Retail is a game of percentages. With sales being 100%, the object of the game is stepping line by line through your cash requirements and maximizing the percentage of sales that you get to keep¹. Inventory, payroll, rent, insurance, merchant fees, etc., etc. all take their piece.
The more you can control these expenses, the more you get to invest back into your business. Easy, right?
Wall Street has a measurement called Operating Cash Flow which they use to measure the cash generated by a business’s day-to-day operations. Consider the Operating Cash Flow of some of the largest retailers in the industry:
* Walmart: 5.6%²
* Target: 9.6%³
* Walgreens: 6.3%⁴
* Macy’s: 7.8%⁵
* Kohl’s: 8.9%⁶
* Nordstrom: 9.1%⁷
All of these majors are hovering between 5–10%⁸.
A common question from indie retailers is, “How much should I be making?” If your business is generating 10% after paying the owners a reasonable salary, you are outperforming basically every publicly traded retailer in the United States.
If you are running under 10% net cash flow, look closely at areas where you can improve your operation to move towards that number. I recommend a line-by-line honest review of your financials to see where changes can be made. Ask yourself how you can improve each line item by 10%. Start with the big ticket items like sales, payroll, and rent, then move down from there. Consider the suggestions below (recognizing that each line item deserves its own chapter — or book!)
Profitably Increase Sales by 10%
To a retailer, when sales are good, everything is good. The retailer obsession with top-line sales is fascinating — and dangerous. Sales growth is definitely desirable, but never at the expense of profitability.
Profitably increasing sales requires careful planning no matter your format. Any retailer can buy themselves a sales increase by over-discounting, over-buying, and over-advertising. Don’t fall into that dangerous trap!
Profitably increase sales by staying in stock on key items, hosting events to drive in-store traffic, increasing conversion rate (even if you are brick-and-mortar you need to be converting those visits to sales), and increasing your average ticket.
Consider expansion into new channels. If you are brick-and-mortar, how can you effectively start selling online? You need to be having these conversations NOW.
If you are already online, does it make sense for you to expand into marketplaces such as Amazon, eBay, or Walmart? Can you start selling internationally? Is it time to invest in an app?
Expansion is risky, but all retailers should be experimenting with new channels. Growth into new channels can generate the dollars necessary for further expansion. This connected world has made it easier than ever to experiment in new channels without “betting the farm”.
Increase Gross Profit Dollars by 10%
Protect your profit margin like your livelihood depends on it. The difference between profit and loss can be the difference between a 50% profit margin and 55% profit margin. This is the most effective “lever” you have as a retailer. Increasing operating expenses demand that you increase your profit margin.
A blanket price increase of 10% will likely turn off your customers. Price increases require thoughtful analysis. You should be looking at every line in your store at least once each year and adjusting prices as needed. Consider quarterly increases to avoid sticker shock.
Augment your assortment with high-profit categories and impulse products. Treat your checkout space like prime Manhattan real estate — items merchandised at your checkout better be paying premium rent!
Negotiate better terms with your suppliers. Look for opportunities to work with importers. Reduce your freight expenses by closely managing routing instructions.
Many retailers are resistant to margin improvement because they are afraid of how their customers will respond. The harsh reality is that if you are not making money (or barely making money), you MUST improve your margins or you will soon be faced with a much harsher reality! Don’t wait until it is too late to act.
Decrease Payroll by 10%
Another sacred line item — payroll. Wages are going up, up, up as unemployment rates remain low.
As with profit margin, declaring a blanket wage decrease of 10% could have painful consequences and permanently damage morale.
Instead, look at opportunities to manage scheduled hours more closely. Every retailer has opportunity to run a little leaner. Take advantage of natural turnover to see if you really need to rehire, particularly at your entry-level positions.
This is so hard to execute because payroll equals people. Again, thoughtful planning is key.
Bringing it Home
Iterative changes to your operation can have significant impacts on your bottom line. There is still money to be made in retail for those who have the courage to take a hard look at their operation and adapt to the changing demands of their customers. Setting a baseline, simple goal of 10% net cash flow can drive you to make some critical course corrections, ultimately giving you the financial freedom to expand or invest back into your business.
1. You’ll notice that I am stepping around terms like “profit” or “net income” as these figures do not incorporate several important figures that retailers need to keep top-of-mind. For example, you may show a net income of $100k but if your inventory has grown by that same amount, the profits your business generated are all sitting in inventory (which is held as an asset on your Balance Sheet). Also excluded are equipment purchases and debt payments — potentially high-impact cash requirements. In my experience, net income and net cash flow are very different. Net cash flow provides a better picture of your ability to pay bills and invest in growth.
8. I tried to find a single publicly traded retail stock with Operating Cash Flow of over 10% and I could only find one (in my 60 minutes of research)… Amazon. However, their business consists of so much more than retail that I have to think that number is inflated by their technology services.