staying open later to benefit from restaurant traffic. Sales, of course, went up.

Sales by category

This is simply a list of items sold by category. A clothing store might segment by tops, skirts, dresses; a restaurant by entrees, lunch/dinner, appetizers, beer and wine. The more specific, the better.

I worked with a pancake house that offered an extensive breakfast menu. They knew that pancakes were, by far, their most profitable item; meats generated the least profit. They had never pulled an itemized sales report and upon doing so, made an amazing discovery. Guess what they sold least? Pancakes! The most? Meats! That made it easy for us to create pancake-focused promotions and samplings. We also raised prices on sides of bacon, sausage and ham to keep in line with escalating costs. In no time at all, pancake sales were soaring – as was net profitability.

A clothing store’s sales declined by over 40 percent. The owner had never pulled a sales by category report and when she did, it revealed most of the decline was in sales of dresses. It was like a lightning bolt hit! She had dropped two dress lines the previous quarter and never checked to see how that impacted her sales.

Average sale

By dividing your total sales by the number of transactions, you get the average sale per customer. This benchmarks what a typical customer spends and your goal is to always increase this number. Increasing the average check is the easiest way to raise revenues immediately!

A coffee shop needed to increase revenues by 10 percent or about $2000 a month. The owner was about to invest $6000 in advertising with the hopes of increasing traffic to achieve her revenue goal. By knowing her average sale, which was $3.95, we were able to bundle two items as a special (coffee and a cookie) at $4.75. Just by upselling her regular coffee customers to the special, she was able to reach her revenue goals without spending a dime on advertising.

Traffic/Sales conversion rate and sales per employee

One of the biggest complaints I get from owners, particularly those in suburban strip malls, is “There’s not enough traffic in this center.” And sometimes, quite frankly, there’s not. A simple test will help you gauge exactly what’s going on.

Track your daily walk-in traffic.
Keep a spreadsheet at the cash wrap broken down by day of week and time of day; 9-11 am, 11am -1 pm, etc. Put a slash in the appropriate box each time someone walks through the door. Create another column for transactions and each time you make a sale, put a slash or the actual total of the sale.

At the end of 30 days, perform the following calculations:

Total traffic for the month

Total traffic by day of week (add up all the traffic for each Monday, Tuesday, etc. to see which are your busiest traffic days.)

Total traffic by time of day

Add up all the traffic in each time block to determine the busiest times of day. With this information, you can more effectively schedule labor and create promotions to help shore up sales on slower days.

Finally divide the total traffic for the month by the total number of transactions.
For example:

Total traffic = 1500 per month

Total transactions = 250 per month

1500/250=6

This means you’re closing one out of every 6 customers that come into your store or have a sales conversion rate of slightly under 17 percent.

Let’s examine these numbers

First, we know we had 1500 opportunities to make a sale this month. Most clients who complete this exercise are surprised at how much traffic really does walk through the doors. Secondly, we know we closed one-sixth, or less than 17 percent, of those walk-ins. What have we learned? If your closing ratio is less than 20-30 percent, your issue may not be lack of foot traffic at all. If people are visiting your store but not buying, I would encourage you to evaluate the competency of your sales staff as well as price points and merchandise mix. Power!

This ties right into sales per employee.

Retail sales is just that…sales! Employees aren’t there to simply ring up transactions or serve food. They are there to sell your products or services. Shops that pay salaries, not commission, usually don’t track this KPI. Some say it’s not an accurate reflection because some employees only work part time, some work in peak periods and others during slower times. How do you make a fair evaluation?

First, total each employee’s sales and divide by the number of hours worked. This will give you a sales per hour number for each individual employee. Now track these figures against themselves monthly. So, if Employee A starts at an average of $110 per hour in sales, track to see if those sales go up or down each month. This way, you are benchmarking them against themselves, not each other. If you find there’s a truly significant discrepancy in these numbers it could indicate you have some weak links on your staff.

Hopefully, you are conducting regular sales training but if someone’s sales are going down, you can intervene quickly to find the source of the problem and remedy it. Later, you can track these figures in year-over-year comparison.

One clothing store’s sales had been steadily declining over a year’s time. The owner was frequently absent and left the store in the hands of her manager who was also the primary salesperson. In researching the sales decline, we pulled the sales-by-employee report. Her manager’s sales had gone down 47 percent year-over-year! Frighteningly, the owner didn’t know this. Clearly the manager had become complacent and lost interest. The owner was able to fix the situation by better motivating and training her manager, giving her goals and incentives to sell more and keeping a closer eye on her. The manager’s sales rose 25 percent in just 90 days.

New vs. repeat customers and frequency of purchase

Successfully growing small requires a good balance of new and repeat business. As I am fond of saying, there are two ways to make money in retail – selling more to existing customers and bringing in a steady flow of new buyers. I’ve worked with many owners who proudly tell me the majority of their business is repeat. This is not necessarily a good thing. Neither is a lot of one-off customers. If you don’t bring in new clientele, business will shrink. It they only come once and don’t return, that signals a potential problem with your product, service or pricing. But you need to know what’s going on so you can address it.

