The life of an independent retailer, the stuff that goes on behind the scenes

As an independent retailer, there’s a lot that goes on behind the scenes that customers may not be aware of. Running a small business can be exciting and fulfilling, but it can also be challenging.

Managing cash flow is a big concern for independent retailers. Unlike larger businesses, they may not have a steady stream of revenue coming in, so they have to be strategic about things like ordering inventory and paying bills. This can mean making tough decisions about which expenses to prioritize and when to reinvest profits back into the business.

Despite this challenge, independent retailers are often able to build strong relationships with their suppliers, customers, and the communities they serve. They may offer personalized services, unique products, or a more curated shopping experience than customers can find at larger stores.

All in all, running an independent retail business can be a rewarding but demanding experience. It takes a lot of hard work, creativity, passion, and perseverance to succeed in this competitive industry.

In this post, I’m going to share a key financial tool, and process to help you measure and manage your improvement, progress, and growth.

Breakeven Volume – What is it?

In this blog post, we will discuss Breakeven Volume – the point at which your revenue equals your expenses – and how it helps indie retail stores create positive cash flow and achieve profitability. We’ll talk about why understanding breakeven volume is so important for indie store owners, go over some tips on reaching that target number, and explore how you can manage to ensure your store’s success and draw in more money. 

Why do you, as an independent retailer need to know this, the Breakeven Volume of your business? What is the importance of knowing this metric?

The break-even analysis is the process to get to the Breakeven Volume. This tells you when your business makes sense and when your business is making enough money to support itself. 

Click here to learn the Small Business Administration’s definition of Breakeven Volume.

This number changes as the business expands or contracts. It tells you the amount to need to sell to satisfy your current expense structure.

Knowing your breakeven point can help you make informed decisions about pricing, expenses, and overall business strategy.

In the next section, we will list the things you need to provide in order to calculate your breakeven point, You’ll need to know your fixed costs (costs that stay the same no matter what), variable costs, and the revenue or sales the store generates.

The Components – The Things You Need To Provide

The illustration below is an example of a Breakeven Analysis that gives the business owner the Breakeven Volume.

REVENUE refers to the income that a company generates from its normal business operations, such as sales of goods or services. It represents the money coming into the company’s coffers, contributing to its financial success. Revenue is a vital metric for evaluating a company’s performance and growth.

PURCHASES are the goods and products you buy from your suppliers. It is the money you spend with your vendors to buy inventory.

CASH MARGIN DOLLARS What are Cash Margin Dollars? Let’s break it down and make it easier to understand. Cash Margin Dollars refer to the amount of money left after subtracting all costs associated with purchasing inventory. In simple terms, it’s the funds available to pay the expenses of the business. 

CONTRIBUTION MARGIN

What is Contribution Margin? Discover the key to understanding your company’s profitability.

Discover the power of contribution margin – a financial metric that brings clarity and boosts your business profitability. Let’s dive into this game-changing concept and unlock a world of financial insights that will drive your success.

What are Cash Margin Dollars? Let’s break it down and make it easier to understand. Cash Margin Dollars refers to the amount of money left after subtracting all the costs and expenses associated with a product or service. In simple terms, it’s the profit you make from each sale. Understanding cash margin dollars is crucial for any business, so let’s dive in and explore this important concept.

BREAKEVEN VOLUME

EXPENSES

• • FIXED EXPENSES
  • VARIABLE EXPENSES

Understanding Fixed vs Variable Expenses

When it comes to managing your finances, it’s important to distinguish between fixed and variable expenses. Fixed expenses are the consistent costs that you incur every month, such as rent or mortgage payments, insurance premiums, and loan repayments. These expenses typically remain the same from month to month, providing a sense of stability and predictability.

 On the other hand, variable expenses are the costs that fluctuate and can change from month to month. This includes things like groceries, entertainment, dining out, and utility bills. Variable expenses can vary based on factors such as personal preferences, seasonal changes, and unexpected events.

By recognizing the difference between fixed and variable expenses, you can effectively plan and budget for your financial goals. This understanding allows you to prioritize your spending, anticipate fluctuations in costs, and make informed decisions about where to allocate your resources.

Take control of your finances by understanding the fundamental distinction between fixed and variable expenses. With this knowledge, you can create a solid financial foundation and make more informed choices for a brighter financial future.

OWNER’S DRAW

 An Owner’s Draw refers to the practice where a business owner withdraws money from the business account to cover personal expenses. 

OTHER INCOME

“Other Income” refers to any revenue or income that does not come from the business’s primary operations. This can include things like interest earned on savings accounts, rental income from property owned by the business, or gains from the sale of assets.

CASH FLOW TOTAL

 This is the bottom line. Based on the projections, will we make any money or not?

Achieving the Breakeven Volume

Once you have a solid understanding of breakeven volume, you can start developing strategies to reach that goal. Marketing is key for indie stores — especially smaller ones. Focus on creating messaging and campaigns that will draw in customers who are interested in the products you offer. You can also think about ways to increase your operating cash flow and efficiency across all areas of your business, such as inventory management or customer service strategies, i.e. loyalty programs, and clienteling apps to help you meet customer demand.

It may take some trial and error before you find the right combination to get your store running profitably, but keep at it! If you can make sure every penny counts towards your breakeven target, you’ll be well on your way to achieving positive cash flow and overall success.

