PROFIT AND LOSS STATEMENT
Sales less Cost of Goods = Gross Profit $
Gross Profit % (GP%) = Gross Profit $ / Sales
- Do you know your Gross Profit %? This is a key performance indicator of your financial position.
- This relates to individual product/services GP% as well as your total business.
- How does it compare to others in your industry (benchmarks) is it increasing or decreasing? Why?
- Focussing on your Gross Profit improvements will have more impact than the other expenses in your business.
The only ways to improve Gross Profit is improving Sales or reducing Product Cost.
Improving Sales
1. Evaluate your pricing strategy,
- How do you set your retail sell price? If its through a markup/formula you may not be maximising your profit potential by really understanding the market for that item.
- Are there some prices you could increase even slightly that will not be noticeable ie; $4.50 could easily be $4.99 which will improve profit margin but not impact the customers decision to purchase. Depends on the demand of that product.
- If you have any exclusive or own branded range, you have potential to raise prices without worrying about competition.
- Consider entry price points and better quality/value items that are clearly different in price to suit different customer needs.
2. Markdown Management
- Discounting product price increases sales units but may be eroding your Gross Profit $.
- Be very analytical about what product really needs discounting (ie; slow sales. Out of season/trend etc)
- Be wary of generic % off whole categories/brands/store etc. Not recommended as it reduces profit on best-selling items that did not need the discount. Save the discount to go heavy on poor items so you can clear them.
Reducing Product Cost – Cost of product is the highest expense for most retailers so needs the most focus!
Negotiate cheaper costs through;
- Increased volumes
- Different quality levels/brands
- Change of supplier/country of origin
- Reducing supplier base may help with increased volumes overall with less suppliers.
- Consider negotiating rebates/special costs to support promotions.
- Ordering quantity/frequency/freight impacts to order smarter.
- Focus on key core items over fashion/seasonal/trend items which have high risk.
- Consider renegotiating payment terms with your suppliers to balance your cash flow.
Gross Profit – Other expenses = Net Profit
Key Other retail expenses that may be able to be reduced.
Rent – usually locked in for a period of time but always look for any opportunity to renegotiate.
Wages – Smart rostering to match busy periods through mix of fulltime/parttime/casual and mix of experienced and young staff. 15 year old’s may be the cheapest but actually may reduce your sales!
Advertising/Marketing- Not always a good idea to reduce as it will directly impact on your sales, however there may be cheaper ways to market your business ie; social media, email instead of printed materials.
Freight/Delivery – If you also sell online, only offer Free Shipping over a $ spend to help recover some of the freight costs to your customer. Also compare other logistic providers, this is a competitive market.
Cleaning – Consider doing yourself ie; window cleaning
Amenities – (Electricity/Gas/Water/Phone/Internet) – Compare other providers that may be able to offer a better deal.
Cash Flow
Many business may be profitable yet don’t have the money to pay for key outgoings of suppliers, landlords and staff.
Improving CASH IN through increasing sales (focus on promotions), encouraging payment upfront from customers (consider other payment options like AfterPay, Paypal, rather than credit cards that may cost you money to process that may encourage customer purchase), focus on clearance of old aged stock first (clearance tables, warehouse sales, pop up stores etc).
Balancing CASH OUT – Renegotiate trading terms with suppliers to balance out payments, offer payment plans rather than no payment as you do not want suppliers to cut you off. Always pay staff and landlords! Check your rostering if your wages bill is blowing out. Ask for rent relief if suffering a particularly slow sales period.
You may need to renegotiate a loan or short-term credit with bank/investor to cover outgoings if you have a particularly difficult month.
Budgeting
Building a budget by week or month is a smart way to stay on track with your sales, expenses and profit figures.
How can you know what financial position you are in unless you are keeping track?
Budgeting is just a form of planning with figures.
START! Using a basic excel spreadsheet, record your last years history at a minimum by month for 12 months
- Sales
- Total expenses
- Profit.
Most retail Point of Sales systems or your book keeper/accountant should be able to provide this data.
PLAN FINANCIALS Once you have your history you need to consider the pattern of how your figures have been tracking as a % .
- Are you trading up or down? Do you know why?
- If you want to be more sophisticated you can break down your expenses as per the Profit and Loss Statement
1. Start planning a realistic increase planning to grow upon last years sales. (Hint – CPI and the retail industry roughly increases between 1-5% per year.)
2. Try and plan expenses down (see hints above in Profit and Loss)
3. Calculate final profit.
4. Budget then gets locked as a plan for 12 months.
Then when you actually trade each month insert the Actual figures to see if you are up/down on both last year and Budget.
You will then have a clearer picture of how your business is really trading!