To build a longstanding relationship with your banker, it is important for retailers to understand what the expectations will be, the red flags that can literally kill the deal, how the loan process actually works, and how bankers think.

To begin with, let’s examine the ways bankers and independent retailers differ.  Typically retailers are entrepreneurs and as such are willing to assume risks in order to succeed.  They are for the most part optimistic people focusing on the upside of any given opportunity. Additionally, their businesses are not heavily regulated. When it comes to business growth, the more the better might sum up a retailers approach. Compare these traits to those of a typical banker.  Bankers are by nature risk avoidant and generally speaking, pessimistic, choosing to focus on the downside. Banks are highly regulated. They are fine with growth, but take a much more conservative approach, wanting to make sure that there is a solid plan in place before committing.

When interviewing a perspective banker for a loan, there are a few questions that you should ask:

  • What is your experience with my industry?
  • How does the size of my loan compare with other loans at this bank?
  • What happens if I hit a bump in the road?
  • Is your bank actively growing its loan portfolio?
  • How are loan decision made at your bank?
  • Is the loan officer the decision maker?
  • Who will handle my account after closing?

There are a few of the questions that the bank WILL ask you so be prepared. They will want to know how you report financial results. Were they internally prepared? Did a CPA review them? Have they been audited? The bank will also inquire as to your ownership structure. Are you a C-Corp, S-Corp, LLC, or Partnership? What does the decision making process in your organization look like? Do you individually make all the decisions or are they made by committee a board or shareholders? They will also inquire about your professional providers including a board of directors, CPA, attorney, or any consultants you might retain for guidance and counsel.

Here are the questions your bank SHOULD ask you:

  • Describe your market.
  • Who do you sell to?
  • What is your niche?
  • What makes your store special or different?
  • Who is your competition?
  • What are your competitive advantages?
  • Describe your financial results and your forecast?
  • Where do you see your company in five years?

Bankers like data and information that will back up your request. Here is a partial list of items to provide bankers preferably before being asked.

  • Timely submission of financial statements.
  • Consistent communication.
  • Early notification of problems.
  • Explanation of large movements in sales, inventory, expenses, etc.
  • Budgeting. This could include the income statement and balance sheet which demonstrates how the business has been performing. Be sure to also include your merchandise plan. A solid sales and inventory forecast shows the banker where you are headed and how you plan to get there.
  • Income statements with comparisons to prior periods including such items as gross margin, owner salaries, depreciation, other non-cash expenses, and one-time non-recurring expenses.
  • Pertinent articles from trade magazines are also helpful.

When bankers review your numbers they are focusing on three main areas.  The first is collateral, in other words, how much you are willing to put in.  You must have “skin in the game”.  The other two areas are cash flow and financial strength (liquidity and capital).

Red Flags for a Bank

Be forewarned of the areas that send up the red flag for the bank. If not overcome, these are potential deal killers.

  • No budget. This should be obvious. Don’t even waste your time or the banker’s time without one. All you will end up with is a free cup of coffee and a complimentary pen with the banks logo on it.
  • Poor credit score or no credit references.
  • Lack of understanding or inability to explain your own numbers.
  • Complicated ownership structure.
  • Tax income is very different than book income.
  • Your primary concern is what the interest rate will be and/or if you will have to sign a personal guarantee.
  • A belief that the loan can be paid back through profits alone.
  • No management team.
  • Expansion and growth without proper planning.
  • Inability to provide periodic and timely financial information.
  • Slowing turnover. This is a big sign that inventory is growing faster than sales and is an indication of potential cash flow and margin concerns.
  • No “skin in the game”
  • Poor communication or lack of honesty.
  • Fighting with management, between partners, or among family members.

For starters your banker will request two years of income tax returns for the company and each owner and two years of financials along with interim financials for the current year. You might also be asked for a personal financial statement and an accounts receivable and account payable aging report.  Don’t be surprised by a request for a personal guarantee.  An unwillingness to put personal funds into a business, should they be necessary, sends a strong message to the loan review committee. Finally, the importance of positive cash flow cannot be overstated.  The lack of cash flow kills more deals right from the beginning than almost anything else.

Assuming that you have made it this far, here is what the loan evaluation process entails. The bank will pull your credit report.  Some banks key in on particular data points from the information collected to come up with what might be called a “liquid credit score”. If the LCS comes in above their base requirements, they will most likely move forward with the loan review process.  From there, the bank reviews the data for business and personal cash flow to be certain you won’t experience any difficulty making the loan payments. Once all of the other factors previously mentioned have been reviewed and all are deemed to be satisfactory, the collateral requirements will be established.