A beauty salon client did not track their new vs. existing clients or client retention KPI. Once they began tracking and analyzing their numbers, it was clear they were getting plenty of new clients, they just weren’t retaining them. In the salon business, a customer isn’t really isn’t considered a customer until they’ve visited a minimum of three times. By understanding they had a client retention issue, we were able to implement a two-fold strategy that included customer service training for the stylists to insure greater satisfaction as well as a new customer welcome program that offered new clients discounts for pre-booking their next appointment.

Now that you know the makeup of your customer base, take a look at how often they frequent your store. Weekly? Monthly? Annually? By understanding shopping patterns, you can create targeted marketing strategies to gain additional sales from existing customers.

Let’s take a restaurant for example. Out of a database of 1000, we found that 35 percent of their regular customers come in once a month. By pulling the average check for this group and the day of sale, we know the majority of these 350 people usually come on a Saturday night and spend an average of $40 per visit.

Knowing this, we did a couple of things:

Created a marketing campaign targeted specifically to these customers to invite them in for a mid-week special.

By knowing the average check is $40, (with an average entree price of $15,) we knew they were largely parties of two that are ordering dinner but not drinking wine or liquor. We offered them specialwine pricing to increase the average check.

Lead sources

In order to effectively measure your programs, you first need to be able to track them. Most POS systems offer the ability to enter codes that track back to coupons, promotions and ads. Be sure to code everything you do and enter that code with each corresponding sale.

Customer profile/demographics

Getting an accurate read on your demographics helps you fine tune offers relevant to existing customers and gives you ideas for attracting new ones. Take the most basic demographic data- the zip code.

I worked with a day care franchisee for whom the franchisor did a quarterly direct mailing that was not producing results. In comparing the zip codes the franchisor used for the mailings against the actual zips of current students, we saw they were not synching. By adjusting the mailing zips, they were able to use a more geographically accurate database, thus producing better results from the marketing dollars spent.

Tracking your KPIs

You should pull your KPI reports, at minimum, weekly. Compare them to your monthly goal and to the same week’s reports from last year. Look for early warning signs. If you pull your numbers at the end of the first week of the month and they’re tracking down, look at traffic. Is it down? Why? What can you do to increase traffic for the rest of the month? Maybe you didn’t have a promotion planned and now is the time to create one. Maybe traffic is good but your average sale is down. How about creating a tiered pricing special?

By understanding your numbers, you avoid the victim mentality. There’s no reason to stand there at the end of the month saying, “We had a bad month.” With the proper information, you have the opportunity to be proactive and turn things around on the spot.

Of course, at the end of each month you should analyze your year- over-year KPIs. Has your mix of items selling changed? Is there any significant sales increase or decrease in a certain category? When you track KPI’s and use them to better understand your business, you have truly taken control of your success.

Profit and Loss Statements

P&L’s provide important information about the financial health of your business. Often times, small business owners don’t want to invest in this expense but you do need to pull them, at a minimum, quarterly, but it’s best to do it monthly and review them with your accountant. Review the current month, year-to-date and year-over- year comparisons for the same period.

A couple of key items you’ll want to keep an eye on:

Gross profitability

Your total sales less the cost of goods sold equals gross profit. That margin needs to be healthy enough to support your business. Depending on the category of business, you could be looking at anywhere between 25 to 60 percent gross profitability. Conduct an Internet search on typical margins for your industry. If it’s less, you either need to negotiate better pricing on your inventory or raise prices. Selling too many items at discounted prices can impact your gross margin negatively.

A shoe store I worked with provided me with P&L’s that were shocking. Since sales weren’t where they needed to be, the owner discounted her shoes at will, just to make sales. Her gross margin was about 7 percent! At that low level of gross profitability, she had no hope of a sustainable business.

Labor and rent costs as a percentage of sales

Your rent as a percentage of sale, inclusive of Common Area Maintenance (CAM) charges, should be around 10 percent. If you are about to sign a lease, you should figure this number conservatively as it relates back to your forecasted sales. One of the biggest issues I find is retailers lease space that is either too big or too expensive for their concept. Perhaps they are overly optimistic about forecasted sales. Keep this number in mind as a barometer for your healthy business.

The correct payroll or labor as a percentage of sales, again, depends on your industry. It could range anywhere between 9 and 30 percent. If you are hovering at or above the high end, you may have to adjust your payroll in order to achieve better profitability.

Now you know the value of managing your finances and data. Learn all the capabilities of your POS system to make the management of these tasks quick and easy. Take time to get the training and be sure to instruct your employees to input properly. Put yourself in the position of power by intimately understanding your business.

I can tell you one thing with absolute certainty. Every time I work with a client and teach them how to track and analyze their numbers and data, they become hooked on the power and move forward with renewed confidence because they truly understand their business.