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Chapter 11: Performance Evaluation
What You Will Learn
It's About The Numbers
Measure Your Productivity
Cash Flow Forecasting
Bonus: Key Performance Indicators Software
Summary
Case Study: Performance Evaluation
Chapter 11 - Tips
What You Will Learn
- Multiple methods of measuring retail performance that are essential to understanding and growing your business.
- Measuring the productivity of your store and various departments.
- A method for projecting and controlling your cash flow.
It's About The Numbers
All retailers know that Sales are the lifeblood of their business. That's fairly simple. Unfortunately, the reality is that measuring Sales alone is not nearly enough.
Retail has become a slick and sophisticated business. There are retailers who play the game merely for the cash flow, using it to leverage other investment opportunities. Profitability for them is secondary.
To compete, even the smallest retailers need to create and manage a series of reports, statistics and measurements for their stores. There are a myriad of Key Performance Indicators that you need to understand, track and manage if you are going to succeed at growing your business.On the following pages, you will find a useful Retail Performance Indicators Reference Guide.
Retail Performance Indicators Reference Guide
Sales Statistics
| Statistic |
How you calculate it |
What it tells you |
Ideas to improve your performance |
| # of Transactions |
Most cash registers and all POS systems will tell you how many transactions (actual number of sales) you made each day. |
# of Transactions is the number of sales made to customers. |
|
| # of Items Sold |
Most cash registers and all POS systems will tell you how many items you sell each day. |
# of Items Sold is a measure of how many total items were sold to customers. |
|
| Total Traffic |
Unless you have a traffic counter at the doors, you won't be able to track this number. |
Total Traffic refers to the number of customers who come into your store, regardless of whether they make a purchase or not. |
|
| Average Sale |
Total Sales ÷ # of Transactions |
Average Sale is the average amount that each customer spends in your store. This statistic is a key driver for any retail business. You need to focus on continually increasing it. |
Average Sale is affected by product assortments, pricing strategies, merchandising and staff selling. Track it every day. Start to examine every aspect of your store for areas to increase customer purchases. |
| Items per Sale |
Total Items Sold ÷ # of Transactions |
Items per Sale indicates how many items each customer typically buys. It's a key driver for your business. The more items a customer buys, the greater your sales. |
Items per Sale is affected by product assortments, pricing strategies, merchandising and staff selling. Look for ways to encourage the customer to buy additional items in your store. |
| Conversion Rate |
# of Transactions ÷ Total Traffic |
Conversion Rate tells you what percentage of customers entering your store actually make a purchase. It's the ideal measure of your effectiveness as a retailer. |
Everything you do as a retailer affects your Conversion Rate. Each time you improve an area of your operation, your Conversion Rate will be positively affected. Remember, customers only buy in stores that they like. |
| Sales per Hour (SPH) |
Total Sales ÷ # of Staff Hours Worked |
Sales per Hour is a measure of your staff's productivity. The higher your SPH, the lower your wage cost percentage will be. |
There are 2 ways to improve SPH. Sell more or use fewer hours. The trick is to find the perfect balance between providing the right level of service and maintaining good cost controls. |
Inventory Statistics
| Statistic |
How you calculate it |
What it tells you |
Ideas to improve your performance |
| End of Month Inventory at Retail |
Record the value of your inventory at its retail selling price at the end of each month |
We track inventory at retail value because of its relationship to meeting sales plan. Sales are made at retail, so inventory needs to be tracked at retail as well. |
|
| Stock to Sales Ratio(S/S Ratio) |
Beginning of Month Inventory at retail ÷ Sales (projected or actual) for the period |
It gives you the ratio of inventory to sales. It's a great way to forecast your inventory requirements. The lower your ratio, the more times you'll turn over your inventory. |
Use the Stock to Sales Ratio to better analyze your inventory levels each month in relationship to your sales. Identify those months where you can reduce your inventory due to lower sales demand. Plus, make sure you're not underestimating the inventory you'll need to meet sales in your peak selling periods. |
| Inventory Turnover |
Sales ÷ (Average Month End Inventory at Retail)orCost of Sales ÷ (Average Month End Inventory at Cost)
| Inventory Turnover tells you how many times your goods sell and are replaced in a given period of time. It's a critical measure of how you are managing your inventory. A turnover that is too low results in poor cash flow. One that is too high may result in stock outs and lost sales. Caution: Because Inventory Turnover focuses on Sales, it may hide the fact that some low margin items appear to be turning rapidly. |
Not all goods sell at the same rate, so track your turnover by Department. You'll discover opportunities to reduce your inventory in slow selling areas of the store.
