If there’s a common thread among the range of clients I work with day after day, it’s that increases in sales are hard to come by, and when they do come, they seem to come in spurts that don’t always last long. This places even more emphasis on managing expenses to consistently generate positive cash flow.
As I have written before, in the world we live in now, financial success requires a commitment to the proven fundamentals of retail, operational discipline, and increased attention to detail. Additionally, financial success requires a commitment to continually improve management skills, including the ability to manage your retail business expenses.
Here are 6 tips to help you better manage your expenses.
1. You cannot manage what you do not measure. Mastering Quikbooks or some other accounting / bookkeeping software is an essential skill set that should be in the management toolkit. Competing with Quikbooks includes maintaining a proper chart of accounts and disciplining that each expense is posted to the correct account for the correct month, in a timely manner. Only then will you be able to generate the financial history necessary to develop realistic spending budgets.
2. Effective spending control begins with setting realistic budgets. A basic familiarity with income statements (sometimes called income statements) and balance sheets is a necessary starting point for developing an expense budget. This is where the financial history of companies is reported much more fully than verifying every invoice and every penny. The income statement is where expenses can best be reviewed, on a monthly, quarterly, or yearly basis.
3. One of the most effective ways to control expenses is to budget and measure each expense line not only in dollars, but also as a percentage of sales. (Quikbooks has the option of reporting each line item profit and loss as a percentage of sales.) Evaluating expenses as a percentage of sales sheds a whole new light on expenses. Recognizing that important expense categories such as payroll and rent cannot exceed specific sales percentages to keep the business profitable allows you to set critical benchmarks.
4. Thinking of expenses as a percentage of sales places specific emphasis on the importance of maintaining gross profit percentages and highlights the importance of markup and markdown percentages. When gross margin percentages increase, that means more percentage points will be available to cover expenses (and to flow directly to bottom line)> Increasing gross margin percentages take pressure off expense levels, while reducing of gross margin percentages increases that pressure. Variable expenses are more manageable than fixed expenses.
5. Variable expenses increase or decrease as sales volume increases or decreases. A good example of this is credit card fees. Fixed expenses, on the other hand, remain fixed regardless of sales volume. Base rent is a good example of this. By their very nature, variable costs are more manageable costs. Structure as many expenses as possible to be variable, particularly those that have the potential to consume a significant percentage of sales. One technique is to structure expenses so that they are variable in steps, fixed over a given narrow range of sales volume, but variable in steps over a broader range of sales volumes. A great example of this is the rental percentage.
6. Today’s expense is tomorrow’s expense. Expenses must be managed at the time the liability is incurred. This comes into play with many provider appointment programs, but it also applies to other expense categories. Even if you don’t have to pay the bill until later, you will still have to pay the bill. Profit and loss reflects when the expense is incurred. Cash, on the other hand, is affected when the bill is paid. If cash is squeezed when bills are due, the cash crunch is the result of decisions made earlier and, in some cases, decisions made much earlier. In my next post, I’ll have 6 more tips for managing specific expense categories.