If your cash flow is in the black, sales are on the right track and you are controlling expenses, then the final part of the equation – profit – will just fall into place, right?
Wrong! For some unfathomable reason, most people in this industry focus solely on sales. But how many stores and buying groups have gone bust just focusing on sales?
I prefer to concentrate on profit – that is Gross Profit and Dollars Gross Profit. As a hardware store owner told me 25 years ago, you don’t bank a percentage, you bank dollars as a result of the percentage against your level of turnover. That is Gross Profit Dollars.
The simple way to look at it is this: if you are making sales and cannot cover your overheads you will go out of business.
UNDERSTAND YOUR BREAK-EVEN POINT
Understanding your break-even sales is the starting point to effective financial management. Say the cost of just opening the doors every month is $100,000 (wages, rent, interest, vehicle expenses, etc).
Depending on where you are, the building activity of the district you service determines the Gross Profit Margin. I have always worked as a rule of thumb on the following (margins after rebate):
So a trade store with $100,000 worth of overheads a month looking for a Gross Profit Margin of say 25% needs to generate monthly sales of $400,000 to break even, just to cover overheads.
Once you know your sales target you can determine the number of customers you need to generate the sales. If the average sale as determined by the computer is say $100, then you need to generate 4,000 transactions a month or 160 transactions a day. Obviously if the average sale is $200 then the number of daily transactions required to break even is 80.
Gross Profit Margin is the most impactful result in business. If you cannot make a decent Gross Profit Margin to cover the overheads and thus generate Dollars Gross Profit then you are out of business.
In our example it would be great to say I have a business which has sales of $4.5 million but what is the point? You are out of business. Again the number I always look at is not turnover but Gross Profit Dollars generated.
KEY DRIVERS OF GOOD CASH FLOW
This leads then to cash flow. Good cash flow comes from firstly a good profit and getting the balance right in the paying of creditors and collecting the debtors. Yes you can be making a profit in the Profit & Loss statement but be going broke doing it.
Running a trade store in particular is tougher than most other retail stores in town simply because the vast majority of sales are on account.
The key drivers of cash flow are in the balance sheet. That is inventory, accounts receivable and accounts payable. When you make a sale in this industry it can take a long time before the funds to arrive into your bank account.
Your challenge to keep cash flow in the black is:
In summary, if you get your cash cycle right and your Gross Profit Margin where it should be and are proactive in selling, your business should be able to look after itself.
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