Friday, January 29, 2010

Profits versus Cash Flow - Which Will You Choose?

Sometimes in retail you are faced with a difficult choice. In a tough economy, one of those choices is Profit vs. Cash Flow.

Sometimes you have to give away your profit to get more dollars streaming through the till. Sometimes you have to give up chasing dollars just to protect your profit margins.

The question is when do you choose Profit or when do you choose Cash Flow?

The answer is when you know exactly where your business stands, where you want to go, and what you need to do to get there.

For instance...

My goal for this past year was to show a profit. The bank gets a little nervous when you don't show a profit, and to guarantee a renewal of my line of credit in these tough lending times, I knew that showing a profit would give the bank confidence in my stability and ability to succeed.

Last November I made a conscious choice to go after profit instead of cash flow. I chose not to run a direct mail coupon incentive that I had used in previous years. The trade-off was dramatic. Sales were down for November because I gave no incentive to shop early. Profit margin was way up, though, because I didn't give away the house.

But as I looked at the lost sales in November, the question begged... Did I lose those customers for November or lose them for good? The answer came quickly in that first week of December... I only lost them for November. At the end of the two months my sales were where I expected going into the season, down only slightly. But my profit was up for the same period compared to last year. Had I run the coupon, I would have increased sales (cash flow) but decreased profit.

Because I knew my goals and knew what I needed to do to achieve them, I was able to be successful. Because I knew how my choices would affect my cash flow and profit, I was able to choose the right approach.

So what is the right approach in your business? It depends on your short and long term goals. Do you need to improve cash flow to fund a new project? Or do you need to show a strong financial statement to your investors? Do you need to improve cash flow to pay off your vendors or do you need to grow your profit to pay off yourself?

When times are good, you can do both at the same time. But when times are tight, you sometimes have to choose. Choose wisely, my friends, by knowing your goals and the means by which you will achieve them.


PS The choice was made easier because our cash flow had been strong up to that point. What I lost in cash flow was allowable because I had built up cash flow from the previous year (at the expense of profit) Sometimes it is a seesaw between the two.

Saturday, January 23, 2010

Two Ways to Increase Profit Margins (Without Bullying Anyone)

There are two simple ways to increase your profit margin. The first is to increase your prices. The second is to have fewer discounts and sales. (There is a third method to higher profit margin - lowering the cost of the goods, but that involves the vendor, which doesn't qualify as simple)

Did you know you could increase prices on some items and actually sell more at the same time?

Quick, without thinking too hard, tell me how much you would pay for a toilet plunger. Five bucks? Ten? What if it had a Vermont Pine handle and was made in the USA? Fifteen?

What if your only toilet was clogged and your wife was pregnant? Twenty Dollars?

Our perception of the cost of many items changes based on our needs and our belief in the product.

By the way, I just bought one the other day for $1.99 - well below what I would have gladly paid for one. (No, my wife is not pregnant.)

Too many retailers make the mistake of pricing items based on their cost. We dutifully take the cost of the item and use some factor or calculation to determine a retail price.

What we miss in this calculation is the human element of the equation. When a customer walks through the door she immediately starts making mental calculations on the Perceived Worth (PW) of each item she sees. If it's something she doesn't need, the PW is zero. But if it's something she needs, she assigns a dollar value to it. Then she checks the price tag. If the price and her PW match, it's pretty much a guaranteed sale.

But if they don't match, a second evaluation takes place.

If the price is higher than her PW, she's not buying.

If the price is lower than her PW she's going to ask, "What's wrong with this?" Until she answers that question to her satisfaction, she's also not buying.

This mental calculation is going on in your store every single day and costing you sales and profits because of it.

Here are two tips for pricing your products that use this knowledge to your advantage.

First, when a new item arrives, before you price it, take it around to your staff and ask them how much they think it is worth. You may be surprised to find that the PW of an item is often higher than the price you were going to mark it.

Second, think about prices the same way a customer thinks about prices - in rounded off numbers. No woman ever looks at a dress and thinks, "Wow this looks like an $87 dollar dress!" It's always numbers that end in zero or five. It's a fifty dollar, seventy-five dollar or hundred dollar dress. So don't price something $97.99 when perceptually it's a hundred dollar item. You're just giving away two bucks. The same is true with smaller amounts. $28.99 and $29.99 are the exact same price to a customer - both are a thirty dollar item. But to you, that extra dollar is your profit. You'd be better off standing at the front door handing out one dollar bills than giving them away blindly on a poorly priced item.

