Now is the time to review overheads!

By Peter Cox December 01, 2014 Industry news

I have never been a great exponent of getting an axe and ruthlessly cutting the operating expenses/overheads in hardware stores.

However my recent experience in visiting and consulting to businesses in this industry now compels me to put forward this strategy as the most effective method of not only re-establishing profit but, more importantly, generating cash flow to survive.

Readers of my column in this magazine know that I prefer a top down approach to reviewing a business. That means starting with strategies to increase sales (but at the same time not buying these sales through discounting), improving Gross Profit Margin and effectively managing inventory and debtors.

Unfortunately, for many of us in this industry, the competition has ramped up and for some this will be another year of reduced turnover and pressure on pricing as all the stores in the district chase the same customer.

Given that we have no control over the weather or competition or the economy, it is imperative that we do review and action what we can control, like overheads.

 

WHERE DOES CONTROL START?

Where does the control start? With you – the owner or manager. It is up to you to keep your finger on the pulse of business costs as well as provide both insight and example to staff on cost saving methods.

Cost control comes in many different sizes and shapes, from a few cents saved turning off unnecessary lights to thousands of dollars gained through better delivery schedules.

Each contributes to the reduction of costs and hence a larger net profit and better cash flow. Costs are classified as Direct Variable Costs which are dependant on sales (like cost of stock, freight and handling) and Fixed or Semi Fixed Costs which are not dependant on sales, but still a cost (like rent, rates) and the largest overhead in most stores, wages.

Cost control has the most dramatic effect on profit in the cost of holding onto stock. Too much stock causes increased costs in capital outlay for stock, increased bank interest to cover the debt, extra insurance to cover the added value, extra staff to handle the added volume of merchandise and ultimately additional costs to cover loss of product from damage and deterioration.

 

WHICH COSTS SHOULD YOU CUT?

In the last five issues of this magazine we have examined the tools that can be used to effectively manage purchases so there’s no need to go over this ground again. However, there are some simple ways of reducing the cost of stock such as using discounts on bulk orders, taking discounts for early cash settlements, consolidating orders to reduce freight and handling, checking freight bills to prevent overcharging and ensuring you are only paying for what you receive.

But very little can be done to reduce costs on fixed expenses, such as rent, utilities and rates other than renegotiating with the creditor. Having said this, training can be useful to reduce for example telephone, internet and communication costs.

But it’s staff costs that seem to come up most often as a way to cut expenses. If staff wages and salaries are of concern you should be looking towards what these costs reflect, your total staff numbers and their productivity.

Do you have too many staff? Could the full time position be replaced with a part time casual employee? How productive are your staff with their time?

As a rule of thumb I use the Three Times Principle: if the wages and on staff cost bill in a hardware store is $500,000 then the store needs to be generating $1,500,000 Gross Profit after rebate.

Why? One third of the Gross Profit covers wages and staff costs, a third covers the other overheads and another third provides Net Profit to the shareholders

Any decision made to reduce overheads and in particular staff costs must be clearly thought through, planned and then monitored in the future.

This is also an excellent time to get the assistance of the staff to help with the problem. You may be surprised – they could have a solution to the problem that has eluded you for months!

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Peter Cox is a senior consultant for Macquarie Advisory Partnership based in Sydney. He has over a decade of experience training and consulting in the retail hardware industry. He conducts key-note addresses, and management and sales workshops, which are aimed at improving profitability and liquidity in one of Australasia’s most competitive retail environments. Phone 0061 438 712 200 or visit www.petermcox.com.au

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