One way to take control of the financial management of your business, without being overwhelmed by reports and information out of the accounting and point of sale systems, is to select five to 10 critical measures you need to look at regularly.
These should be indicators or measures that provide an early warning signal of trouble ahead, or highlight areas requiring management attention. In effect, they should provide you with a brief yet insightful overview of how your business is going.
The profit and loss statement, balance sheet, and cash flow statement are important, and these should be reviewed regularly. However, you need to have measures which go a little deeper, yet can be easily determined and frequently reported.
What are such critical measures?
Let me suggest the following five for your consideration, because they focus on the three areas/resources that consume the cash in your business. How well are you utilising these resources to operate a successful business?
The measures I am suggesting can be summarised on a page, can be readily determined each month, provide a reasonably quick financial analysis of your business, and most importantly enable comparison with others without risking confidentiality.
They could be called the monthly ‘must see’ scores. In financial terms, these are key performance indicators (KPI’s).
A. Stock
This is usually the biggest dollar investment you have in your business, and is your key profit producing asset. So it is imperative you monitor it well.
1. Gross Margin Return on Inventory (GMROI). This is your gross profit divided by your average or closing stock. It brings two of your key measures into one (gross profit and stock). It tells you how many dollars of gross profit you are making for every dollar of stock. So, for example, if your gross profit for the year is $480,000, and you have a closing stock of $240,000 you have a GMROI of $2.00 meaning that you are generating $2 of gross profit for every $1 of stock. This is an extremely helpful measure when you measure it by product and department as it can highlight high performing and problem stock areas. This is one of the surest ways to determine where you are overstocked.
2. Stockturn/Days Stock on Hand. This is your cost of goods sold divided by your average or closing stock, and tells you how often you are turning your stock over in a year.
Another way to view this is to divide 365 by the stockturn and it will tell you how many days you have your stock in the store before selling it. I’d encourage you to be aiming above 2.5 overall, and clearly this will vary by product and department. The real power of these two stock KPI’s is when you apply them to individual stock lines and departments.
B. Staff
Staff are a key resource/asset in your business, yet are only seen as a liability (on the balance sheet) or as an expense (on your profit and loss report) in the traditional accounting reports. I suggest you take the view that staff are your most vital asset and that maximising their productivity is the message
3. Sales per FTE (full-time equivalent) staff member. This is your sales divided by the number of FTE staff you have, and is a measure of the productivity of your staff, and perhaps an indicator of underperformance. As a rough guide, $280,000 is a good place to start, preferably higher.
4. Employment expenses (with wages and superannuation comprising the ‘lions’ share of these) as a percentage of sales. The trend of the last two decades is for employment expenses to be increasing as a percentage of sales. Given that excellent customer service is an important ingredient in the retail fashion industry, I suggest that the way to reverse the trend is to increase productivity rather than reduce staff. Less than 15 per cent is a good target.
C. Space
5. Sales per m2 of your store area. This is your sales divided by the area of your store. It is primarily a measure of how well you are utilising the space in your store, which usually is a measure of your merchandising and layout. Do you have a retail offer that matches the space you have available?
Why not develop a one-page management report at the end of each month, and include the above five measures.
Brett Stevenson is Director of Excellere Pty Ltd, a company that specialises in workshops covering financial and strategic management. www.excellere.com.au