Of all the possible measures of a business’s success, profit remains at the top of the list.
Measuring the effectiveness of any retail business is a tricky subject, as one person’s idea of success is not necessarily the same as another’s.
Some look for customer satisfaction, others aim for awards or staff retention rates; but there is one overriding measure of retail success that will ensure the longevity of your business – profit.
Measuring true retail performance involves key performance indicators – metrics that business owners use to measure the effectiveness of their business. They provide an invaluable insight into the health of your business and its ability to survive.
Here are seven key things a business needs to stay profitable for the long term.
Sales compared to last year or to budget: Sales revenue measured against a prior period or against a budgeted forecast is essential. If you are running your business effectively, then the revenue figure will set the scene for your financial success. Ensure that whatever your forecast that it is suitable to meet your other financial goals.
Gross margin: A measure of the percentage of profit each product or service sold contributes to your business. Remember ‘mark up’ is not gross profit and many businesses have come unstuck confusing this.
Gross profit dollars: The amount of pure profit a product contributes when sold. It is this figure that you use to pay your operational expenses and the lifestyle you would like to enjoy.
Sales per square metre: Annual sales divided by the total useable floor area of the store. The question for an owner here is whether they would achieve their current sales in a smaller space at a lower rent.
Average sale per transaction: Measures the total number of units sold in a given period divided by the number of transactions. This will tell you if your staff are offering the equivalent of ‘would you like fries with that?’
Conversion rate: Ensuring each customer entering your business makes a purchase is not just about sales. It involves effective marketing, merchandising and a sales focus based on a desire to ‘problem solve’.
Gross margin return on inventory investment: Measures the productivity of your biggest asset – your inventory. Many consider that large stock holdings are the key to great sales. Forgotten is the cash that is tied up in stock cannot be used for other activities. Optimum stock levels should be the focus of all businesses.
These KPIs can only be calculated and understood if your business has effective strategies for collecting and analysing the necessary data, either electronically at point of sale and/or through detailed analysis of figures. This information also needs to be observed in context and used in conjunction with observations from the business in a real-world sense.
If this all seems a little overwhelming, think about employing a business consultant or accountant who can either help you understand these KPIs, or do the hard work for you and produce regular reports. If nothing else, please remember that profit should be your main indicator of success – it’s what pays the bills and allows your business to achieve all the other goals you set for it.
Paul Rowe is managing director of The Business Squad, which works with businesses to implement strategies, systems and procedures to improve performance.
