Retail businesses are complex, multi-faceted operations with virtually unlimited metrics you can track, but which ones are the most important for you to track?
Establishing a Solid Financial Foundation:
To master finance in retail, it is crucial to start with a strong financial foundation. This includes the basics, like having the correct business bank accounts set up (not all are created equal!), a bookkeeping software for tracking sales and expenses (preferably one that links to your Point of Sale system), and an internal system for keeping accurate financial records. The true base of mastering finance is to set up the correct information and data flow which enable you to work systematically through your financial position. Before starting, make sure you’ve got these basics covered.
Budgeting for Success:
Most people will tell you “developing a comprehensive budget is essential for effective financial management”, and I am here to tell you that they are only 50% right. The truth is, almost all forecasts we make are wrong 2 days after we have made them. This means that we have two options, try to fit our reality to the budget or be willing to have a rolling and flexible budget which matches reality. I will always choose the latter. Clearly it is vital to understand your financial position at a point in time and try your utmost to extrapolate this into the future, but don’t get too hung up when things change. In creating your budget consider all of your key expenses, factors such as inventory costs, marketing expenses, employee wages, rent, utilities, and always leave a section for overheads (unforeseen expenses). Unless you are showing your budget off to raise funding, err on the side of caution and produce prudent numbers for both sales and costs. It is never bad to have more money than expected in the bank account, often it can be disastrous to have less!
Effective Cash Flow Management:
Cash flow is the lifeblood of any retail business. To master finance, retail business owners must prioritise effective cash flow management. This involves monitoring cash inflows and outflows, optimising payment terms with suppliers, negotiating favourable terms with creditors, and ensuring timely customer payments. Implementing cash flow projections and maintaining a cash reserve can help safeguard against unexpected expenses or slow sales periods. Always make sure to refer back to your original budget and update it over time to reflect your new reality (but also keep the original for reference and to show how wrong you were!).
Pricing Strategies for Profitability:
Pricing strategies are the most crucial decision you will make as a retailer. Do you compete on price making volume sales and lower margins? Or do you compete on quality, settling for less sales but higher margins per sale? To understand which you need to conduct market research to understand customer preferences, monitor competitors’ pricing strategies, and consider factors like product costs, profit margins, and perceived value. Always be experimenting with different pricing models and test customer responses to promotions and product launches. Make sure to keep data on your experiments and learn from them going forward.
Inventory management is likely to be the most impactful place you can spend time as a finance director in a retail business. Inventory will likely be a minimum of 20-30% of your costs and could be up to 70-80% depending on your industry. Making 1% changes in this area can have a bigger impact on your company than anything else you carry out. Measuring metrics like Inventory Turn, Total Inventory and Gross Margin ROI are all good ways to understand how your inventory is performing. At my company, our favourite method is ABC, measuring the number of SKUs and % of value of those SKUs that represent the categories: Top 80% of sales A, 80-95% of sales (B) or 95% + (C). Using these, we can see how successful we are at concentrating our purchasing on revenue generating products and which ones we need to liquidate as soon as possible.
Capital Investment and Expansion:
As your business grows you are likely to have to make decisions about where to spend your cash and which opportunities to accept. Opportunity cost is the key thing to consider here, what am I foregoing if I go ahead with this project? Understanding investment costs and potential cash flows will help you to make decisions, using metrics such as NPV and IRR can help you to understand how much and how fast you can generate a return, whilst risk assessments can help you to figure out where you are most likely to fail.
Financial Analysis and Key Performance Indicators (KPIs):
As a minimum you should be carrying out some form of financial analysis on your business every week. That means looking into your sales growth (like for like and new), tracking your costs, checking on profitability by location, looking into your gross margins and average transaction values. By creating a set of metrics, you will be able to have a dashboard which describes the financial health of your organisation at a glance and helps you to know where you are succeeding and where you are falling behind.
Risk Management and Contingency Planning:
In the retail industry, uncertainties and risks are inevitable. As a retail business owner, it is crucial to proactively identify potential risks and develop contingency plans. This includes having insurance coverage, creating emergency funds, and implementing strategies to mitigate risks such as economic downturns, supply chain disruptions, or changing consumer trends. These are some of the basic risk-mitigation strategies, but some of the most important. Often you don’t see the problems coming until they are already here, so it pays to be prepared for difficulties at all times.
Finance is a fundamental aspect of running a successful retail business. By mastering finance strategies, retail business owners can enhance profitability, optimise cash flow, and make informed decisions that drive growth and long-term success. From establishing a solid financial foundation to implementing effective cash flow management, pricing strategies, and investment decisions, the key is to consistently monitor and adapt your financial management practices as your business evolves. Remember, continuous learning, financial analysis, and seeking expert guidance are essential to stay ahead in the dynamic retail landscape. With a sound financial strategy in place, you can confidently steer your retail business toward a prosperous future.