If you want even more tips on how to increase your pricing while actually making your merchandise look more affordable, download this free eBook Pricing for Profit.

The second thing eroding your profit margin is sales & discounts.

You keep hearing that everyone is looking for a bargain. The data backs this up. Kinda. A National Retail Federation survey showed that 40% of shoppers were looking for sales & discounts to determine where they shop. Another 12% were looking for everyday low prices. By my math, that only comes to 52%. The other 48% were using some other non-price-related criteria for determining where to shop.

You don't have to discount to get traffic. But you have to give customers what they want. And according to NRF, 48% want a great selection, great service, and a great experience. And those customers are willing to pay for it.

If you keep offering discounts, coupons and sales every time you turn around you're doing two things to your business.
  1. You train your customers to wait for a sale
  2. You train your customers that regular price is too high
If that's what you want, good luck. But if you want to increase your profit margin, you have to wean your customers off the sales, coupons and discounts and start offering them over-the-top customer service.

We gave up our one and only coupon this year. We lost a little bit of sales in November (when the coupon normally ran) and made some of it up in December. Best of all, we had a higher profit margin for the two months, which more than made up for the lower sales.

Bottom line? Our bottom line improved. We increased our profit margin another point. And that has made all the difference.


Tuesday, January 12, 2010

Inventory Controls That Work

Open-to-Buy is great for businesses with vendors who ship quickly and can pinpoint delivery with consistent terms. It works great for businesses whose monthly/weekly/daily sales are predictable. It is a super system for companies who can give the system full-time attention.

In other words, for the Independent Retailer, Open-to-Buy sucks!

I've looked at a half-dozen OTB methods, none that I could ever get to apply to my business. Too many vendors with different terms, different minimums, different seasonal needs, different availabilities. If I tried to run LEGO on an OTB, we'd be OOB (out of business). I sell it all in December, but if I don't order it to arrive in August, LEGO will be sold out and I'll get nothing.

Instead of an OTB, we followed these three simple principles this past year that gave us the results we wanted.

Don't be out-of-stock of the Must-Haves. We define Must-Haves as any product that we sell more than 36 pieces a year. You probably already know intuitively what products you sell on a regular basis that you always have to have in stock. Make sure you have enough of those items at all times. (Note: You can define your must-haves by whatever criteria you want. Just make sure you always have them.) This way, although the rest of your stock might be low, the customer always thinks your stock position is strong. The fewer times you have to say, "No, I'm sorry, we're out-of-stock," the better.

Don't out-buy your Dating Terms. If the vendor gives you 30 days to pay the invoice, don't buy more than a 60-day supply (assuming keystone or higher mark-up). Sure, sometimes this doesn't work (see the LEGO example above). Sometimes the minimum order is more than a 60-day supply. Fill your shelves with that first order, but don't re-order until you can order within the terms. And whenever possible try to get longer terms from your vendor.

Two ways to extend your terms:
  • Ask your vendor - especially if you are ordering new stuff. If you have a strong credit rating or excellent payment history ask for an extra 30 days. Remind them that it will help you to buy/try more. Then be absolutely sure to pay that bill on time.
  • Pay with a Credit Card the day the invoice is due. This give you an extra 20-30 days depending on your credit card agreement. (Make sure you pay that bill on time, too - fees and interest will kill any deals/savings you get.)
Minimum orders are Okay - Don't buy what you Don't Want. You don't always have to increase your order just to get whatever special is available. Discounts, Free Freight and Extended Dating are nice, but not always necessary. Sometimes you find yourself buying stuff you don't want or need just to qualify for the discount. After paying interest on the money you borrowed to pay the invoice, plus taking a markdown on the products you didn't want and couldn't sell, you'll find that the special wasn't so special after all.

The best specials your vendors can offer you are:
  • Extended Dating - Net 60 or Net 90 do more for your cash flow than anything else. Always select this option first if given the choice.
  • Free Freight - Depending on where they ship from, this can be as much as a 15% discount - great for the bottom line profit.
  • Deep Discounting - 5% is no incentive. 10% isn't much either. To be considered Deep you need a 15% or better discount. Don't ever over-buy your dating terms for less than 15% off (the equivalent of Free Freight). Even then, only buy what you know you will sell.
Dating does the most for your Cash Flow. Discounts & Free Freight really only help the Profit/Loss. Go after the special that meets your needs.

There will always be times when you have to over-buy. But choose them carefully. Do it for your Must-Haves. Do it when the dating terms are favorable. But if you ever find yourself thinking, "I'm not sure I really want to buy that," then don't!