Understanding how banks think and operate, along with being prepared, will go a long way toward successful loan approval and a longstanding banking relationship.

Ritchie Sayner

 

(I wish to thank Paul Van Erem of Enterprise Bank & Trust in Kansas City, MO for his generous contribution to this article.)

 

A while back I stopped by a local car dealership to check out a car I had seen advertised. The general manager informed me that the particular model I was inquiring about was not allowed to be sold at that location. That seemed odd to me, as the dealership represented only one line of vehicles. So I inquired as to the reason.

I was told that unless the dealership was willing to “invest” money (translation: spend it) to add an additional level onto their building, along with other costly improvements, the dealership would not be allowed to carry the model I was inquiring about. The manager was frustrated by the automobile maker’s policy, since he felt his company had always supported this manufacturer through a sizeable inventory investment. Add to that the expense of the existing building and all of the advertising they had paid for over the years to promote the brand and build a customer base. The rules of the game were clearly changing, nobody at the corporate level seemed interested in his concerns, and there was nothing he could do about it. To make matters worse, the manufacturer was spending huge amounts of advertising dollars to generate consumer interest in a vehicle that the dealer wasn’t allowed to carry. Feelings of resentment were growing.

Does any of this sound familiar?

I believe most vendors want to provide a good product at a fair price and want the buy/sell relationship to be mutually beneficial. However, certain vendors offer incentives from time to time as coercion to buy other products or lines that they want to sell. I advise retailers not to let vendor incentives, dating, aggressive discounting, threats, intimidation, deadlines, or ultimatums force them into making decisions that are inherently negative for their business. I find it a better business practice to buy products that sell well on their own merits because they are good products.

When incentives must be applied to motivate the buyer to buy, be wary. As a general rule, things do not end well when buying decisions are made under “pressure” circumstances. Below are just a few “sales” techniques you might want to be skeptical of:

  • “If you don’t increase your order by X% over last year, we will have to offer the line to your competitor.”
  • “If you don’t buy this special program, you won’t be considered a ‘Five Star’ retailer.”
  • “If you take delivery by X date, you won’t have to pay for it until Y date.”
  • “You have to buy X of specific product in order to maximize marketing dollars.”
  • “If you don’t get the order in by a certain date, you will lose a certain discount/delivery time, or the product might be sold out.”
  • “If you buy a certain quantity, you will get free freight.”
  • “We’ll even guarantee the sale.”

Let’s examine these sales ploys more closely and discuss options.

The threat of losing a line to a competitor strikes fear in the hearts of most retailers. It happens all the time anyway, so don’t worry about it. Do you really want a vendor thinking that they have that much control over your business? If you feel pressured to concede to this sales tactic, you don’t have much of a relationship to begin with. Also, you might as well plan on being bullied again in the future, since it worked this time. Course of action: Turn in the order that you feel comfortable with, and let the chips fall where they may.

In their understandable push for consistency of both product presentation and image, vendors for years have come up with programs designed to recognize their top dealers. On the surface, there is nothing at all wrong with this – unless you are striving to become a “Five Star,” “Diamond,” “Titanium” or some other coveted, precious element dealer for the wrong reasons. These levels of distinction often are accompanied by perks – greater discounts, return privileges, increased marketing allowance, payment terms, seats on advisory boards, and freight allowances, to name a few. If the size of your orders puts you into this category anyway, fabulous! You deserve the perks, and the dealer recognition is nice. On the other hand, if your ego has taken over your good sense and you are buying more than you should for the sole reason of achieving this distinction, you might want to rethink your priorities. Course of action: Buy what you can sell, and forget the gratuitous designations unless they make economic sense.

Oftentimes vendors offer special dating if you take early delivery. The pitch is great: Take delivery by such and such a date and you might get several extra months to pay for the merchandise. The idea here is that you will get a longer time in which to sell the product, perhaps even all of it before the invoice is due. Isn’t this retail heaven? Not really. Vendors want to keep factories operational and they want the product shipped to you as soon as available for a couple of reasons, primarily: (A) so you won’t buy from another resource, and (B) so you can’t cancel the order if sales slow because you already have it. The reason I don’t care for dating programs is simple: Once the merchandise is received, it begins to sell because of the power of fresh new merchandise. This means the goods you had planned to sell at this time may not sell as quickly, potentially leading to higher markdowns and slower turns. Remember when you are enjoying the extra months that there will be a day of reckoning: the date the invoice is finally due. Course of action: Though there are numerous exceptions and many cases where dating is favorable, it is best to buy the quantities you want as close to time of need as possible.

