Retail Math

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Small business retailers are typically focused on the day-to-day tasks of operating the business and it’s not unusual to see many retailers use KPI’s just for scorecards. It’s unfortunate, as this approach would be like getting to your destination and then checking the traffic instead of using Waze to provide you with real time information on traffic conditions.

Below are some of the KPI’s to consider in managing your business on a daily basis, and while no one by itself will give you any great insight, the combination of all of them will let you know if the road ahead is a green, red or orange line.

Sales & Margin

The most important performance indicator for a retail store is the sales totals and the cost of the product  (including freight) associated with those sales.  Look at this number at both an overall and at a category level and if possible even at a brand or supplier level.  Take a look at the inventory levels and compare the cost of inventory on hand to the overall contribution to sales and to the margin during the period. Over time this could help you identify under performing, mispriced or overstocked items.

Gross margin refers to gross profits expressed as a percentage of sales. This is an important indicator of a company’s financial performance. Gross margin is also important for determining the markup percentage for products. When pricing consider gross margin and historical markdown percentages on a category.

Margin minus Labor

If you have enabled the time and attendance module, look at the Margin Minus Labor as well as any commissions paid to sales associates to see the impact of labor on your operation. Run this report by day to see if there are days that you are overstaffed, in addition consider customer activity and units per transaction for those days to see if what if anything can be done to improve the overall Margin minus Labor number.

Many SMBl retailers do not bother with this metric. They focus primarily on sales – product cost, and as long as the sales keep rolling in they stay focused on keeping the shelves stocked (too often at any cost); sales does not equate to profitability.

Gross Margin Return on Investment (GMROI)

GMROI measures your profit return on the dollar amount invested in inventory and may be the most important KPI to track, as it provides you a snapshot of the overall picture of your store’s performance. It essentially tells you what your return was for every dollar you invested into inventory.  Run this at an overall and category level to see if your product mix is right, and a brand or vendor level to see if you should be repricing or renegotiating pricing on any lines.  Is this return worth your investment in inventory?

Product Returns

Scan Return reports over a period of time to identify any potential problems in quality of lines or a category.  High returns across multiple lines may mean that there is a problem with information provided by your sales associates on products and may be a simple matter of improving their understanding the product. Irrespective of the reason, this is a number that retailers should be aware of try to reduce as it impacts their costs, and negatively impacts their units per transaction.

While reviewing returns, also run customer and cashier reports to see if there is any unusual activity associated with specific customers or cashiers.

Units per transaction (UPT) and Margin per Unit

Just as it sounds, this KPI will tell you how many units are being sold pre-transaction. Compare this number over different periods and see the performance of your sales associates.   Having the entire team focus on this number can have a direct impact on overall profit as there are typically no additional fixed costs associated with an increase in this number, increases in units per transaction have a direct impact on overall profitability.

Inventory Turnover/Stock Tun

Stock turn, is the number of times inventory or stock is sold over a period of time, typically annually.  It tells you how quickly you sell your stock. In most cases a high stock turn  indicates that you are operating efficiently and don’t have money being tied up in inventory for long periods. Review this number at a category and a brand or supplier level to determine if your product mix needs to be modified to improve efficiency.

A higher than usual stock turn may indicate that you don’t have enough inventory on the floor, and you want to see what the impact on other numbers are, are your units per Transaction slipping? Are sales dropping?

Compare this ratio to industry benchmarks if available, remember while a  low turnover implies poor sales and, therefore, excess inventory but a high ratio could be caused by either strong sales or ineffective buying.

Sell-Through Percentage

This KPI is the percentage of items sold, compared to the amount of items that were available for sale. This tells you how a product is performing and should be run at a category and an attribute level. This information should be used when ordering product, or to decide how to bundle product to encourage sales movement. This can also be used to rest your displays.

Sales to Inventory

The inventory to sales ratio can signal potential problems in cash flow. For example, an increase in inventory to sales ratio from one month to the next indicates that one of the following is happening:

  • Investment in inventory is growing more rapidly than sales
  • sales are dropping

No matter which situation is causing the problem, an increase in the inventory to sales ratio may signal an oncoming cash flow problem.

Likewise, a decrease in the inventory to sales ratio from one month to next indicates that one of these is occurring:

  • Investment in inventory is shrinking in relation to sales
  • sales are increasing

Here again, no matter which situation is causing the reduction in the inventory to sales ratio, either one suggests that you are effectively managing your business’s inventory levels and its cash flow.

To reiterate it is important to just not consider one KPI and draw a decision on it, these should be viewed in totality and see if the road ahead is red, green or orange. For example you may see the your inventory to sales ratio is dropping and your stock turn is dropping which suggests your inventory efficiency is improving and decide you need to do nothing.  Next you look at your Units Per Transaction and see that it has dropped, as are your total transactions and sales. Putting all these data points you may conclude that your drop in inventory is causing you to have product Out of Stock losing sales opportunities with your customers which in turn start having them shop elsewhere.

If this all sounds interesting, download our KPI dashboard app or sign up for our monthly KPI webinar.