Understanding key financial figuresBY Australian Retailers Association
The managing process entails setting goals and objectives, agreeing plans and budgets, evaluating and controlling performance. Information underpins management hence why retailers spend a lot of time collecting and analysing information. Put simply it allows them to better manage their business.
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One of the key elements of retail management is the ability to understand and often take responsibility for store budgets. Budgets are used to ensure a business can survive and ideally prosper. Therefore, before contemplating the budgeting process it is helpful to visit the financial perspective of running a retail business.
What are the financial tools retailers use to measure and evaluate their performance?
Retailers can potentially receive a continuous stream of information about the performance of their business. They may count how many customers enter their store each day and then check their register receipts at the end of the day to see how many were converted into sales.
Large sophisticated retailers can get instantaneous sales information for each item at every store using modern data communications systems linked to point of sale (POS) equipment.Retailers use this information to evaluate their performance relative to their objectives. If a business is achieving its objectives, changes in strategy are not required. But if the performance information indicates objectives aren’t being met, the retailer needs to analyse strategic plan.
The key to these changes is to use data to first understand how the business is tracking, use financial tools to plan the most desirable outcomes and then use data to measure the impact of changes to determine if the outcomes are being met. Unfortunately, far too many small retailers run their business based on gut feel or on the advice and direction of their suppliers, without spending the time to set up and manage the systems that will tell them far more about what is really going on in their business.
Income and expenditure
For the novice retail manager dipping a first toe into financial management the logical starting point is to develop an understanding of income and expenditure. Income in a retail context generally comes from the sale of products and services. Put simply it is the money that comes into a business as revenue. Expenditure is the capital spent in order to generate the revenue received. Retailers focus upon increasing sales and reducing expenditure, which together positively impact business profitability. This understanding sets the scene for the most basic level of financial management.
Gross profit and loss
The Profit and Loss Statement summarises a business’s financial performance over a period of time (one month, quarterly or annually are most common) and details the sales, gross profit, expenses and net profit of the business. Since the level of sales achieved, the gross profit percentage and the management of expenses are a critical component of successfully running a retail business, the Profit and Loss statement is the one most often utilised by retailers. In fact, in some cases with small retailers, it is the only report they use and indeed it is not uncommon for some small businesses owners to be unaware of their current level of profitability.
The more astute retailer will develop a budgeted profit and loss pro-forma by month for the coming year and at the end of each month will track how their business is performing relative to their plan, relative to year-to-date and often in comparison to the previous comparative period from last year.
They will identify areas of concern and take corrective action to guide their business back in line with their budget, or where factors out of their control have impacted on their business (such as a centre redevelopment or aggressive new competitor) they will re-work their budget to ensure the business is still viable with these new factors considered and then once again track their ongoing performance relative to this new plan.
Profit & Loss vs. Balance Sheet
The Profit and Loss Statement summarises the financial performance over a period of time, while the Balance Sheet summarises a retailer’s financial position at a given point in time, such as the last day of the financial year. Liabilities are the business’s obligations (such as accounts or invoices payable) to pay cash or other financial resources, in return for past, current or future benefits.Owner’s equity is the difference between assets and liabilities. It represents the amount belonging to the owner once all
obligations have been met. Typically owners will enter a business to either derive a regular flow of income from the business (profit) or to build up the value of the business to make money when they sell it (equity) or a combination of both. The Profit and Loss Statement will indicate the level of income that can be taken out of the business whilst the Balance Sheet will indicate the level of owner’s equity that has been generated.
Manage operations to budget
Many factors contribute to a retailer’s overall performance. Therefore it is hard to find one single measure to evaluate performance. For instance, sales are an overall measure of how much activity is going on in the store. But a store manager could easily increase sales by lowering prices. If they were to do this, the profit made on the stock (gross margin) would suffer as a result. Clearly then an attempt to maximise one measure may lower another. Managers must therefore understand how their actions affect multiple performance measures. It’s usually unwise to use only one measure since it rarely tells the whole story.
About ARA Retail Institute
ARA Retail Institute is Australia’s leading retail training provider for both accredited and non-accredited learning programs. For more information, please visit: www.retailinstitute.org.au
ABOUT THE AUTHOR
Australian Retailers Association
Founded in 1903, the Australian Retailers Association (ARA) is Australia’s largest retail association representing Australia’s $310 billion sector, which employs more than 1.2 million people. As the retail industry’s peak representative body, the ARA works to ensure retail success by informing, protecting, advocating, educating and saving money for its 7,500 independent and national retail members throughout Australia. For more information, visit www.retail.org.au or call 1300 368 041.