Sometimes you might receive an extra advertising allowance if your order reaches a certain level. This just might work for you, because if you have purchased more than you can sell profitably, you will need the extra ad budget for all of the sale ads you will be running. Course of action: Stick to your open-to-buy plan and buy what you can sell profitably. If you happen to qualify for the advertising allowance, great — but don’t reach too far, or the “free” advertising won’t be free after all.

One of my favorites is the enticement of getting the order turned in by a certain date or lose a certain discount percentage. Sometimes, you may be told, the product may even be sold out. It takes a lot more than a few discount points to make up for a 50% markdown if you have hastily submitted an order without thorough preparation. Also, I never understood how the product in question could be sold out when there were several more shows left in the selling season. Course of action: Take your time, do your homework. If the discount makes sense and you have seen all of the competing lines you need to in the category, pull the trigger. 

In some categories free freight is a huge deal and obviously something to be considered. Course of action Know what the savings will be, prior to committing to quantities you can’t handle.

Having a vendor “partner” with you on goods they think you should buy can be a positive. Make certain all parties are clear regarding all terms – including any markdown money, return goods allowances, credits on your account, ending dates, etc. Oftentimes, these programs can leave a retailer with even more slow-moving goods the next season if not executed properly. Course of action: Make sure you have a vendor prenuptial agreement prior to embarking a partner program. Get it in writing by someone in authority.

I am not suggesting that sales incentives aren’t worthwhile. They are often very valuable. What I am saying is, don’t get greedy. Don’t let the “deal” coerce you into making a bad business decision. Always ask yourself: Would I be buying this if it wasn’t for the particular incentive(s)?

Setting goals and striving to reach them is admirable. However, when achieving a goal benefits one party while putting the other at a disadvantage, the purpose of the relationship comes into question. And the biggest danger that creates is losing the larger objective of mutual benefit to selfish, short-term motivation.

 

The store meeting is one of the most important forms of direct communication between owners, managers, buyers, and sales associates.  Once a regular part of the work week during the era of mostly full-time employees, this long-held tradition seems to have fallen by the wayside.  Taking its place is communique in the form of texts, emails, conference calls, and notices posted by the punch clock or in the break room. Admittedly, the scheduling of store or department meetings is a bit more challenging today then in year’s past due to split shifts, days off, vacations, and the increasing use of part time employees- all of which makes the store meeting that much more necessary.

 

Timing and Notice

Some stores can get by with regularly scheduled monthly meeting, while others wait for circumstances to dictate a store-wide get- together. Either way, remember to provide ample notice and pick a time when most employees are able to be present.  If store management deems the meeting mandatory, hourly workers will need to be compensated for their time, whereas salaried workers do not.

The ideal time for a meeting really depends on the size of the operation.  A small store with few employees can perhaps get by with as little as a few minutes on the floor when business is slow. Larger operations will sometimes have meetings before the store opens or after it closes. I work with a particular store that has a storewide meeting every single day prior to the store opening and has for years.  Store executives would tell you that this form of communication is one of the secrets to their success. They back up their claim with sales exceeding $1200 per square foot, margins of 55% and a stock turn of 4 times annually.  The meetings are so informative that employees who end up missing a particular meeting- due to a day off or a staggered starting time- feel that they have missed out until they are brought up to speed.  Meeting notes are provided to those employees unable to attend.

In multiple store operations, it would be impossible for owners and even buyers to attend each individual store meeting. However, it does lend a feeling of inclusiveness when an owner makes the effort to attend branch store meetings on occasion.

 

What to Cover

Be sure to keep meetings relevant and positive so that those attending feel that their time is being productively used. There are an array of topics that should be covered regularly including customer service issues, policies and procedures, shrinkage control, business goals and objectives, sales training techniques, upcoming ads and promotions, and definitely features and benefits of new merchandise arrivals.

