Knowing for certain the performance of inventory in your business will support better decision making. Too many decisions in local indie retail, however, are not made based on evidence.
The very simple approach I outline in this post could be done by anyone, and it could lead to profitable changes in your business.
With retail space usually costing between 11% and 15% of (non agency) revenue, it is usually the next highest cost outside of the cost of stock itself.
Retailers often argue that rent should be lower. It could be that a different view of shop floor performance helps you achieve a better return.
- Take a blank sheet of paper, ideally A3, and roughly sketch out the layout of your shop, marking in display units, shelving, the counter – everywhere you have product. Include your back room if you have stock there.
- Colour-shade the layout by department.
- List the departments on the side of the floor plan.
- Calculate the percentage of total space used for each department. This does not need to be accurate to two decimal places. List this next to each department you have listed.
- Use your POS software to report on gross profit dollars earned by each department over the last year, or calculate it from sales figures knowing the average GP% per department.
- Calculate the percentage of total gross profit contribution earned by each department and list this next to the floor space allocated to each department – on the floor plan map you have done.
- Circle in green those performing the best, where the GP% contribution is more than the GP% space allocation, and in red those performing the worst.
The goal is to show you the performance by space, so you can work out if you should give more space to a category or less. Many shops don’t make changes to their shop floor by moving categories or increasing or decreasing space allocation. The evidence revealed by this quick GP analysis could lead to valuable changes.
Typically, a business owner doing this for the first time will have an ah ha moment, seeing something they had not realised.
I have seen business owners make changes including to floor layout, quitting suppliers and increasing stock weight for some departments.
You can take the analysis a step further by looking only at one department and analysing performance by category, using the method outlined above.
What I have outlined here is very basic, easy to do. It’s not something you need an accountant to advise you on. There is no downside is spending the new minutes it takes to do. So, do it!