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Retail: the solution

June 16, 2010 | 07:45 AM
In the previous column, I discussed a merchant who lost the competitive edge slipping into bad buying habits and discontinuing doing what had worked for them in the past. Whether you're a brand new owner, or one who hasn't had a "business physical" for a while, the same principals pertain.

n Know Your Expenses — There are two basic expenses: fixed and variable. Purists will say there's also semi-fixed and semi-variable. This is true but for simplicity purposes lets stay with the two primaries.

Fixed are what your accountant defines as your operating expenses, or your overhead. Examples include your lease payment, loans, officers salary, depreciation, etc. Variable expenses run in correlation with your sales volume. Also referred to as controllable expenses, they include inventory purchases, hired hourly labor, delivery costs, etc.

From these numbers, you can determine your break-even and begin to identify what your markups need to be in order to engineer a predetermined profit.

n Mark-ups vs. Margins — Once you've classified your expenses, its time to create a mark up strategy that absorbs all expenses, and creates an engineered profit. Remember to treat profit as an expense, not a leftover.

If you use a two times mark up, your gross margin of profit will be 50 percent. Does this absorb all of your fixed expenses? If your overhead is 30 percent of sales, and you want to engineer a 10 percent net profit, then your gross margin of profit needs to be 40 percent by design.

n Change Your Image — Revisit your store image. Are you maximizing your square foot allocation strategy? Do you have a strategy to engineer the needed gross margin of profit, and to absorb the cost of your fixed expenses? If you're not hitting your overall target margin, then revisit the various departments or profit centers for potential "leaks." Visit different venders who might offer more competitive margin opportunities.

n Monitor Your Results — Make sure you take the temperature of the profit water on an ongoing basis.

Budgeting your expenses and forecasting your sales at various levels are excellent ways of controlling costs, and staying on top of your results. Comparing departmental results on an apple to apple basis is an excellent way of identifying a negative trend. Compare results over three or four years to identify improvements or declines.

n Break-even As A Competitive Tool — Knowing your break even is an essential element in competing for market share. When McDonald's runs specials on two for one sandwiches promotions, it's not because they love to give food away but rather because they have broken even, and are buying market share at a profit-smaller, but still a profit. Major retail players know there break even by the day, the hour and the minute.

n So Should You? — Implement a strategy to improve you competitive edge. Focus on a proactive plan of action versus a reactive one.

If you have a business and have a question specific to your situation, you can contact me at genevabizconcepts@att.net and I will be happy to help. Also, log onto the Regional News Web site, click on Powers' column under "Community and Society" and respond in the feedback area.

Powers is a semi-retired senior executive analyst who has worked with more than 1,800 small businesses during his 30-year career.

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