Is Your Business in Trouble?
One of the things I enjoy most is walking around town, especially in the early hours of the day. It is a chance to observe the transition from the stillness of the night to the bustle of the day.
People are going to work, deliveries are being made, and businesses open their doors to greet their customers. In many countries, you will see the shop owners sweeping the sidewalk in front of their store or watering down the pavement to keep the dust down. The day begins, the products are put on offer and, hopefully, the cash register will ring.
How many times have you walked down a street and noticed that a store that’s been operating for years is now closed? When I see this, I always want to know what became of the business. What changed in the competitive environment to cause the store to close? Did something happen within the business that caused them to close their doors? Or did the owner just decide to retire and walked away? Every business has a story to tell.
However, these are questions that are asked when you are on the outside looking in. How do you see these things happening in advance when you are on the inside? What are the events that tell you there is a problem with your business so that you can put plans in place early enough to avoid closing the business?
I thought it might be helpful go through some points that can be red flags indicating trouble so that you can do something about them before it is too late.
Let’s start with the financial performance. The most obvious indicators are the numbers that should reflect in your bookkeeping and profit and loss statements. I hope it goes without saying that we should all have accurate accounting methods in place for running our stores. Useful financial information begins with collecting accurate and consistent data from your operation every day. This is truly one of those situations where “garbage in is garbage out.”
The number of times our contract operations group goes in to operate a site and we find that there is no accurate financial information are too many to count. The operator was, in effect, running the store blind – not knowing what was going on. I suppose that’s one reason why the business owner calls us in to help.
So, what are the financial fundamentals? Let’s start with the top of the profit and loss statement. If total sales/revenues are in a continuous decline compared to the previous year, there is a major problem. The store is either losing customers or the same customers are not buying as many products when they visit. In either case, this is a bad sign.
The immediate remedies are to:
- Make sure your store is clean and presentable;
- Evaluate your staff and ensure they’re customer friendly in service and presentation; and
- Try to bring more customers into your store with new marketing ideas (signage, cleanliness, lighting and advertising) or promotions (providing added-value promotional items to customers so that they will spend more money and buy more items).
The next line of the financial statement to check is whether your gross profit margin is in decline. If your profit percentage has decreased over time, that means your retail prices have not increased in relation to the rise in the cost of the products you are selling, or you are suffering from large inventory shrink losses or excessive spoilage (more on this later).
If the gross profit percentage is holding steady, you need to check your gross profit dollars. Gross profit dollars are what is left when you subtract your cost of goods and inventory shrink from your total sales, plus any rebates or allowances. If your gross profit dollars are declining, you have a problem with either falling sales or excessive inventory shrink and/or spoilage.
Keep in mind that the amount of inventory loss or spoilage reported by employees may only be a small percentage of the actual amount. In many cases, inventory shrink – otherwise known as theft – and product spoilage are underreported and you may be losing money because products are going out the door (or into a dumpster) without being paid for.
There are ways to put in place tight inventory controls, including tracking purchases accurately, doing regular store audits and inventory accounts, and maintaining a spoilage log at the store that is verified by management.
We’ve now arrived at the literal bottom line of the profit and loss statement: the net profits generated by the store. If your net profit is declining, it is an indication that either sales or gross profit dollars are eroding, or that labor and operating costs have increased.
If you find that your gross profit dollars are the same as previous years, then you need to look very hard at your operating costs. Questions you should ask are whether you are spending too much on staffing and labor and whether your controllable expenses (utilities, repairs, maintenance, etc.) are under control.
The items I’ve mentioned up to this point are tangible signs of how the store is performing — hard numbers, percentages and trends. However, there are other, intangible, things to look for in order to check the pulse of your business.
One of the items I’m always focusing on is the cleanliness and presentation of our stores. In my experience, a store with declining sales is usually dirty, has dust on the shelves and on products, and looks untidy and unkempt. Whether this is the cause, or the effect, of the reduced sales is a matter for discussion. What I find is that a store that is not busy engages employees less, which means they are on the sales floor less and do not pay as much attention to the cleanliness of the store. Conversely, a clean and orderly store shows customer engagement and prompts the customers to make more frequent visits and buy more products.
An increased number of out-of-stocks also can indicate a reduction of sales. The most important point: if the product is not on the shelf, you can’t sell it. It is a missed revenue opportunity. It does not count if the item is in a box in the storage area. If the customer can’t pick it up, it is out of stock.
Additionally, out-of-stocks indicate that the store employees are not focusing on sales opportunities. The manager must order products before they run out; not after. In our stores, we use a “build-to” system. The build-to tells us two things: what the minimum number of items should be on the shelf when more are ordered, and what the maximum number of items on the shelf should be. For example, let’s say you are selling cans of beans. The build-to will tell you that when you get down to two cans, you should order more. It will also tell you that you should have a maximum of six cans. Indicating the maximum number of items on the shelf keeps employees from over-ordering and tying up your capital in inventory that’s just sitting on the shelf.
The build-to number should be checked regularly (possibly, every six months) and adjusted according to the ordering history and the volume you are selling at the store. If the number of cans of beans that you are selling goes up, the minimum may need to be changed to three and the maximum to 10. On the other hand, if the number you are ordering is going down, the minimum may need to be changed to one and the maximum to four. As you’ve already deduced, if you are having to adjust your build-to down, then you have a sales problem.
An indicator that is much more difficult to judge is employee tenure. Everyone wants to have good long-term employees. However, if they have been with you for a long time, you need to make sure they are motivated and focused on growing the business. Everyone gets stale and complacent after a while. It is the job of a good manager to make sure everyone is moving forward.
None of these individual indicators (with the exception of the net profit number) is enough to judge your business by itself. They all need context to determine the overall impact. Checking several of these metrics on a regular basis will give you good insight into how your business is going and, I hope, provide you with advance warning to fix problems before they get out of hand.
Roy Strasburger is president of Strasburger Retail, a privately held retail consulting, operations and management provider serving the small-format retail industry nationwide. Strasburger Retail operates retail locations for companies that don’t have the desire, expertise or infrastructure to operate them. Learn more at strasburgerretail.com.
Editor’s note: The opinions expressed in this article are the author’s and do not necessarily reflect the views of Convenience Store News.