Ep. 59 The Retail CEO Challenge: Metrics and Benchmarks for a Successful Retail Business
This post is part 5 of a 5-part series for the Retail CEO Challenge. Read the other parts here: part 1, part 2, part 3, part 4.
The Retail CEO Challenge is coming to an end, and we’re wrapping up the challenge by learning how to complete the Retail Business Year-End Report! This 11-page document will help challenge participants to summarize their 2020 business metrics.
I’ll be teaching a live masterclass on Monday, February 8, 2021 for everyone who signed up for the Retail CEO Challenge. We’ll be learning how to fill out this critical data piece for your business. You can still join the challenge through February 7, 2021 to get access to everything I’ve written about in parts one, two, three, and four of this series, as well as access to the masterclass.
What You’ll Need to Complete the Retail Business Year-End Report
I know I talk about data often, and that’s because it’s important. In order to complete the report, here’s a list of data you’ll need. If you don’t have all of it, no worries—sometimes the win comes from learning what you need as you build your business.
You’ll need information from each of the items on this list:
- Profit & Loss Statement
- Loyalty Reward Program
- Bank Account(s)
- Email Software Program
- Inventory System
- POS system
- Ecommerce system
- Retail store (in particular, your retail square footage)
I’ve said before that revenue isn’t the only thing you should track in your business. But we do need to know this number! If you aren’t generating revenue, your business won’t survive.
On the Retail Business Year-End Report, we’ll calculate your year-over-year growth. Hopefully, it’s a positive percentage, meaning that your sales went up from the previous year. If it’s negative, indicating that your sales dropped from one year to the next, I know it doesn’t feel good. But the important lesson here is to determine why.
Gross Profit & Gross Profit Margin
This metric tells you how profitable you are in dollars or in percentage.
I know of a shopkeeper who purchased an existing retail business for well over $100K 3 years ago. She recently told me she has no idea what gross profit margin is or means. Her business dropped drastically in 2020, and it wasn’t because of COVID.
She believed everything in retail should be marked up 2x. If you’re doing this too, you have been misinformed! There’s so much that goes into pricing. Keystone pricing, where you take the price you paid for an item then multiply by 2 to determine your retail price, won’t always keep a retail business alive.
To learn more about pricing, check out these episodes of the Savvy Shopkeeper Retail Podcast: How Retailers Can Increase Their Average Sale and The Retail Profit Pie. You can also read my blog post called How to Price Products in a Retail Store.
Cash flow is the amount of money flowing through your business each month. Of course, we want more sales coming in than expenses going out. But the number one reason a retail business fails today is its inability to manage cash flow.
To check your cash flow, ask yourself these two questions:
1. Do you have a reserve or emergency fund account for your business?
2. Have you done a deep dive into your expenses?
All small business owners should have a reserves or emergency fund account. 2020 might have slapped you in the face with this, but there are other situations for small business owners where a reserve account could prove to be really useful. Some examples are fires, tornadoes, flooding, hurricanes, or criminal acts.
We can’t control mother nature, crime, or accidents. But what we CAN do is make smart decisions like contributing a percentage of revenue every month to a special account. That way you’re prepared for the unknown in business.
Another crucial part of cash flow is expenses. With technology and recurring payments, retailers can easily lose control of this part of their business. Business as usual is not my recommended approach.
I do P&L audits with 1:1 clients and I can’t tell you how many times they had no idea how BIG the Expense piece of their Retail Profit Pie was. Doing a deep-dive analysis of your expenses is so important.
Other Data Points for the Retail Business Year-End Report
You’ll also need information about your transactions and your e-commerce stats, such as how well your website converts visitors into online sales. This is something I’ll personally be working on this year for my own store. It’s time for a change and I shouldn’t and can’t put it off any longer.
If you’re a brick-and-mortar store owner, this report also covers an important metric regarding your retail space investment.
Even if you’re a maker with a home studio or a non-traditional retail store owner, don’t disregard this part of the report, especially if you’re looking to grow or move into a studio space outside of your home later on.
A member of Master Shopkeepers doesn’t have a gift shop or apparel store, but I recently pointed out the revenue she generates per square foot is still important for her business. She has a few revenue streams, so viewing each stream in terms of SPSF is enlightening!
Why Benchmarks Are Critical to Business Success
In the Retail CEO Challenge live masterclass (coming up on February 8, 2021!), I’ll break through the elusiveness of retail and I’ll teach you about benchmarks. I’ll talk about how you can set goals for yourself that are realistic, but more importantly, it’s the benchmarks that will help you either figure out why you’re struggling and hopefully start profiting more.
Example Benchmark: Rent to Sales Ratio
I have a good example of this. I had a 1:1 client who couldn’t understand why she was struggling so much. When we walked through her P&L Audit, I found that her rent-to-sales ratio was well over 30%.
Ideally, for most retailers with brick and mortar spaces, your rent-to-sales ratio should be 6-10%. That’s a benchmark!
And don’t let the word ratio intimidate you. This is simple. How much of your revenue is being used to pay for rent. That’s it.
Take what you pay in rent for the year: let’s say you pay $1k each month, so $12K for the year.
Take your total revenue, for the sake of this example let’s say it’s $150K.
Divide total rent ($12k) by total revenue ($150K ) = 8%
Seriously, that’s it! What’s important here is that SO MANY retailers have no idea their benchmark should be 6-10%. My client was above 30%. Holy smokes, no wonder why she was struggling so much!
The space you use for your retail business is an expense and can be a substantial one at that. You should KNOW what your ratio is! I don’t want you to just pay rent every month because you think it’s a fixed expense and shouldn’t be looked at any further than that. Knowledge is power.
Benchmark Example: Inventory Turn
We’ll also talk about other KPIs like customer loyalty and inventory value at the masterclass. But one final metric that retailers often neglect is Inventory Turn.
Measuring your inventory turn requires a good inventory system with good reporting, along with at least one full year of data. If you aren’t there quite yet, that’s okay—just work at getting that data prepared this year.
I recently told a 1:1 client that it took me nearly one full year to get all of our inventory into an inventory system. We use Shopventory, and now, I can run a “dead inventory” report and calculate Inventory Turn. When we opened, we had no idea about inventory management. By the time I learned about this and the value of the data we probably had $50K in inventory in our store.
Building our inventory management system wasn’t an overnight project, heck, it wasn’t even a one-month project. I tackled it one category at a time over an entire year.
Note: If you’re a Shopkeeper’s Lab subscriber, my live lesson in January was all about Inventory Turn. You can visit the UNITS tab, go to Unit #6, watch the lesson, and grab the Inventory Turn worksheet.
After my 1-year inventory project, I was able to calculate my Inventory Turn. It was enlightening was how slowly our baby category was turning and how quickly our paint category was turning. When you learn about turn, you realize things like where you should start investing more and just as importantly, where you should start investing less in.
You Can Still Sign Up for the Retail CEO Challenge
It’s still not too late to sign up! I’ll close the Retail CEO Challenge on Sunday, February 7th at Noon EST. The live masterclass I’ll be teaching is on Monday, February 8th, 2021 at 1 pm EST. You’ll have access to everything in the challenge, and if you can’t attend the live class and Q&A, you’ll get access to the replay.
The 2021 and 2022 Retail CEO Challenges are now closed. However, all of the worksheets, including the Business Health Checklist and Year-End Report are available in the Shopkeeper’s Lab. Members can find these in the CEO Time + Worksheets module. Click HERE to learn more.
- part 1, part 2, part 3, & part 4 of this series
- How Retailers Can Increase Their Average Sale
- The Retail Profit Pie
- How to Price Products in a Retail Store
- Master Shopkeepers
- The Shopkeeper’s Lab
- [01:55] What You’ll Need to Complete the Retail Business Year-End Report
- [12:35] Why Benchmarks Are Critical to Business Success
- [18:56] Sign Up for the Retail CEO Challenge!