Key Metrics in a Retail Business
The phrase “Retail is Detail” has long been used to summarize and illustrate the challenge of managing a retail business. A successful retail business must be based on more than the vision of a creative merchant; it is also necessary to have a systematic process in place to measure daily, weekly and monthly results so that adjustments can be made quickly to maximize profitability and cash flow.
By focusing on five key metrics, the retail business owner can avoid being overwhelmed by the details, but at the same time stay informed about the performance of their stores.
Key Retail Metric #1 – Same Store Sales
Also referred to as comparable store sales or like-to-like sales, same store sales compare the sales generated by a multi-store retailer over a certain period of time (e.g. month, quarter or year) to the identical period of time in the previous year for stores that were open in both time periods.
Business trends can be measured more accurately by analyzing how comparable stores are performing. Increases or decreases in same store sales can indicate a number of things, and should be carefully analyzed by the CFO.
Key Retail Metric #2 – Inventory Turnover
Inventory turnover is a measure of how many times inventory is sold during a certain time period, and should be monitored carefully.
When setting your goals for turnover, it is important to consider your retail market segment. There are wide variations in expected turnover based on the type of item being sold.
Inventory turnover is a very critical metric because it will indicate when to order, how much to order, what to sell, and how to price it. Review turnover by item or category of goods, and do careful analysis to find the cause of any low turns. Regardless of the cause, slow turns point to cash that has been spent and is not being reinvested in your business.
While higher turnover rates are generally preferred, turnover rates that are unusually high indicate inadequate inventory levels that result in lost sales; therefore it is always a balancing act between inventory levels and anticipated sales. By managing to an optimal inventory turn, you can reduce the holding cost of your inventory, respond faster to changes in customer demand, and increase the profitability of your business.
Key Retail Metric #3 – Gross Margin Return on Investment (GMROI)
An important tool in analyzing sales, inventory, and profitability is GMROI (also known as GMROII) which stands for Gross Margin Return on Inventory Investment. The GMROI calculations assist owners in evaluating whether a sufficient gross margin is being earned by the products purchased compared to the investment in inventory required to generate those gross margin dollars.
Gross margin return on investment is very closely related to inventory turn. As your turnover increases, your average inventory cost will be lower relative to your gross margin; therefore, you receive a greater return on your investment. The goal is to increase GMROI by keeping turnover high and margins high.
Key Retail Metric #4 – Selling Cost
Usually, the largest variable expense for a retailer is the selling cost, or payroll expense. You must always balance how much you can sell and at what margin versus your expenses. The required payroll as a percentage of sales will vary by retail category. The business owner should make sure the proper reporting is in place to monitor the selling payroll as a percent of sales on a weekly and monthly basis.
Key Retail Metric #5 – Customer Conversion Rates and Repeat Customers
Any discussion of key metrics for a retail business would not be complete without an analysis of customer focused metrics. While there are many different metrics, customer conversion rates and sales to repeat customers are two of the most important.
Customer conversion rate refers to the percentage of potential customers who enter a store and make a purchase before leaving. Systems should be in place to monitor this.
High repeat customer counts demonstrate that your customers like what you are selling and are returning for more purchases, and systems can be implemented to monitor and measure this.
In conclusion, while there are numerous metrics that are helpful to a retailer, using these 5 key metrics as a starting point will help you to manage the details of your business. Your CFO can help you to easily streamline the management and reporting of your sales, inventory, gross margin, operating expenses, and customer buying trends, resulting in a higher level of profitability and improved cash flow for your retail business.
Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast, with more than 100 CFOs and Area Presidents throughout Ohio, Indiana, Kentucky, Michigan, North Carolina Pennsylvania, South Carolina, West Virginia and Tennessee. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses.