Four tools to control residues

Balance is a natural business process that can be planned and managed. But in order to gain power over them, you must constantly keep your finger on the pulse of your business. Weaknesses are easily calculated using four simple indicators. Which ones, ”said Oleg Gruzdev, the founder of the first showroom gallery in Russia, during the Fashion Retail & Distribution forum.

First of all, the owner of any store must understand that leftovers are not a problem, but as much a natural part of retail and wholesale as purchasing, staffing, customer service. And like any business process, the accumulation of residues has a beginning and an end. It begins at the time of purchase, which means that you can plan the appearance of leftovers in advance.

It is impossible to completely prevent the formation of surpluses, although it is possible to influence the factors that lead to their excessive volume. What are these factors? The purchase of more goods than the store can sell, the reduction in planned sales, the inefficient display of goods, the purchase of commercially ineffective goods, the wrong choice of suppliers and overstatement of the retail price.

To keep the level of balances "in check" will help you, firstly, a thoughtful choice of a supplier. Every season a good supplier finds new interesting brands, provides consulting support and assistance in opening stores, worries about the business of its customers, constantly meets halfway in negotiations and even sometimes gives travel tours.

In addition, you can control the level of balances by regular analysis of the business according to four main indicators: the level of turnover, the ratio of the value of stocks to the monthly sales volume, the total profit on the capital invested in the purchase, and the efficient use of the retail space.

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Analyzing the "Turnover" metric: Turnover is the most important metric and should be monitored weekly and monthly. The higher the turnover, the more stable the store's position, so you should strive to achieve the highest possible turnover for the store. Insufficient turnover for the store's standards may be due to the incorrect use of merchandising strategies. What does this mean? There are at least two merchandising strategies: "high prices with low turnover" and "low prices with high turnover." Remember that high-margin products always pay a higher "rent" for shelf space, as they occupy space longer than products with a lower markup. The ideal situation is when these two merchandising strategies are combined in a single store, but one still prevails.

Analyzing the "Return on Capital Invested in Purchases" metric : a store owner is essentially an investor and must constantly monitor the income generated by each asset, including their business. If the return on every ruble invested is 1,5-2 rubles (i.e., 15-20%), this means the business is pointless and you're simply covering expenses, although you could be investing in other investment vehicles. A return of 2,5-3 rubles per ruble invested indicates that the store is doing well, and the owner is not only covering losses but also making a profit. However, this doesn't necessarily mean that you need to increase the markup factor to 3 to achieve maximum profit. High income can be achieved through other means: increasing turnover and capital reinvestment, shifting advertising emphasis to high-margin products, and leveraging third-party investment sources in addition to your own savings.

Analyzing the "Inventory Value to Sales" ratio: This ratio is calculated as the value of inventory divided by monthly sales volume. If the calculation yields a ratio of 5 to 1, it means your warehouse is overstocked. A ratio of 3 to 1 is good, but 2 to 1 is even better. To avoid overstocking and freezing cash, we recommend our clients not stock their entire warehouse at the start of the season, but rather purchase additional inventory in several increments, such as once every month or two.

Analyzing the "Retail Space Utilization Efficiency" metric. Small and medium-sized businesses are often mistaken for neglecting their retail space efficiency, as effective use of retail space can increase revenue by 20-30%. To determine what percentage of your total retail space is retail, use the formula "retail space/total store space." A result of less than 0,6 indicates that most of your retail space is underutilized. In the West, an acceptable ratio is 0,7, which describes a situation where the ratio of retail to non-retail space is 70:30. Of course, the higher the percentage of retail space, the better. How do you calculate its efficiency? Divide sales by the size of the retail space. If the result is that 1 square meter brings you less than $3,500 per year, this means either the store has too much retail space, which means the owners are paying very high rent, or sales volume is poor. A standard and achievable figure for a clothing and footwear store is $4,000 to $5,000 per square meter per year, but ideally, one square meter should generate $7,000 or more annually. However, it's worth noting that specific figures are highly dependent on costs, which vary by region. Another metric that helps assess the efficiency of retail space utilization is the installation coefficient. It shows the share of the store's equipment and can be calculated by dividing the area occupied by equipment by the area of ​​the sales floor. For efficient space utilization, this coefficient should be between 0,2 and 0,32.