 

What’s Hot, What’s Not

If you are the meeting organizer, one of your goals will be to get as many people involved in the meeting as practical.  Role playing when dealing with suggestive selling or sales training techniques works well in this situation.  Something I used in during meetings was a conversation starter called, “What’s Hot, What’s Not”.  Each buyer or manager would bring two items to the meeting and be prepared to discuss both.  During the What’s Hot portion, each buyer would share with the group the item that was currently the hottest in the department.  This discussion included vendor, quantity purchased, sell through, initial markup, reorder possibilities, how the item was being featured, and just what was making the item so “hot”.  The procedure was just reversed during “What’s Not”.  Buyers would take turns presenting the item that was currently the biggest dog.  Discussion points would include why they bought the item, how many they still had, why it was not selling and what they planned to do to move the slow seller. At the end of each buyer’s presentation, other buyers and sales associates could offer ideas and suggestions that might prove beneficial.

The What’s Hot, What’s Not discussion was not only entertaining, but also became a great learning experience.  Each buyer wound up learning what was working and what was not from other buyers in the organization as well as techniques for solving merchandising issues.

 

Invite Case Studies & Guests

Case studies also make great discussion starters. Have a different employee each meeting bring up an actual issue that has come up for the group to analyze.  This promotes group interaction and helps build  problem-solving skills. Sales associates can learn from each other the best ways of handling objections as well as complaints.

Another way to make staff meetings interesting is to invite an outside guest.  One great idea is to schedule a rep from one of the stores major lines to give a “mini clinic”. This is an excellent way for sales associates to hear in detail about the merchandise that the store is or will be carrying.

When your return from buying trips, always share new merchandise trends, styles and lines that you have purchased. Your enthusiasm for the upcoming season’s merchandise is contagious-use meetings to share it and pump your employees up.

 

Involvement Brings Satisfaction

Also, in an effort to get everyone involved, solicit input and invite meeting participants to air grievances as well as possible solutions or customer comments that affect the store.  It’s a good idea to monitor this portion of the meeting closely so that it doesn’t spiral into a gripe session.  Be sure to follow up as quickly as possible to questions that arise. This leads to job satisfaction and employees feeling valued.  One way to get everyone involved might be to select a different employee at each meeting to take notes of the meeting and make sure that everyone, both those in attendance and those that were not, receive a copy.

If you are already conducting regular store meetings, keep doing them. If not, consider scheduling one soon. Your employees will be very pleased with the open communication.

 {Need a good cornerman to coach you with your plan?  Contact me at Ritchie@write4retail.com}

I am guessing that heavyweight boxer Mike Tyson never saw himself as a business philosopher, but he certainly didn’t pull any punches with this quote.  The analogy between his quote and the trials and tribulations of the retail business is about as good as it gets.

Most retailers approach planning for the upcoming year by reviewing what happened the previous year, good or bad. Modifications are made taking into account the weather, the economy, the political landscape, merchandise trends, and current vendor relationships among other factors. Depending on the size and sophistication of the operation, the planning process can be as basic as an owner preparing a plan by himself, or as complex as soliciting input from a variety of sources including buyers, financial control folks, merchandise managers and even store operations staff.

Planning is most often done in the privacy of an office, surrounded by supporting spreadsheets and reports intended to backup or reinforce the outcome.  Well and good to this point. Assuming the plan is constructed accurately, taking into account trends in classification sales, margins, turnover rates, proper timing of deliveries, reasonable results could be expected.  However, much like a boxing match, the retail environment stands ready to deliver “punches to the mouth” sufficient enough to knock even the strongest of merchants down for the count if not prepared to go the distance.

Getting punched in the mouth is analogous to the unanticipated events that can have dramatic effects on a business plan.  Weather, like a boxing opponent, is unpredictable and capable of delivering a sucker punch to the best of plans.  Warm, dry winters can bruise an outerwear or glove season just like cold, wet springs hurt sandal sales.  If these two seasons occur back to back, you have a right, left combination that can land a retailer on the ropes.

Other “punches” retailers endure might include, late shipments for any variety of reasons, road construction in front of the store, your best salesperson leaves, the landlord raises the rent, the air conditioner goes out on the first hot day, fit issues, shoplifting, the POS system is obsolete, an on an on. Any of which can be a huge body blow to the business.

How you recover from the many varied body blows you are bound to receive during the course of a year speaks volumes to how well you have planned.  If the sales forecast is not trended properly, you run the risk of having either too much or too little inventory as this is the crucial starting point for any merchandise plan.  If the turnover rate for the particular classification being planned is incorrect, the result could be missed sales opportunities or too much stock.  Seasonal adjustments must be made to the planned inventory levels so as to have enough to meet customer demand, but not so much as to create a markdown problem.   Exit strategies must be planned for clearance of seasonal products to avoid excessive carryover.  Not having such a strategy can result in a blow below the belt, causing cash flow to be tight and in severe cases credit issues with vendors. This in turn can force a retailer to resort to alternative funding sources such as credit cards or tapping bank credit lines.