Identify slow moving and overstocked areas with low turnover rates and develop an aggressive merchandising, marketing and markdown program to move them out of the store. Turn your "bad" inventory into cash, which you can then reinvest in better goods. |
| GMROII (Gross Margin Return on Inventory Investment) |
Gross Margin $ ÷ Average Inventory at Cost |
This is your premier inventory turnover number. It focuses on how your inventory turns over based on profit, whereas the Inventory Turnover stat is based on sales. By focusing on profits, you can get a clearer picture of how your stronger margin products are performing. |
GMROII is improved when you track it by Department. This allows you to balance your inventory based on profits as well as sales. |
| Markdown $ |
The amount by which you reduce the original selling price of an item. Because you track inventory at retail values, you need to make sure you reduce it, not only by the sales made, but also by the markdowns that were included in those sales.
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| Shrinkage |
The book value of your inventory compared to the actual inventory when counted. The shortfall is your inventory shrinkage. |
The combined losses of assets due to theft, administrative errors and vendor fraud. |
See chapter # 10 on Loss Prevention. |
Payroll Statistics
| Statistic |
How you calculate it |
What it tells you |
Ideas to improve your performance |
| Wage Cost % |
Total Payroll ÷ Total Sales |
For most retailers, Wage Cost % is the single largest expense. As such, it becomes one of your most important areas to manage aggressively. |
Wage Cost % is reduced by either increasing revenue or reducing payroll.Challenge your current scheduling practices to ensure that the right number of hours are used on the right days and during the right times. Cut any excess hours, while preserving customer service levels.Examine your pay system to determine if a "pay for performance" element would benefit both your top and bottom lines. |
| Transactions per Hour |
# of Transactions ÷ # of Hours the store is open |
Transactions/Hour provides you with an indication of how busy your store is. It provides insight into the number of staff hours that are required to operate the store. |
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| Employee Turnover % |
# of staff leaving your company ÷ # of staff working for you |
Employee Turnover typically reflects the desirability of your work environment. While there are exceptions, it often answers the question of whether or not you are a good employer. |
Conduct exit interviews with staff who have decided to leave your company to determine why. Once you understand why they are leaving, you can determine how to resolve the issues. |
Financial Statistics
| Statistic |
How you calculate it |
What it tells you |
Ideas to improve your performance |
| Working Capital |
Current Assets - Current Liabilities |
Working Capital is a clear indication of your current cash flow position. |
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| Quick Ratio |
Current Assets, not including Inventory ÷ Current Liabilities |
The Quick Ratio allows you to get a relative indication of your short-term liquidity. Because it excludes inventory, it allows you to measure your ability to meet immediate cash requirements. |
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| Accounts Payable as a % of Inventory |
Accounts Payable ÷ Inventory at cost |
A key indicator of how highly leveraged your inventory has become. This relative indicator allows you to identify potentially dangerous financial trends in your business. |
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| Return on Assets |
Net Profit ÷ Total Assets |
Return on Assets gives you the rate of return you are earning on your asset investment. |
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| Return on Net Equity |
Net Profit ÷ Net Equity |
Return on Net Equity indicates your rate of return on your net worth invested in the business. |
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| Total Debt as a % of Debt and Net Equity |
Total Debt ÷ (Total Debt + Net Equity) |
This statistic indicates how highly leveraged your business is. Because it is a relative indicator, it identifies potentially dangerous financial trends. |
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| Occupancy Cost |
The cost of your premises, including rent. |
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Customer Service Terminology
| Refund % |
Total Refund $ ÷ Total Sales |
Refund % tells you how good customers think your products are. It also indicates how good your sales staff are at helping customers make the right decisions. |
Identify which products keep coming back to the store and either get rid of them or fix the problem.Coach your sales staff on how to uncover the customer's needs and provide the right solutions. |
Measure Your Productivity
Measuring the productivity of your store and its various departments is based on three key statistics:
- Sales Per Square Foot
Sales (typically annual results)
____________________________
# of square feet (store or department)
This is the industry standard for measuring store or department productivity. You don't need to be a large chain to make use of this statistic. Start calculating the Sales Per Square Foot for your various departments.
