In today’s dynamic economic landscape, furniture companies must continuously evaluate their retail expenses to enhance profitability and ensure robust cash flow. While increasing sales is vital, optimizing all types of costs can significantly impact your bottom line.
Let’s consider how the types of costs affect your business and the challenges many businesses are experiencing: Variable and Fixed expenses.
First, fixed costs are defined as costs that do not change as a dollar amount with changes in sales volume. An example could be office salaries. Whether your business has a record sales month or a poor month, your business will incur the same cost. Thus, the higher the total sales volume, the lower this cost will be as a percentage of sales. In turn, the spread above where your fixed costs are covered (also known as break-even) is why your net income percentage increases significantly in good periods.
Due to the post-COVID economy, inflation has been a challenge worldwide. Therefore, even though historically many costs were considered fixed, they have become step-fixed costs or increasing fixed costs. As a result, business profitability has been under pressure.
The other main type of cost is variable costs. They are retail expenses incurred only when a sale or revenue is realized. Using the cost of goods sold as an example, we see that when merchandise is sold and delivered, margin is made. The margin of every sales dollar that is produced varies as a dollar amount and traditionally is constant as a percentage of revenue. Thus, whether sales are good or bad in any time period, profitability is not affected by variable costs as the percentage remains the same.
A similar challenge is currently occurring with this variable cost as the inputs: merchandise costs, freight costs, and government taxes in the form of tariffs, have been unpredictable. Thus, the most important variable cost, the cost of goods sold, has been acting like a sort of unknown cost that is constantly changing and risky due to unknown margins. If a business gets this wrong, it could easily lose all profits.
Understand that it is very difficult to cut your way to business growth. If a business stops investing in itself and starts making broad cuts, revenue growth is unlikely to follow. There may be short-term savings, but in the long term, growth and profit suffer. Sales will usually level out or fall further, in a sort of self-fulfilling prophecy.
A less considered but hugely important cost is opportunity cost. These are the costs usually incurred because of indecision or poor decisions. These costs that are not on the P&L . Opportunity costs are the costs of lost business or increased retail expenses due to the loss of efficiencies.
As an example, suppose that an operation chose to reduce its salesforce and sales support to save payroll and give more customers to its top salespeople. This may make sense from a short-term accounting perspective. However, suppose the top salespeople are already performing at their capacity. In that case, they may not make up for the amount of sales lost by NOT having enough people to handle and convert prospects in a proper fashion. In this basic case, if the company decreases a net of 2 salespeople and their sales per salesperson remain the same at $800 thousand per year, their opportunity cost would be $1.6 million per year. Always consider the possible opportunity cost when cutting any retail expenses that are meant to add value to the business.
I think it is always better to seek to improve the selling process first with a combination of improved processes and technology. That said, all costs should produce value and be important for the future growth of the business.
Determining ROI and using Contribution Margin (CM)
Understanding a couple of equations can help with decision-making regarding cutting or keeping expenses and whether to bring on a new investment or not.
ROI = Net value gained from investment / Investment cost
Approximate Sales $ to Cover Fixed Investment = Fixed Investment cost / Contribution margin (CM) %; CM% = (Sales-Variable expense) / Sales
With the longer supply chain of furniture and lower turn period of inventory in this industry, the moving targets of costs have created sizable challenges that businesses are dealing with, while profitability is being threatened.
Below are some ideas you may consider reviewing to maximize profitability and cash flow, especially in periods of uncertainty.
Fixed Costs:
Fixed costs, such as rent and utilities, are incurred regardless of sales performance. Occupancy costs, in particular, can be substantial. To manage these retail expenses:
- Space Utilization: Aim for showroom productivity of at least $150 per square foot, with higher targets for boutique spaces.
- Lease Negotiations: Engage landlords in discussions about rent adjustments or space reconfigurations to better align costs with revenue.
- Energy Efficiency: Invest in energy-saving measures to reduce utility expenses over time.
- All Other fixed costs: Run them through both my ROI and CM value equations. Make sure you calculate properly, don’t be emotional, and don’t exclude anything. For instance, when determining the net value of ROI, remember cost savings as well as tangible value gained. You do not want to mistakenly cut a valuable cost by not accessing it properly.
Variable Costs:
The cost of goods sold (COGS) remains the most substantial variable expense for furniture retailers, often comprising up to 50% of each sales dollar. Variations in COGS across businesses can be as much as 15%, in normal times, influencing gross margins and the speed at which break-even points are achieved.
To effectively manage and reduce COGS:
- Strategic Pricing: Set premium prices for bestsellers, special orders, and new arrivals to maximize margins.
- Best Seller Pricing: Ensure you get 5-10 GM percentage points above your average marketing.
- Special Order Pricing: Prices are similar to best sellers and include “padding” for unknowns such as tariffs, delays, or freight increases.
- Freight Optimization: Regularly compare shipping rates and negotiate with carriers to secure the best deals.
- Bulk Purchasing: Leverage volume discounts and consider joining buying groups to reduce per-unit costs.
- Sales Training: Educate sales teams on promoting higher-margin products and value-added services.
- Inventory Management: Maintain optimal stock levels to prevent overstocking and associated markdowns.
Credit Card Costs: More and more businesses in this industry are now partnering with services that pass on the “convenience fee” to customers wishing to pay with credit cards. I predict that in the next five years, almost all retailers will be doing this.
Sales commissions: It is always a good idea to review these. Seek to pay your people more for selling what and the way you wish them to sell. Pay them less for underperformance. Even though paying on delivered sales makes sense on the P&L, that is NOT the way people think. You should consider a hybrid model: part written, part delivered.
Enhancing Cash Flow: Practical Strategies
Beyond cost management, improving cash flow is essential for financial health. Consider the following tactics:
- Keeping inventory at the correct level: Be conservative when buying new merchandise. Use an inventory-to-sales equation where inventory is current and sales are projected at the current 12-month run rate.
- Prompt Invoicing: Implement systems to invoice customers on the written sale, and if not fully collected, immediately upon delivery to expedite payments.
- Flexible Payment Options: To accommodate customer preferences, offer various payment methods, including digital wallets and financing plans.
- Inventory Liquidation: Regularly assess and clear out slow-moving inventory through sales or promotions to free up cash.
- Expense Audits: Periodically review all retail expenses, including insurance and credit card processing fees, to identify savings opportunities. Use ROI calculations.
Focusing on these areas can strengthen furniture retailers’ financial position, ensuring sustained profitability and healthy cash flow in an ever-evolving market.
Maximizing profitability and cash flow requires more than just cutting costs—it demands a thoughtful, data-driven approach to managing all retail expenses. Furniture retailers can make smarter financial decisions that support sustainable growth by understanding the true nature of fixed, variable, and opportunity costs and applying ROI and contribution margin analysis. In an environment marked by inflation, supply chain instability, and shifting consumer behavior, businesses that continuously evaluate the value of every dollar spent, while strategically investing in people, technology, and process improvements, will be the ones that thrive. The goal isn’t necessarily to spend a lot less, but to spend wisely, to enable future growth.