Since markdowns affect sales as well as ending inventory levels, they should be built into the plan profitably at this time.  Planned markdowns add to needed inventory. If sales and inventory projections are not met or were planned incorrectly, the business will experience yet another jab. Next is to plan the receiving flow at cost and retail. For this to be accurate, you will need to know the initial markup for each class.  Finally, the merchandise-on-order expected is added for each store and class and you have your merchandise plan.  One last kidney punch is possible however.  If all of the orders are not entered into the POS system, the open-to-buy will be wrong and you could end up buying too much.

Successful planning both on the merchandise side as well as the expense side is vital to any retail operation.  Without a solid plan in place, the chances of success are greatly diminished.  Creating a plan that relies on optimal business conditions or best-case scenarios is risky at best and potentially disastrous at worst. Remember, it’s not IF you are going to get punched in the mouth this year, it’s when, how many times, and how hard. With a solid plan, your business will be better prepared to go the distance. Those that choose not to plan, or don’t adhere to their plan, might just be the ones that end up throwing in the towel.

(It’s a fact…20% of the people that find this website will end up reading this article. Out of that group, 20% will actually DO something proactive while 80% will not.)

In 1906, an Italian economist by the name of Vilfredo Pareto, created a math formula describing the unequal distribution of wealth in his country.  He observed that 80% of the wealth, which was mostly land at that time, was owned by 20% of the people.  In the 1930’s and 40’s, quality manager pioneer, Dr. Joseph Juran, recognized the universal applications that the “law of the vital few” had and applied it to business.  As such, the 80/20 rule or Pareto’s Principle as it would be known was born.

Examples of the 80/20 rule in the retail world are numerous.

  • 20% of the vendors you carry supply 80% of the inventory you have.
  • 80% of your sales come from 20% of your stock.
  • 80% of the sales are produced by 20% of the sales associates.
  • 20% of the staff causes 80% of the problems.
  • 80% of your time is spent dealing with the 20%.

Though the 80/20 examples above may not perhaps be absolute for your company, the idea is to understand that the principle exists and use it to help manage more effectively.

Some popular management theories suggest that the most effective use of time, talent, and resources is to focus almost entirely on further development of the 20% that is already performing and leave the remaining 80% status quo. With regard to inventory management, I would offer that efforts to improve the 80% would prove more beneficial.

Let’s assume that we have a classification where 80% of the sales are coming from 20% of the inventory, a very common scenario. Most often, I see this in a class that is overstocked and under stocked at the same time. Contributing to the overstock situation is usually old, dated inventory consisting of broken sizes, discontinued styles, poor color choices and even vendors that are no longer part of the merchandise assortment.  In other words, the class consists of a whole lot of nothing. Typically, the same class will be under stocked on items that are selling well and should be filled in, but are not because “on paper” the class is overbought.  This class will never reach full potential until this problem is diagnosed and remedied.   Typical merchandising benchmarks of turn, margin, GMROI, can oftentimes be misleading if not thoroughly reviewed.  In my opinion, this is the very reason that some stores never achieve the inventory turnover rate that they should.

Take a hypothetical classification with 10 styles.  Let’s assume that 2 of the styles have just been received and are blowing off the shelves. Let’s further assume that 5 styles are just OK and that 3 styles are real dogs. In fact, they are so bad that you had to check the purchase order to see if you really bought them in the first place. If the store is functioning efficiently, the fast-selling styles get reordered immediately, the “dogs” get returned or marked down just as quickly, and the so-so styles are scrutinized closely throughout the selling season.   If you are reviewing at the class level only, and not drilling down to the SKU level in your POS system, you may miss the hot sellers and the “dogs”. This is the very reason that good POS systems allow you to create fast and slow seller reports.

If the reorders get missed, sales begin to suffer because sizes become depleted and remaining styles are not as desirable.  If the “dog” styles are not dealt with immediately by way of a vendor return or early in-season markdowns, inventory levels become bloated slowing turnover and choking off open-to-buy.

Narrow and deep

In theory, the cash generated from marking down the slow selling styles pays for the reorders of the faster selling ones. As the store approaches the peak of the selling season, the assortment of styles offered at the beginning of the season would have narrowed, while the styles in demand would be readily available in needed sizes and colors.  If the store has effectively managed its open-to-buy plan, it should now be in a position to land promotional merchandise to blend into the assortment at season end.  If you are lucky or if you have negotiated well with the vendor upfront, you might be able to buy the same styles that performed well during the season at a promotional price. This merchandise will service to boost both sales and margins for the category.

Managing the 80/20 rule is a continual process. The value of the Pareto Principle is that it continually reminds us to focus not only on the 20% that is the driving force behind the sales, but also to manage the remaining 80% more efficiently.

If you accept the premise behind the 80/20 Rule, then 20% of the people that find this website will end up reading this article. If you have gotten this far, you are part of the 20%. Out of this group, 20% will actually DO something proactive relative to this concept while 80% will not. And so it goes.

If you are among 20%ers, congratulations!   Try shifting some of your focus to the 80% not working for you and see how quickly things improve.

This is the first post I have made to this site that was something that I didn’t personally write.  One of my clients sent this out to his staff a few days ago and copied me.  I thought it was such a positive message that I sought his permission to share it with you. He agreed on the condition of anonymity. I hope you  like it as much as I did.

####

We’ve arrived at the end of another year and the beginning of a new one. I
thought I would share my New Year’s Resolutions and some new ideas that
managers and salespeople should consider:
*       Resolve to satisfy each and every customer: Sometimes satisfying
them will not end in a sale; but if this is your goal, then you will make
more sales then you lose.
*       Resolve to smile: It’s amazing what a simple gesture like a smile
can do and it takes very little effort.
*       Resolve to send thank you notes: Especially if you are selling large
ticket items or recognizing your best customers, take the time, get their
info and write thank you notes. They will pay off in the long run.
*       Resolve to keep up on product knowledge: It’s easy to get lax in
this area, but it so important that salespeople know what they are selling–
inside and out; both footwear, apparel and shoe care.
*       Resolve to solve your customer’s issues, problems or concerns:
Customers, at one point or another, are going to have issues either during
or after the sale. Take the time to understand the issues and do everything
in your power to solve them.
*       Resolve to get away: It’s important that you make plans with
management to take time for you and your family during the year.
*       Resolve to be a team player: Yes, selling is a competitive business

but don’t be afraid to assist a co-worker. They may return the favor to you

at some point.
*       Resolve to have fun: Sales is our profession, but it should also be
fun. If you are having fun, chances are your customers are having fun and if
they are having fun, then the odds of them buying increase.

Happy New Year to you all!

(If your sales aren’t growing as quickly as you would like, call me I can help-Ritchie@write4retail.com)

There is an old retail saying that goes something like this, “increased sales volume cures all ills.” All retailers seem to breathe a little easier when sales are rising.  Invoices are easier to pay, expenses aren’t a problem, credit lines are reduced or paid off, and cash flow isn’t a concern. Positive sales growth is a retailer’s validation that he or she is doing a good job and is in control of the business. In other words, it’s FUN to go to work!

Top line revenue growth is the most vital component of a thriving retail business. A store can have great margins, phenomenal stock turnover and an outstanding GMROI, but if sales aren’t sufficient to cover normal operating expenses…you’ve got a problem!

Review Financials First

When a store comes to me with this problem, one of the first things I do is review the financial statements. It is important to get a base line on the business. The profit and loss statement helps ascertain that the cost of goods sold is within industry norms, and that operating expenses are reasonable and typical for the type and location of the store in question.

The first portion of the P/L provides information relative to sales volume and the profitability of those sales.  Look for a percentage change from one year to the next if available. The gross margin number shows how effective the operation is at selling merchandise at full price.  A GM% that is too low would be an indication of excessive markdowns and/or an inadequate initial markup.

When evaluating operating expenses, primarily focus on occupancy and payroll costs, as those tend to consume the largest portion of the budget. Since the discussion is on sales growth, or in this case, the lack thereof, a review the sales and promotion expense is also in order.

With regard to the balance sheet, look for three main things:

How much money does the store have available now?
How much money is owed and due now?
Are there loan obligations that need to be met monthly and if so how much?

Calculate Breakeven

Assuming that no major issues are discovered in the review process, the next step is to determine the store’s breakeven point. This is the sales number that must be attained for the operation to be viable. There are two ways to get this number, the long, complicated way (probably your accountant’s way) and the quick, simple way (my way). Let’s go with my way.  To get a quick and accurate breakeven figure take your total annual operating expenses divided by the anticipated gross margin percentage.

Formula:  total expenses/anticipated GM%

Example:  $440,000/47%=$936,170

Why Aren’t Sales Growing?

If the financial statements are in reasonable shape, the next determination to make is why sales aren’t growing. There are several factors that can come in to play, location, overall economy, dollars per square foot, advertising and promotional activity including social media marketing, attitude and ability of sales associates, ownership and management involvement, assortment, pricing, but most importantly… the freshness of the merchandise.

Let’s focus on inventory freshness.  I will restate a question posed previously, what sells fasted, merchandise from past seasons or last year that you have carried over or fresh, new products that have just arrived in time for the new season?  Admittedly this seems to be a ridiculous question, at least on the surface. That said, I am amazed as to why so many retailers fall into the trap of not adequately clearing out seasonal goods? We are not dealing with wine or antiques here folks. This stuff doesn’t get any better with age. It just costs you more money the longer it sits unsold on your shelves (or worse yet in a box in the back room).

I recently worked with a women’s and children’s shoe retailer that was doing this very thing.  Things seemed reasonably fine on the surface, but invoice payments were always running behind, discounts were being missed, and cash flow was usually tight. When reviewing the age of the merchandise by classification, a very revealing discovery       came to light. What was detected was that in three significant categories merchandise was very slow turning. In fact the old 80/20 rule was in play with 80% of the sales coming from about 20% of the inventory….and it wasn’t the old stuff that was selling.  Surprise, Surprise!

Fresh Inventory = More Sales

After a heart to heart discussion with the owner, it was decided that anything over six months old would be liquidated as soon as possible. The initial misgivings that I heard regarding impact on margins soon dissipated when the back room was cleared out of all old goods, the sale room was empty, past due invoices were paid, and money was in the bank instead of being tied up in product that in some cases had had not one, but two birthdays. Another important side benefit was that this owner went to market with expanded open-to-buy dollars in these categories for fresh new inventory.

The end result is that overall inventory has been reduced significantly; sales volume is stronger because the store has fresher merchandise and gross margin is healthier because now more product is being sold at full price.

The moral of the story is that fresh inventory in the right quantity and the right classifications drives sales volume.

(Need a lyricist to write a verse about how your store can improve sales and turnover?  Email me at rsayner@rmsa.com)

One of the classic musical pieces of the 60’s was a song called Turn, Turn, Turn.  Put to music originally by Pete Seeger, and later recorded by The Bryds among others, the song is adapted almost entirely from the Book of Ecclesiastes in the Old Testament. The basic premise of the song is that there is a time and place for all things.  Being consumed by retail when I was growing up, I was certain that someone had written a #1 hit about turnover. What did I know?

Turn, Turn, Turn should be every retailer’s theme song today! If we put a retail spin on the lyrics, increasing sales volume would undoubtedly be the opening verse. Following would be a refrain on selling inventory more quickly.  In other words…faster turn! Notice I did not mention margin. The margin that you maintain is irrelevant if sales are not sufficient to cover expenses and merchandise receipts.

Increased turn and sales growth can be achieved by adhering to the following protocol:

Readily identify hot selling styles and trends and react accordingly.
Work with resources that can supply product.
Negotiate stock balancing agreements in advance for per performing styles.
Minimize seasonal carryover and avoid packing goods away for the next big sale.
Reserve OTB for off price opportunities that can be volume drivers.
Pay close attention to scheduling deliveries so that there is a constant flow of fresh merchandise arriving regularly.  Employ this merchandising philosophy as apposed to frontloading at the beginning of each season in hopes that you planned (guessed) correctly about future business.
Chase product when possible. This is a much preferred strategy to overbuying and trying to cancel.  Any manufacturer’s rep. will support me on this.
Don’t become the vendor’s warehouse.
Negotiate longer terms.  Even an extra 30-60 days will help cash flow and give you an opportunity to sell some of the product prior to the invoice coming due.

I have taken the liberty of rewriting some of King Solomon’s original words, but the tune remains the same. I invite all of you to sing along with me. Here we go…

To every class Turn, Turn, Turn, there is a season Turn, Turn, Turn, and a time for every markdown under heaven.

A time to buy, a time to sell; A time to reorder, a time to review;

A time to plan, a time to promote; A time to markup, a time to markdown the old stuff that isn’t selling.