- Profit Per Square Foot
Gross Profit $
______________
# of square feet
This is the same type of ratio as Sales Per Square Foot, except this time it's based on profitability, which is more important. Just a little tougher for some retailers to calculate.
- Sales Per Linear Foot
Fixture/Department Sales
_______________________
# of linear feet
This statistic is used for merchandise displayed vertically along walls or, in some cases, gondolas.
Once you have measured your productivity in each department, you can determine which ones are doing well and which are not. This allows you to decide those that warrant expansion and those that might just as well be eliminated.
Knowing the facts is an essential part of retail management. If you become a little more scientific and detail-oriented, you can produce far superior results.
Cash Flow Forecasting
Cash flow projections are an essential part of running any business. In retail, where cash flow is often more important than profitability, this is especially true.
A cash flow forecast is designed to predict as accurately as possible when cash will be received (typically through sales) and when payments will need to be made (expenses).
If you hope to stay in business and get along with your banker at the same time, you need to complete a cash flow projection each and every month.
There are numerous inexpensive software programs on the market that facilitate cash flow forecasting. If you don't already own one, it's time to make the nominal investment required and put one in place. It's imperative.
On the following page, you will find an example of a very basic and simple cash flow forecasting form. While simplified, it will provide you with an understanding of the mechanics of completing a cash flow forecast.
Cash Flow Projection
| Month: |
Oct.
Projected |
Nov.
Projected |
Dec.
Projected |
Jan.
Projected
| Feb.
Projected |
Mar.
Projected |
Total
Projected |
| Opening Bank Balance |
($50,000) |
($46,500) |
$1,500 |
$41,500 |
$62,000 |
$49,000 |
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| -- Operating Costs |
$10,000 |
$12,000 |
$18,000 |
$10,000 |
$10,000 |
$12,000 |
$72,000 |
| -- Other Expenses |
$3,500 |
$4,000 |
$4,000 |
$2,000 |
$1,000 |
$3,500 |
$18,000 |
Accounts Payable: Merchandise
-- Open-to-Buy |
$3,000 |
$6,000 |
$8,000 |
$0 |
$2,000 |
$4,000 |
$23,000 |
| -- Booked |
$20,000 |
$10,000 |
$50,000 |
$32,500 |
$30,000 |
$35,000 |
$177,500 |
| + Other Income/Cash Receipts |
$0 |
$0 |
$0 |
5,000 |
$0 |
$0 |
$5,000 |
| + Sales |
$40,000 |
$80,000 |
$120,000 |
$60,000 |
$30,000 |
$35,000 |
$365,000 |
| = Ending Bank Balance |
($46,500) |
$1,500 |
$41,500 |
$62,000 |
$49,000 |
$29,500 |
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Bonus: Key Performance Indicators Software
Industry Canada offers you the chance to download a free program to assist you in calculating and tracking your Key Performance Indicators.
This Microsoft Excel programmed document is available to you at (insert web address).
Summary
- Analyze every number possible for your retail store.
- Recognize that information is the key to, not just understanding your business, but also growing it.
- Do a cash flow forecast for your business every month.
Case Study: Performance Evaluation
Now let's get back to the challenges at Jackson's Department Store. In this segment, you will evaluate Jackson's financial performance.
Chapter 11: Performance Evaluation
How time flies when you're having fun! We're into the eleventh month of this great turnaround story. Year-end was January 31st and even though things only started to move in the right direction in the last six months, the bean counters estimated that, not only did we reverse the loss trend, but we should show a small profit. Wow!
Even though Jackson's is far from being a typical retailer, it is always a good idea to "benchmark" one's performance against similar operations. Associations (Canadian Sporting Goods Association, Canadian Jewellery Association, etc.) usually poll their members on a periodic basis in order to get various "cost of doing business" numbers and ratios that they share with participating members. The Retail Council of Canada is one such organization that collects these benchmark numbers and classifies them into different categories (e.g. Women's Wear, Men's Wear, Gift, Hobby, etc.).
