Ep. 169 The Shocking Brick and Mortar Retail Business Metric
It’s all too common for retailers at all stages to feel confused, frustrated, and disheartened—especially when it comes to how much they can pay themselves. But most retailers don’t realize that their success, growth, and take-home pay come down to a single metric: their net profit.
Let’s learn what net profit is, how it’s calculated, and what you can do to improve your bottom line.
Indie Retailers Pay Themselves Out of This Key Metric
In episode two of this podcast, titled “How Much Do I Need to Make In Sales In Order To Pay Myself,” I wanted aspiring or current store owners to understand the volume of revenue they would need to generate to hit their income goal.
However, what I shared in episode two was an indirect way of telling you what I will tell you directly in this blog post.
In the show notes for that episode, you can sign up for my newsletter and get access to one of my most popular resources: the “Sales To Salary” calculator. Based on what store owners put into the calculator, the average salary they want to pay themselves is around $50K.
So where does that money come from?
Well, for many starting store owners—and even more experienced store owners who generate $300-500K in annual revenue—their pay comes from the net profit in their businesses.
Later on, your CPA might recommend adding you to payroll or filing as an S Corp, but for the purposes of this post, we’re going to keep it simple and focus on net profit.
How to Calculate and Understand Your Net Profit
Net profit is such an important metric to know and understand. It’s what people refer to as the bottom line on your profit and loss statement because it’s literally the last line.
The net profit amount, which is also referred to as margin, can be “in the red” (negative) or “in the black” (positive). It’s determined by taking your total revenue for the year and subtracting your cost of goods and operating expenses.
For example: let’s say Becky’s Boutique generates $100k in sales. She spent $50k on the cost of goods and $35k on operating expenses. After subtracting the COGS ($50K) and the operating expenses ($35K) from Becky’s revenue ($100K), we’re left with a net profit of $15K. That $15K is how Becky pays herself and/or reinvests in her business.
Additionally, Becky’s net profit margin is 15% (15K/100K). That same 15% profit margin for a $500K business is $75K, and for a million-dollar business, it’s $150K.
If those numbers seem small, I have news: net profit is often slim in traditional brick-and-mortar retail businesses. Usually, it’s less than 20%—and it’s not uncommon for it to be 10% or less.
Other business types have far better net profit margins, of course. For example, retail brick and mortar businesses that rent out their space for events, have thriving eCommerce businesses, or make their own goods and have a solid wholesale revenue stream might be at 30%.
Another example: Take brick and mortar OUT of the equation, such as for service-based businesses like independent accountants or graphic designers who work from home. These businesses don’t have the overhead that comes with having a physical space OR the expense cost of goods. For them, net profit can be 50-70%!
Understanding Net Profit Puts Things In Perspective
With net profit being so low for brick and mortar businesses, it’s no wonder many struggle or fail!
But they don’t have to fail, and I am not sharing this to spread doom and gloom in our industry.
So why don’t aspiring and current store owners know about net profit?
There are a variety of reasons:
- they’re blinded by the dreamy store they want to open
- they don’t have a bookkeeper
- their bookkeeper doesn’t communicate with them or educate them about this
- they’re afraid to face or look at their numbers
- they’re too busy wearing 100 hats
- No one teaches this or screams it from the rooftops like I am now!
Having worked with hundreds of retailers directly, I have analyzed the P&Ls of at least 100 of these retail businesses. I’m also familiar with the net profit of businesses that have unique business models or don’t have brick and mortar retail spaces. That’s why I’m so comfortable sharing this information about net profit.
How Indie Retailers Can Increase Their Net Profit
It IS possible to get into the 20% or higher range of net profit. The storekeepers who achieve this 1) know they must focus on GREAT margins, 2) know they have to keep operating expenses lean, and/or 3) have a unique retail business model or additional revenue streams.
There are Master Shopkeepers members who generate $1 million in their retail business and pay themselves $100-$150k a year (I see you RETAIL CEO!).
But if you’re not there yet, use this post to inspire and empower yourself!
And if net profit is suddenly a problem and you’re thinking, “How will I ever make enough money from this business to pay myself….”
Remember that problems are OPPORTUNITIES.
Net Profit measures how effectively your business generates profit on each dollar of revenue you bring in.
So to increase your net profit, you need to ask yourself—and get creative at answering—these three questions:
1) How can you generate more revenue?
2) How can you get every penny possible out of each dollar?
3) What ELSE can you do to generate revenue?
Because it IS possible to run a profitable retail business that pays you. IT IS POSSIBLE.
Empower Your Fellow Retailers By Sharing This With Them!
This podcast episode is something I’ve wanted to record for a while now. And I literally want to scream this from the rooftops for all aspiring and current store owners to hear! I WISH someone would have shared it with me ten years ago.
On my Team Savvy Trello board, I have our purpose, our cause, and our passion listed so that we can stay focused on our mission. The first item on the list is this: “to empower independent retail business owners by supporting and educating them.”
I can’t manage the minds of retailers. But I can educate and empower you by giving you the information you need. If I didn’t record this episode, I would be doing all of you a disservice. I wish I had been more direct with all of you sooner.
If you’re a member of Master Shopkeepers, you have access to tools like the Retail Profit Pie Spreadsheet to help you understand what you can improve to profit more. You also have a hefty volume of marketing lessons to help you get more foot and online traffic to increase your revenue. You are not alone in this!
Too many retailers are confused about why they aren’t “successful,” why it feels so hard, why they can’t pay themselves, and why they feel like they’re failing.
We put so much emotion into our businesses. But once you realize it’s just a numbers game and learn that you can take X, Y, and Z steps to make your numbers better…
…then you can take the emotion out and start to get creative with actual solutions to your numbers problem.
If you have a friend looking to open a store, are part of a Main Street Organization or a member of your Chamber of Commerce, or a local small business group member, I encourage you to share this episode.
In fact, I’m imploring you to share this because it’s THAT important. While we often remind our customers to “help keep indie retail alive,” we also have a responsibility to keep indie retail alive—and that starts with all of us supporting each other with the information we need to thrive.
- Episode 02: How Much Do I Need to Make In Sales In Order To Pay Myself
- Join Master Shopkeepers, the only territory-protected retail training mastermind! You’ll get access to many valuable lessons & resources, coaching calls, and a vibrant community of your fellow store owners cheering you on.
- [01:20] Indie Retailers Pay Themselves Out of This Key Metric
- [03:28] How to Calculate and Understand Your Net Profit
- [09:51] Understanding Net Profit Puts Things In Perspective
- [12:26] How Indie Retailers Can Increase Their Net Profit
- [15:07] Empower Your Fellow Retailers By Sharing This With Them!