Financials: Break it Down

Jennifer Polanz

There are lots of acronyms in business today, but few more important than KPIs, or Key Performance Indicators. Even if you don’t recognize the term, chances are you’re already using some of these formulas to assess the health of your business and strategize your way toward greater profits (or to plug leaks). Essentially, KPIs are ways to measure your business in a variety of areas, including sales, inventory, cash flow, labor, marketing and advertising returns, and many other aspects of the operation.

We asked three industry consultants to weigh in on their favorite KPIs to get a baseline start for looking at the profitability of a retail operation. By observing these KPIs, retailers can see where more growth is possible, as well as create strategies for change that are based on hard data rather than gut feelings.

Bill McCurry
You know him from the pages of this magazine and Bill is the owner of McCurry Associates, a consulting firm for retail garden centers and the imaging industry. His KPIs include the following:

1. Average Margin Basket Size—“On your average order; every time that cash register rings, what is that average sale?” asks Bill. “But that can be totally misleading if you’re not tracking what are your margin dollars from each transaction. If you’re only looking at sales size, you can take it from $80 to $800, but if the margin goes from $40 to $4, then the average sale doesn’t mean anything.”

2. Inventory Turns—He recommends tracking against yourself here, since on the live goods side of the business, it really depends on if you’re buying in product or growing your own. “If you’re buying in, you’re going to turn over faster than if you’re growing,” he adds. This is a balancing act: turn too slowly and you’re eating away at your profit margin by keeping products on the benches too long; turn too quickly and you may be leaving money on the table with inadequate pricing or not enough stock.

Sid Raisch
Sid is the president of Horticultural Advantage, a consulting firm for retail garden centers, and a service provider to The Garden Center Group. He recommends two simple yet effective KPIs for measuring the business:

1. Sales to Budget (Goal)—“The reason I say Budget (Goal) is that I prefer to see goals stated as budget because people tend to take them more seriously as a ‘have to’ instead of a ‘nice to,’” Sid says. This is essentially matching your actual sales with your forecasted sales to see if you were on target or if you missed by a wide berth. If you missed, the next question is “why did that happen?” It can give you the data you need to take a harder look. Sid adds most companies already look at this on a regular basis. “Because of variations in a season due to the way holidays fall and, of course, the weather, this is a better indicator when used on a same week to the previous year and a year-to-date basis. It is usually reviewed each week. Some companies use a rolling three to five-year average to take seasonality into account.”

2. Gross Margin Dollars to Budget (Goal)—This one is a variation of the first, but throwing in one additional factor to create a more accurate picture of those sales. It takes into account the Cost of Goods Sold (COGS) to ensure the sales you made were actually profitable. The formula is Gross Margin $ = Revenue – Cost of Goods Sold. This helps assure the integrity of pricing and control of discounting. “Sales dollars are important, but the biggest portion goes to cost of goods and may or may not allow enough to pay for wages, operating expenses and profit,” Sid explains. “The gross margin is the difference between sales and cost of goods that pays for wages, operating expenses and profit. Once a budget is established, a company will know the percent of gross margin that is required to pay these costs of doing business.”

Ian Baldwin
Ian is a business advisor for garden and hardware retailers, as well as an industry speaker and writer. He has two metrics that go even deeper for added analysis.

1. “Gap”—“My signature metric looks at the difference, or “Gap,” between actual GM % or dollars (after inventory adjustments) and Labor Costs % (including burden or employment costs such as payroll tax, FICA, Workmen’s Comp, health care, training—all human costs),” Ian explains. To get to this figure, subtract your labor bill from Gross Margin. “Profitable and successful LGCs (local garden centers) are in the range of 26% of sales to 35% of sales. Anything higher runs the risk of prices being charged not equaling the service level received by the customer. One year of less than 26% is not a problem, but I can soon tell a place with a consistent Gap in the lower 20%s; they just look short of cash (older facilities, rusty carts, cracked paving, scruffy store, undeveloped outside sales area, etc.).” He adds, though, that what’s more important than the Gap % is Gap Dollars, i.e., the money left to run the business, pay bills, reward owners and team, and building a fund for growth after inventory has been purchased and people paid. “If Gap Dollars grow slower than sales grow or inflation of overhead costs grow, the company is going backwards even though sales are climbing,” he notes. “We have clients with a 10% sales increase, but a 50% increase in Gap $ (or more) last year.”

2. Labor Hours—“Managers are pretty good these days at tracking payroll, but most don’t compare hours utilized. This is about productivity, which we express as Sales $ per Labor Hour and GM $ per Labor Hour,” Ian says. “As competition increases, productivity growth again should outpace the cost of doing business.” He adds these are best when compared against your own business year-to-year on a weekly or monthly basis.

This article is just the start of a continued discussion on measuring the business. We’ve only just touched on the two major items that take up the biggest chunk of costs: inventory and labor. Stay tuned for additional articles on these two aspects in the coming months. Also, if you have a financial question, email me at jpolanz@ballpublishing.com and we’ll compile them for future stories. GP