It’s a true story (pretty much).
A few weeks ago, after my first literary missive for this scholarly journal appeared in print, I got a call from an actual skate retailer. “It said at the end of the article that you work with companies in transition,” he asked almost as a question. “It’s true,” I told him.
“Okay,” he said. “Help me with mine.”
The story unfolded like this: He’d been in business for a bunch of years, and loved the business. He was doing about 400,000 dollars a year, but increasingly it was a struggle to make ends meet. He seemed to be feeling a little run down and beat up from the constant pressure of making ends meet financially and working long hours without enough help. Anybody out there sympathize with him?
Breaking the primary rule of having a consulting business, I started asking questions, trying to figure out his situation and help him before he’d agreed to pay me anything. Oh well, so I’m a pushover. He seemed like a nice guy.
The conversation revealed that his product mix was about 60 percent decks, trucks, and wheels, and 40 percent apparel and shoes. Margins were “good” on the apparel and shoes and “not so good” and declining on hardgoods. He couldn’t be much more specific than that, and didn’t even want to hazard a guess about which brands gave him the best margins and what those margins were. Nor was he real clear with me on which products and brands were turning, or how quickly.
The finance guy in me perked right up. I started ranting and raving about his need for point-of-purchase registers, new computers, and advanced accounting software, forgetting for a minute that this was a 400,000-dollar retail store, not Sports Authority. The long pause on the other end of the phone line brought me back to Earth. It was clear that a big investment in equipment and hiring a financial controller wasn’t going to happen.
“Let’s try it another way,” I suggested. “Ignoring the small stuff and what you don’t sell much of, do you know what you sell every day by category and brand?”
“Sure,” he said.
“And you know what it costs you, right?”
“Of course I do,” he said a little frostily, beginning to think I was suggesting he was an idiot.
Then I asked, “And you can come up with a pencil and paper, can’t you.”
Before he could tell me to go squat on a fireplug and then hang up on me, I said, “Well, then you can figure this thing out!” He was still unsure what to make of me, but at least he was still listening.
Every Sunday evening, I told him, he should get his sales records, dealer invoices, the pencil, paper, maybe a calculator, and a cold beer and sit down at a table. “Get the beer first,” I corrected myself. “And don’t put the beer on the pad of paper. It’ll make a big wet circle.”
You can do this, too. List your dollar sales by category and brand. Get your costs for those sales from your supplier invoices. Pretty soon, you’ve got a neat, one-, two-, or maybe three-page document that shows you your sales and gross profits by brand and product category. Do what works for you, but it might look something like this:
Sales in Cost of Gross Margin
Decks (by brand)DollarsGoods(Dollars) (Percent)
Small business owners have a lot of this information in their head. But usually not all of it, not accurately, and not in a way where they can see the relationships. But with a weekly chart like this one, you can see which brands are selling well, how your margins are, and how sales of one brand compare to another.
Consider the decisions you can make after you’ve been doing this for maybe a couple of months and have accumulated some data. Where are you actually making your money? Should you be carrying more of that product or brand? What is it timme to discount and get rid of? What are the financial results of changing your product mix and increasing your gross margin by a couple of points?
If you want to get a little fancier, include columns for cumulative sales and margins from the first week you start doing this. There will be nothing to it if you’re doing it on a computer and using a spreadsheet. One last iteration might be to show the total inventory you’ve got in each brand and category. Obviously, sales have some relationship to what you’ve got in stock, and you wouldn’t want to condemn a brand for poor sales when you’re low on inventory.
My final comment to this shop owner about the financial nuts and bolts was that he join the National Sporting Goods Association (847 439-4000) and get a copy of their cost-of-doing-business survey. With that in hand, he could see how his shop compares to others in its expense ratios and financial indicators.
Such an analysis isn’t just financial in nature, but is the starting point for evaluating some important operating issues. In the case of this particular retailer, we pretty quickly got around to asking how and if he could change his sales percentages from 60 percent hardgoods and 40 percent softgoods to the other way around. We knew that although we couldn’t be specific during the conversation, the change would have a major impact on his financial situation.
I asked him some questions about his store layout and merchandising. It seemed like it had been a while since he’d changed some of his fixtures. His lighting, he acknowledged, might not be quite up to par or focused on the products he was most interested in moving. It sounded like some reorganization of his selling space was overdue, and that product access could be improved. I don’t know a hell of a lot about merchandising and layout, but people who do know have told me that changes in these areas almost always result in sales increases and need to be done on a regular basis.
I wasn’t telling him to throw out all his fixtures and displays, trash his lighting, and redecorate his whole store. It wasn’t in the budget. But maybe some of those fixtures could be spray painted and put in a different place. Maybe the light bulbs could be changed to a higher wattage. Perhaps a coat of paint on one wall would help highlight some of his higher margin, but slower moving, product. Couldn’t he use some simple financial analysis to make some inexpensive but effective merchandising and marketing changes?
The point, I guess, is that financial analysis doesn’t exist in isolation from other aspects of your business. The analysis isn’t difficult if you have some simple systems, and doesn’t require a complex knowledge of accounting. It shouldn’t be looked at as forensic. That is, it’s not just something you have to do at the end of each month, quarter and/or year to satisfy your banker. Typically, standard financial statements by themselves will not give you all the information you need to make day-to-day management decisions.
So improvise a little. Get yourself a beer, and sit down with some paper and a pencil and calculator. You live or die by your gross margin. Use the information about it that’s at your fingertips to make business decisions that are responsive to the changing skate market.
Jeff Harbaugh works with companies in transition and tries to help them make business simpler. Reach him at (206) 232-3138.