The Top 10 Ways to Future-Proof Your Retail Business
Control your success in the future as situations change
It’s no secret that many CEOs and commentators are worried about the possibility of a recession. At Management One we take a different perspective. We believe that with the right mindset, focus, and tools your retail business will generate positive cash flow in almost any economic conditions: the key is to manage your business actively, based on data.
With that in mind:
Are you seeing or worried about a shift in customer demand among your shoppers?
Are you worried you might go from lean and focused inventory (or maybe even missing sales) to overstocked as vendors start to deliver more reliably and completely?
Is inflation driving up your costs?
In comparison to national chains, indie retailers are more agile and their ability to quickly identify opportunities and correct inventory mistakes presents a significant advantage right now. Seizing opportunities requires the development of a good merchandise plan and maintaining a consistent focus on the key data points within it to drive your future purchases. At Management One, our clients know that inventory is one of the largest items on their balance sheet and they can’t afford to “wing it”, or use gut feeling to guide their decisions.
The data from your daily retail business transactions is too granular to make decisions. The data needs to be aggregated in a meaningful way to allow you to manage your biggest investment: your inventory. Success is driven by knowing what levers need to be pushed and pulled in the season, as well as how to create the best strategies for your future seasons.
The work can seem overwhelming to the untrained eye, so we’ve developed a checklist of the top 10 action items you should attack now and continue to follow up on at regular intervals throughout the year.
Top 10 Future-Proof Checklist Items
Inventory Freshness
Focus on sell-through. The cost of sitting on unproductive inventory when the cost of money is high and inflation is present undermines your financial health. Time does not benefit you on aging inventory. Typically (depending on classification), if you have merchandise that hasn’t sold in 60 days, that is a concern and if it is at or above 90 days, it needs to be addressed immediately.
Merchandise Classification
Do you have a classification structure that reflects your current mix and trends? Do you regularly assess which classes are hot and which classes are not? Are you re-investing in classifications and vendors that will drive your business? When you analyze your inbound purchasing and outbound retail sales by class, you gain invaluable insight into exactly how much of each class you need.
Cost of Goods Purchased (COGP)
Retailers typically focus on their cost of goods sold (COGS), but this is one of the most misleading metrics in retail because it doesn’t accurately reflect unsold merchandise. Is the COGP above or below 50% across each of your classifications and over what period of time? It is best to check over a 90-day cycle. Do I have a target of cash profit created greater than my expense structure?
Cash Margin Return on Investment (CMROI)
Retailers are aware of gross margin return on investment (GMROI), but it doesn’t account for unsold inventory. How much available cash is each one of your merchandise classes generating against your investment in inventory? This metric is the gold standard for measuring inventory success at the class and total levels. How is your team calculating the CMROI of your products and what is your strategy for reviewing these metrics regularly?
Stock-to-Sales Ratio
This metric is closely related to inventory turnover (in fact it is the reciprocal). If this number is decreasing, it indicates that you are making more sales per item in your inventory. While an increasing STSR trend may reflect poor sales performance, a rapidly decreasing trend (towards zero) shows that you could be selling your stock too quickly or not bringing in enough new goods to keep up with customer demand. Are you monitoring monthly STSR fluctuations across each of your products? Higher stock-to-sales ratios indicate heavy investments and inventory not turning. Low stock-to-sales ratios, without heavy markdowns, represent quick turn, and high demand. If stock-to-sales ratios are under 2 for more than two consecutive months, you may be missing business.
Retail Transaction Trends
Whether in a brick-and-mortar store or across digital channels, every independent retailer should monitor the amount of revenue generated per transaction (average order value or AOV) along with the number of items sold (units per transaction or UPT). Are these trending up or down in your business?
Vendor Performance
Your ability to effectively negotiate with vendors is significantly improved when you regularly evaluate the performance of their products. Management One has developed a free Vendor Performance Scorecard to track retail inventory performance so you can speak to your vendors with data-based transparency. Be careful not to be over-assorted and not to spread your consumer demand thinly across too many vendors.
Tighten Up Your Cash Positions
Instead of a 12-month view, analyze your cash flow for the next 12 weeks to maximize your agility and help avoid any unforeseen situations that could affect your short-term ability to invest in new opportunities. Do you have enough cash to cover your current payables? Management One has developed a free 12-week Cash Flow Tool, so you can get better visibility into your cash position.
What is Your Required Initial Markup (IMU)?
In order to remain profitable, your pricing strategy must factor in the cost of the goods you bring in and your likely future markdowns at the product and classification level. At an aggregated level, you also need to factor in your fixed expenses and your variable sales and marketing costs. With all these data points in hand, you can establish an initial markup (IMU) that will drive positive cash flow to your business. This is an important strategic consideration. Contact us for the formula to identify the right IMU and the right IMU strategies.
Revisit Your Breakeven
Product cost and operating expense increases are a concern, but they can be managed and compensated through active measures. When was the last time you sat down and weighed your overall expenses versus incoming revenue? The breakeven analysis involves figuring out how much you must sell to cover all your costs and start making a profit. Management One has developed a free Break-Even Worksheet, so you can decide which levers to pull.
Are you still feeling overwhelmed? The daily schedule of tasks for most business owners is already full. Who has the time to monitor critical retail data each month? That’s where Management One comes in. If you’re an M1 client, contact your Retail Expert today to run through this checklist with you. If you’re not a client, contact us today and learn how successful retailers are forging ahead using facts, not fear, to create strategies that will shield their business from external volatility.