Many jewelry retailers are so successful they are slowly going broke by chasing sales and neglect to create vital Goss Profit. Too little GP means one of two things - either the business cannot meet its financial commitments on time, or the owners are not enjoying an income in line with their investment in the business or both.
Not only does a business need to produce enough GP to meet its ever-increasing operating expenses and give the owners a good return on their investment, but also enough to allow for expansion. Too often a business will expand by either adding lines (increasing stock on hand) or adding stores, without serious consideration about how its going to fund the expansion because the excitement has overridden the logic. Often the rationale is “we’ll fund the expansion out of profit.” What Profit? When the business is struggling to meet current commitments and give the owners a fair return, what profit is left to fund expansion?”
There are only two ways to create additional GP, either sell more at the current margin, or sell the same at a higher margin. The ARMS approach is to help clients increase sales AND increase margin. For example, per $1,000,000 sales at 100% markup results in $500,000 GP. Increase GP margin to 55% and the same sales creates an additional $50,000 in profit. On the flip side, a decrease in GP margin to 45% due to excessive discounting equals a loss of $50,000 GP.
The difference between the above two examples is a huge $100,000 in lost GP per $1m of sales. It’s not hard when you don’t keep your eye on the ball of GP to drop your margin. It happens all the time. If your GP last year was $500,000 and this year with increased operating expenses you will require $550,000 GP then you must either achieve $1.1m sales or an increase in margin from 50% to 55%. You cannot afford to gamble on either outcome so put a dollar on both horses.
- Plan to increase your margin to 55% and your sales to $1.1 so even if you do not reach either goal, a combination will get you there. Don’t wait until the end of the year to see if you have been successful.
- On a daily or weekly basis, you need to look at achieved margins and at the end of each month you need to check sales goals.
- ARMS reports are designed to allow you to keep your eye on both these critical key indicators by comparing them with previous years, department by department.
“Remember, if you fail to plan you are planning to fail.”