To achieve your goals, you must commit to doing whatever is necessary, not just what is easy or pleasurable. There are many things in life that must be done if we wish to find that light at the end of the tunnel. It is unrealistic to assume that every task we take on will be a delight. Many things we must do are out of our “area of expertise” or we just don’t want to do them. But to succeed, we must grit our teeth and get the job done. Once engaged, it’s amazing how many of those disdainful tasks were not as unpleasant or time consuming as first imagined. Occasionally, we find we had untapped ability in areas we never imagined. Other times, we were absolutely right about the tedious nature of the task, but can take pride in getting through it and achieving the desired result.
Sounds a lot like retailing, doesn’t it? Most of us have entered into retail because of its product orientation. We love the products we deal with and are drawn into retail by that allure. Much of what we do is truly a joy. Shopping for merchandise, ordering, displaying and selling are very pleasurable aspects of the retail process. But then there is the other stuff. The “necessary evil” jobs that must be done. Dealing with the staff, the landlord, the federal, state and local agencies, handling emergencies and eating lunch at 4:00 PM are just a few that come to mind. I’m sure you can expand the list. You probably took a break from one of them to read this article.
It seems that retailers are divided into two groups – product people and number people. Both love dealing with the product, but only the smaller “number” group enjoys the financial/business end of their business. The product people give lip service to the business aspect of retailing, but do everything to avoid it. This attitude brings more problems than the false sense of security it creates. Retailing is a business. A business that must be run by the numbers. The product is only a means of fulfilling the numbers.
Since your bottom line is directly tied to your buying, the most important numbers in your business are your buying numbers. By properly planning your buying dollars based on anticipated sales and desired turn rates you will always have the right amount of inventory in the right categories at the right time. This will produce a positive cash flow and enable you to pay the bills and take home a profit every month.
This process, called “open-to-buy” planning, begins with designating codes to track all merchandise categories through the store. As you buy, receive and sell merchandise it is tracked by these category codes. Open-to-buy works by category and not by item because the items and vendors are changing, but the categories remain somewhat stable.
A sales plan is projected for the next twelve months in each category, usually based on the preceding 12 months. If you are a new retailer or one without good history, percentages can be used to create your sales plan. Next, turn rates are projected for each category of merchandise. Turnover is the key to retail profitability and must be considered in the construction of ideal beginning inventories.
Turnover is a function of three elements – delivery time (how long does it take to get the merchandise), shelf life (how long you want it sitting there), and item quantity (how much do you need to be properly represented). The actual computation for annual turnover is to divide your total annual store sales by the average amount of retail inventory.
Turnover = Total Annual Sales
Average Retail Inventory
Annual turn rates are adjusted by the sales impact of each month and these adjusted monthly rates are divided into 12 (months) to yield inventory factors (or stock-to-sales ratios). The inventory factors are multiplied times the projected sales to determine ideal beginning inventories for each month for the next year. All figures are considered in retail dollars because you are building a retail dollar inventory to support your retail dollar sales. A current inventory compared to the ideal beginning inventories by retail dollar by category will show where you are under- or over-stocked. This actual inventory figure will also be the starting point for your open-to-buy calculations. (This inventory information can be determined by a physical inventory or taken from a point-of-sale or inventory control system if one is in use.) This setup work needs to be done only once.
The monthly cycle of the process begins with the open-to-buy calculations which determine how many retail dollars should be received in each category each month
for the next 12 months. With this information you are ready to intelligently search out and buy the best available items to fill your dollar plan. During each month you will be tracking receipts and sales and at the end of each month an analysis of sales, inventory and turnover will show how your store performed (actual vs. projected) and how things are trending. Based on this information, revisions can be made to your plan and corrective action taken to insure the proper flow of merchandise to your store to maintain a positive cash flow.
As you can imagine, to work through an open-to-buy plan involves a lot of numbers. But these numbers will guide you to having the right amount of inventory to support your sales and produce a positive cash flow. Retailing is a great opportunity for creative expression, but more importantly, it is an opportunity to find great financial success dealing with products you love. Many retailers are seeing the fruits of their labors by using open-to-buy planning to guide their buying. You can too, but first, you must commit to running your business by the numbers.