Following is the year end income statement for Jackson's Department Store, along with sample benchmark figures for the industry.
Income Statement: Jackson's Department Store Ltd. January 31.
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Jackson's |
Industry average |
| Gross Sales |
$1,351,200 |
100.00% |
100.58% |
| Returns & Allowances |
- |
- |
.58% |
| Net Sales |
$1351,200 |
100.00% |
100.00% |
| Cost of goods Sold |
787,500 |
58.30% |
57.81% |
| Gross Margin |
$563,450 |
41.70% |
42.19% |
| |
|
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| Administrative Expenses |
$131,066 |
9.70% |
6.97% |
| Accounting & Professional Fees |
10,810 |
.80% |
1.17% |
| Buying & Merchandising |
28,375 |
2.10% |
1.47% |
| Interest Expense |
22,968 |
1.70% |
1.92% |
| Occupancy (rent, maintenance, utilities) |
45,941 |
3.40% |
9.36% |
| Advertising & Promotion |
52,690 |
3.90% |
2.61% |
| Selling Expense |
145,929 |
10.80% |
11.96% |
| Handling and Delivery Expense |
14,863 |
1.10% |
.85% |
| Other Operating Expenses |
77,018 |
5.70% |
2.51% |
| Total Operating Expense |
529,670 |
39.20% |
38.81% |
| Operating Income (Loss) |
33,780 |
2.50% |
3.38% |
| Other Income |
- |
- |
.75% |
| Other Expense |
- |
- |
.54% |
| Profit Before Tax |
33,780 |
2.50% |
3.59% |
| Income Taxes |
11,500 |
.85% |
1.04% |
| Net Profit After Tax |
22,280 |
1.65% |
2.55% |
Note: Using the sample "Industry Average" as a benchmark, Jackson's stacks up pretty close in most areas. The big differences are in administrative expense and occupancy costs. It's a good thing they own the building and have no mortgage, or we would be looking at a substantial loss instead of this small profit. As far as administrative expense goes, this will come into line once David retires and stops drawing a salary (if that ever happens). Now if they can increase sales and/or gross margin without greatly increasing expenses, we will see a pretty nice bottom line.
Exercise: If Jackson's were able to increase sales by 5% and gross margin by 3/4% over the next year, while holding total expenses to a 1/2% increase, what would the profit before tax be?
Answer: Profit before tax = $ 69,946.
The 5% increase in sales = $1,418,760. The 3/4% increase in gross margin = 42.45% or $602,264. The 1/2% increase in operating expenses = $532,318 ($1,418,760 x 42.45% - $532,318 = $69,946). This represents a whopping 107% increase over the previous year's profit before tax of $33,780.
B: Cash Flow Forecasting:
Cash flow projections are necessary for forecasting future cash requirements. You will sleep better at night knowing that you have sufficient funds to handle the cash needed in the upcoming months. A cash flow forecast is designed to predict when the company will receive cash and when payments must be made.
Back in month #9, Jackson's was considering opening a women's wear concept in a local mall. You volunteered to prepare a cash flow analysis to determine what the "cash required" consequences for this new venture would be. To start, you had to get management to agree on some key figures and assumptions.
Key Figures/Assumptions (for new location cash flow analysis):
- Sales Projection: $300,000
- Operating costs: $12,000 per month (rent, wages, utilities advertising, taxes, etc.)
- Construction & Fixturing Costs: $60,000 (terms 50% 30 days, 50% 60 days)
- Opening Inventory: $50,000 (to be received in March, terms 50% 30 days, 50% 60 days)
- Stock Turn: 4 times per year (This means our average inventory will be $75,000 at retail value per month, which equals approximately $37,500 at cost value, assuming a 50% markup.)
- Terms on goods purchased in season: 30days (Merchandise received in March is paid for in April.)
- Opening Date: 1st week in April.
Cash Flow Projection
| Month: |
April
Projected |
May
Projected |
June
Projected |
July
Projected |
August
Projected |
Sept.
