3 Business Tweaks That Bring Significant Retail Cash Flow

Retailers often think the next boost in their business will come from finding the next amazing line of merchandise or discovering a new marketing tool. Sometimes, they believe it will happen because they hire a killer salesperson or hope new businesses will fill vacancies around them, bringing traffic.

The problem with these “solutions” is that they are external to your business. You cannot predict, control, or invoke them when you need more cash. As such, while they are fun to dream about, they are not what you should focus on to improve your business.

What I am about to show you is magical. When I first learned about these little tweaks, I was honestly and truly blown away. I think you will be, too. What blew me away was that these small adjustments enormously impacted the business. They are easy to implement and, if done properly, will bring about tremendous change.

TWEAK #1 – Adjusting your selling cost

Most retail businesses operate on some form of base plus commission. The selling cost is an area I find implemented poorly in many businesses. May stores pay commissions on the first dollar sold (they should not be; the salespeople should need to hit a goal) and are not planned in such a way as to keep the cost of sales in line. Let’s tweak that and see the results.

First, “Selling cost” is the percentage of your sales that pay for your salespeople. The formula for this is Total Cost of Sales (which includes salaries plus commission) divided by Total Sales (without tax). For example, if you have an employee whose payroll cost for last month is $1,700 and that employee sells $12,500, then the selling cost is $1,700/$12,500 = 13.6%.

What if you put in a commission plan that keeps the sales at a good percentage, such as 9%? How? Try this – divide your employee’s hourly wage by .09. That number is the employee’s hourly goal. For example, if you have an employee paid $10 per hour, you would divide $10 by .09 and get $111.00. That is what that employee has to sell each hour.

Now, multiply that hourly goal by the number of hours that person works in a week. If they work 30 hours, the goal is $3,330.00. As soon as they hit that goal in the week, you can pay them 9% of all sales above the $3,330. This goal incentivizes them to sell, helps them earn great commissions, and keeps your selling cost low.

We did that in a store whose annual sales were $750,000. Look at the results below.

By implementing this strategy, we lowered their selling cost by 2%, which resulted in an extra $15,000 in cash to the bottom line. But wait, that’s only the first tweak!  

TWEAK #2 – Lowering your purchases

 This one almost seems too easy, but watch the math. We took a store and found ways to lower their inventory purchases by 2%. Look at the results.

Yes, it’s another $15,000 improvement. But let’s be careful here. This tweak was NOT done by unilaterally hacking 2% off of all orders. We determined which “signature” classes for the store carry more inventory than they should. You can do this systematically, using all the tools that open-to-buy planning (definition: open-to-buy is a great sales forecast by class, accompanied by an inventory plan that prevents you from overbuying or underbuying). Our overall goal was to cut purchases by 2%, but we had to figure out precisely how and where. If you are using something other than an open-to-buy plan to do this, you should investigate getting on to one.

TWEAK #3 – Adjusting your Markdowns

 I can almost feel you all rolling your eyes reading this one. “Oh sure, Dan, just take fewer markdowns – right!”  Let me start this section by saying that there is no such thing as a “perfect buyer.” My retail clients have often heard me say that buying is the toughest job in the store. Knowing how hard buying your product is, there are some strategies we can use to reduce or limit the markdowns.  

Most independent retailers need a solid markdown strategy. Goods need to be given sufficient time on the floor to sell, but after that, they need to be identified as slow movers, and we need to get the cash out of them. The earlier we do that (especially for seasonal goods), the lower the markdowns, and the better the chance of us moving through the goods faster.

Markdowns are usually caused by the following:

• Receipt of late goods
• Overbuying beyond demand
• Inadequate department/class structure
• Bad forecasting
• Bad buying
• Too broad of an assortment
• Not reacting to early poor sellers
• Bad performance on the sales floor

We can develop strategies and measurements to reduce or control all of these. Here’s a simple one – if vendors ship late, we either get free shipping, markdown money, or return the goods. Remember, you do not have to permit shipping past a cancel date. Cancel dates are the terms of the agreement; if the vendor violates those, you have the right to either receive extra compensation or cancel the agreement.  

Here’s the tweak for this one – let’s lower the markdowns by 2%. Here are the results:

By implementing all three tweaks, we get the following increase in cash:

Let’s review the tweak(s) and the benefits:

• Lowered Selling cost by 2%= $15,000
• Lowered Purchases by 2% = $15,000
• Lowered Markdowns by 2% = $7,500

We produced $37,500 on a $750,000 business. Not too shabby. And it didn’t come from a crazy new marketing idea, a revolutionary new line, or a magical new salesperson. It came from looking at the details of the business. It came from watching the numbers, not only based upon what happened but what we PLANNED to happen, and working with the buyers, the vendors, and the store managers to bring that plan to fruition.

Apply these tweaks in your store and see what happens!