We decreased our average inventory by over 10% this past year (while only losing 4% in top line sales). This caused us to have a higher Gross Margin Return on Investment (we made more money on the money we spent) and better Cash Flow. Follow those three principles and you'll see an improvement in your business, too!


Monday, January 11, 2010

Cutting Expenses the Smart Way

This past year I cut expenses at Toy House by 7.8%. And I did it without sacrificing customer service or the reach and frequency of my advertising.

Here's what I did:

PAYROLL - Yes, I cut payroll. Had to. It is the single largest expense we have. Yet, even with all my cuts, my payroll actually became a larger percentage of expenses than before. And customer service did not diminish.

The two things I did were:
  • Schedule Smarter - By more closely tracking sales I was able to better schedule the staff to make sure I covered the busiest days and times without over scheduling the slow times. I also spent more time matching team members to make sure I had the most efficient crews working when staff was at lower levels. Put your peak staff on at peak times to get peak results for your money.
  • Divert My Own Salary - As the president of the corporation, I pay myself a salary. This year I took a pay cut, offset by a dividend on the company stock I own. This shifted my payroll expense from the Profit/Loss statement to the Business Equity. If your business has a lot of equity, this can be a great way to shore up the P/L for the short term. Talk to your accountant to see if this is right for you.
Net result - 4.8% cut in payroll and related expenses

ADVERTISING - Another big expense that I cut drastically (on paper) was advertising. In actuality, I made some smart changes. Specifically:
  • Cut Yellow Pages - They aren't worth the money. People don't use them anywhere near how they used to use them. Even the online Yellow Pages don't garner much business. I get far more traffic to my website from my vendors' Store Locator pages than I ever did from yellow pages online.
  • Shifted Radio Stations - I switched one of my stations to a cheaper station with a similar number of listeners. Same reach, greater frequency, fewer dollars.
  • Invested Time into Social Media - Time equals money. I put time and effort into building relationships through Facebook. Doesn't cost as much money, but does take some effort.
Net result - 20.4% reduction in advertising expenses without changing the reach and frequency (and I am already spending some of those Yellow Page dollars elsewhere for a bigger reach and frequency this year:-)

Other simple cuts included:
  • UTILITIES - Made a 1 degree change in the thermostat that kept heating costs down. Customers didn't notice, and the staff changed wardrobe accordingly. Saved 0.8%
  • INSURANCE - My insurance rep negotiated a better Worker's Comp policy saving us 2.1%
  • TRAVEL - Made all the same trips as last year. Just stayed one less day at the trade shows. Saved 18.1%
  • SELLING SUPPLIES- Searched for new supplier of bags and giftwrap to lower expenses. Saved 2.9%
  • FREIGHT - Less sales meant less inventory meant less orders meant less freight expenses. Saved 10.2% (Consider this a benefit of a down economy:-)
Yes, those last few were smaller dollars, but every little bit adds up.

There are many ways to cut expenses without cutting services. You just have to be creative. Look for places where you can spend time instead of money. Follow the three R's - Reduce, Reuse, Recycle. Measure, measure, measure. You can't manage what you don't measure.

That's what made the difference for us. What will make the difference for you this year?


Wednesday, January 6, 2010

Settling the Dust

Christmas is over. Retailers across the country are adding up the numbers to see how they did.

The media is having a field day reporting about whether Sales were up or down and using that to determine who "won" or "lost". The problem is that the media are not looking at the whole picture.

Sales are only one number among many that tell the true story of a business. You also have to look at critical numbers like:
  • Expenses
  • Inventory Levels
  • Profit Margins
  • Cash Flow
  • Net Profits
  • Happy Customers (had to throw that one in, too:-)
To make all your decision based only on Sales is to decide what an elephant is by only looking at the leg.

My father taught me years ago that it is virtually impossible to get all those numbers to look good at the same time. But if you can get 4 or 5 of the 6 numbers going in the right direction each year, you're doing well.

So how did you do?

At Toy House and Baby Too I was able to...
  • Cut Expenses
  • Lower Inventory Levels
  • Raise Profit Margins
  • Increase Cash Flow
  • Raise Net Profit
  • Keep Our Customers Smiling
In a year where our Sales were down, we still found ways to make money and show a profit. And it wasn't as hard as many make it out to be.

Over the next couple weeks, I'm going to explore how we improved 5 of our 6 critical numbers so that you can learn from our example and apply it to your business. Some of the steps to take are so incredibly easy, you'll kick yourself for not having done them already (I kicked myself at least three times this year.)

Stay tuned...