Projected |
| Opening Bank Balance |
$0 |
$47,000 |
$104,000 |
$101,000 |
$93,000 |
$87,500 |
| Operating Costs |
$12,000 |
$12,000 |
$12,000 |
$12,000 |
$12,000 |
$12,000 |
| Other Expenses (construction) |
$30,000 |
$30,000 |
$0 |
$0 |
$0 |
$0 |
Accounts Payable: Merchandise
for Opening Inventory |
$25,000
$0 |
$25,000
$10,000 |
$0
$5,000 |
$0
$5,000 |
$0
$2,500 |
$0
$15,000 |
| Other Income |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
| Sales |
$20,000 |
$20,000 |
$20,000 |
$25,000 |
$20,000 |
$30,000 |
| Ending Bank Balance |
($47,000) |
($104,000) |
($101,000) |
($93,000) |
($87,500) |
($84,500) |
| Ending Inventory Plan (in retail $) |
$100,000 |
$90,000 |
$80,000 |
$60,000 |
$70,000 |
$90,000 |
| Sales to Stock Ratio |
5.0 |
4.5 |
4.0 |
2.4 |
3.5 |
3.0 |
| Planned Purchases (at Retail) |
$20,000 |
$10,000 |
$10,000 |
$5,000 |
$30,000 |
$50,000 |
Cash Flow Projection
| Month: |
Oct.
Projected |
Nov.
Projected |
Dec.
Projected |
1/1/98
Projected |
Feb.
Projected |
Mar.
Projected |
Total
Projected |
| Opening Bank Balance |
($84,500) |
($101,500) |
($103,500) |
($75,500) |
($70,000) |
($67,000) |
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| Operating Costs |
$12,000 |
$12,000 |
$12,000 |
$12,000 |
$12,000 |
$12,000 |
$144.000 |
| Other Expenses (construction) |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$60,000 |
Accounts Payable: Merchandise
for Opening Inventory |
$0
$25,000 |
$0
$10,000 |
$0
$20,000 |
$0
$12,500 |
$0
$0 |
$0
$15,000 |
$50,000
$120,000 |
| Other Income |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
| Sales |
$20,000 |
$20,000 |
$60,000 |
$30,000 |
$15,000 |
$20,000 |
$300,000 |
| Ending Bank Balance |
($101,500) |
($103,500) |
($75,500) |
($70,000) |
($67,500) |
($74,500) |
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| Ending Inventory Plan (in retail $) |
$90,000 |
$110,000 |
$75,000 |
$45,000 |
$60,000 |
$70,000 |
$78,333 |
| Sales to Stock Ratio |
4.5 |
5.5 |
1.3 |
1.5 |
4.0 |
3.5 |
|
| Planned Purchases (at Retail) |
$20,000 |
$40,000 |
$25,000 |
$0 |
$30,000 |
$30,000 |
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Exercise:
A cash flow projection is a combination of many assumptions (i.e. sales forecasts, required inventory, etc.) and facts (i.e. rents, operating costs etc.). If we miscalculate any of these, it can have a great effect on our cash reserves or bank balance. To illustrate this and better understand the formulas used in cash flow development, try your hand at the following skill testing questions (a calculator will help):
- If we underestimate operating costs by $500 per month (and everything else is constant), what will the "Bank Balance" be at the end of March?
- If construction cost terms were negotiated to be 1/3 30 days, 1/3 60 days and 1/3 90 days, what would May's bank borrowing requirements be changed to?
- If half of our opening inventory came from existing stock (which was already paid for):
- What would be the highest month for bank borrowing?
- How much would it be?
- If our average terms for fill- in orders during the season were 60 days instead of 30 days, what would May's bank borrowing requirements be?
- If we were to miss our sales projections by an average shortfall of 5% per month (but we still adjusted fill-in purchases to keep us at desired inventory levels), what would the high month of November's bank borrowing requirements be?
Answers:
- -$80,000:
$500 x 12 months = $6000. Added to the $74,000 in bank borrowing =
-$80,000.
- -$84,000.
- a. November b. -$85,000.
- -$94,000
- -$112,250.
Chapter 11 - Tips
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Business Information by Sector