A time to open, a time to close; A time to hire, a time to train; A time to motivate, a time to unload sales people whose selling costs continually exceed10%.

A time to relocate, a time to remodel; A time to lease, a time to renegotiate your lease especially if it’s over 8-10% of your sales.

A time to transfer, a time to cancel; A time to test new vendors, a time to drop lines that no longer work or are not profitable .

A time to forecast deliveries, A time to budget expenses; A time for a new POS system, A time for Facebook, Twitter, and perhaps even Groupon; A time to build your OTB plan by classification and store from the bottom up.

I readily admit that my version may not end up being the #1 hit that The Bryds had. I also added some lines so that folks on the operations side wouldn’t feel left out. The central theme however is that improving turnover IS the pathway to profitability. Faster turning stores have better cash flow, larger sales increases, and way better GMROI.

I swear it’s not too late!

(As a benefit to readers of this blog, I will provide the analysis described below at NO CHARGE for a limited time.  Sign up on the contact page if interested.)

A large volume store recently came to us with an interesting dilemma.  The store had a good gross margin and a fabulous inventory turnover, yet was not making any money. The merchant had a gross margin of 48% and operating expenses of the same. Not surprisingly, their accountant’s initial reaction was to mandate that $1,000,000 be cut from operating expenses immediately. So the accounting minions went to work examining every line item on the expense budget to see where cuts could in fact be made.  Rents were examined and renegotiated where possible, selling expenses were more ardently monitored, and the scalpel was taken to the advertising and promotion budget as well. Travel, freight, insurance, outside services, you name it, were scrutinized.  Careful review and control of operating expenses is prudent for every retailer. The exercise however, is a one-trick pony. You can only fire someone once! In other words, once an expense is cut, it’s cut.  No retailer can continue to back into a strong profit and loss statement by continually chopping expenses.  A retailer typically gets one pass at this strategy after which merchandising performance must improve in order to grow.

If you take the engine out of a car it will make the car lighter.

That is true, the car will have less weight, but won’t be able to move.  So the objective of reducing the car’s weight is achieved, but in doing so the car is not able to function as designed. The same concept is true when reducing operating expenses.  Selling costs cut too aggressively will end up costing the company sales. Trimming the ad budget by too much can lead to lack of visibility in the marketplace.  Cut out travel and pretty soon, the store risks not showing the newest products available. The examples are endless.  You can trim the fat only so far before cutting into muscle. You will need to find another way to increase profitability.  Reductions in operating expenses may serve to accomplish a short term profit goal, but the strategy is not sustainable in the long run. You ultimately will need to increase sales volume.

Back to our example

The assumptions we made were that the majority of the major expenses, once trimmed were for all practical purposes “fixed” expenses as opposed to “variable” expenses which adjust according to sales. We also were convinced that the store was able to maintain the same margin on any planned sales increase.

We knew the margins were reasonable and the forty million dollar sales volume was no small piece of change.  So where was the problem? A peak “under the hood” at the merchandising data showed that the store was turning its inventory way too quickly and losing thousands of dollars in sales in some classifications. Any regular reader of this column knows that I often extol the virtues of faster turns at every opportunity. The benefits of which have been discussed on many previous occasions.  There is however, a balance that must be struck between turning too quickly and missing business, and not turning fast enough and having cash flow and markdown issues.  This optimum balance can only be achieved if you regularly monitor the sales and inventory plan at the store and classification level.

In this case, a 5% sales increase, deemed easily attainable by slowing the turn in areas where business was being missed, proved to be a viable solution.  By reviewing the sales and inventory forecast monthly with this retailer, we were able to show him how his inventory dollars could best be allocated to achieve the volume increase he needed.  By adding inventory in the right classifications at the right time we purposely slowed the turnover in order to maximize sales. Margins and operating expense dollars remained constant, the increase in volume yielding a 2.4% improvement in net profit. Any expense reduction possible only makes the end result that much better.

Every retailer should periodically have a “check-up”.  Much can be learned by allowing an independent, third party to objectively review the merchandising data as well as the financials. This simple process generally involves emailing sales, inventory and profit and loss information. A couple of screen shots from most POS systems is generally all that is needed.  When I do an analysis, I try to get information at the class level if possible.  The most rewarding part of the process is when I am able to discover areas of upside potential buried deep within a retailer’s data. To me, this is like a big treasure hunt. Once the opportunities are discovered, a plan of action is agreed upon and set into motion. The puzzle is solved.