So don’t be discouraged if you’re not seeing sales numbers immediately. By understanding breakeven volume and taking the right steps to reach it, you can bring your business into a profitable state — and reap the rewards!

Don’t forget to use smart marketing techniques and other strategies to help you draw in more customers. Once your store is making money, your success will only grow — so get out there and start counting those pennies! With the right approach, you’ll be well on your way to drawing money off the shelves of your indie store. Good luck!

Maintaining Positive Cash Flow

Once you have reached your Breakeven Volume sales volume, it will require constant attention so the business can enjoy the ease and freedom of producing enough revenue to pay all of its expenses.

To avoid cash flow problems, do the following:

1. Monitor the purchases as % of Revenue

• • • If your inventory purchases are in line and cash is tight, a couple of things may be happening
      • You may not be turning your inventory fast enough to support the business.
      • Price increases are eating away at your cash margin dollars, the money you have to pay your expenses.
      • Are your largest sales volume categories generating enough profit or are they loss leaders?

2. Monitor the Expenses as % of Revenue

Expense management is an essential part of any well-run business. If your Expenses as % of Sales is 42% on your breakeven analysis, yet when you review your current profit and loss statement, the expenses as % Sales crept up to 47%, that is a red-flag you as the owner must investigate and understand.

3. Inventory TURN – Getting A Return On Your Investment

Inventory Turn is HOW you make money in retail. 

As an indie retailer, it is crucial to understand the turn rate of the products in your inventory. The turn rate refers to how quickly items are selling and how often they need to be restocked.

If a retailer has a slow turn rate, it means that products are not selling quickly and may be tying up valuable cash flow. On the other hand, if they have a high turn rate, it means that products are selling quickly and generating revenue.

By monitoring and analyzing turn rates, indie retailers can make informed decisions about things like what products to stock, how much inventory to order, and when to schedule promotions. For example, if a product has a low turn rate, the retailer may decide to mark it down or discontinue it altogether to free up space for more popular items.

In addition to helping retailers manage their inventory, understanding turn rates can also inform pricing strategies and help retailers stay competitive. If a particular product has a high turn rate, the retailer may consider increasing the price to reflect its popularity and demand.

Overall, keeping a close eye on turn rates is essential for independent retailers to successfully manage their inventory, optimize revenue, and stay competitive in today’s fast-paced retail landscape.

4. Do Cash Flow Projections

Cash flow projections are an important tool for independent retailers to anticipate changes in sales and expenses that may impact their profit. Cash flow projections help retailers forecast how much cash they will have on hand at any given time based on expected inflows and outflows of cash.

By projecting cash flow, indie retailers can identify potential shortfalls and take action to prevent cash flow problems. For example, if the projections show that expenses will exceed sales during a particular month, the retailer may decide to delay certain expenses or seek additional financing to cover the shortfall.

Real Life Example

In a recent review of a client’s cash flow, it was clear the store’s revenue had returned to its pre-pandemic levels. That meant we could anticipate a revenue loss of 150K for 2023. Subtracting $54,000 in purchases, the business would not have $96,000 to function. This was a sobering discussion, but the discussion needed to be had. The business owner began taking steps to improve the profitability of the store:

1. Markdowns – She immediately created a few strategic promotions to move through some inventory and generate cash.

2. Discontinued a line of products that she brought in during the pandemic that was not producing the desired results.

3. Enhanced the store’s digital and online presence.

4. Refocused on the store’s private-label merchandise, developing new graphics and fresh displays to generate interest.

In 60 days, these steps created some positive momentum and “stopped the bleeding” and the business is poised to post its first increase this year.

The 5 Things Successful Indie Retailers Must Do

In retail, “art” and “science” refer to two different approaches to running a successful business.

The “art” of retail involves elements like merchandising, customer service, and branding. This approach focuses on creating a unique and memorable shopping experience for customers. While this side of the business may be more creative and fun, in order to be successful, we must balance the “art” with “science”.

The “science” of retail involves data analysis, inventory management, and financial forecasting. This approach focuses on using data to make informed decisions about things like pricing, ordering inventory, and scheduling promotions. The 5 things successful indie retailers do are:

1. Monitor The Metrics

Based on your Breakeven Analysis you know what your key % to Sales metrics are. So in your monthly review of your financials, you check your Purchases % to Sales, your Expense to Sales %, and your Gross Profit %. If they are higher than your benchmarks:

1. Do you know why?

2. Was the increase planned?

3. Did the increase create a negative impact on your P & L? If, so can you weather the storm?

2. Inventory ROI

The key to successful cash flow in retail is cashing out of your inventory in a timely manner. There are several methods and metrics to help you manage this.

• • Inventory Turnover
  • Sell Rate
  • Vendor Scorecard

3. Keep Your Bookkeeping Current

Good bookkeeping is essential for small businesses for several reasons:

1. Accurate Financial Records:

Good bookkeeping ensures that all financial transactions are accurately recorded and tracked. This includes income, expenses, sales, and purchases. Accurate financial records help business owners understand the financial health of their business and make informed decisions on important matters such as pricing, inventory management, and overall strategy.

2. Tax Compliance:

Proper bookkeeping helps small businesses comply with tax laws and regulations. It ensures that all transactions are properly recorded and documented, making it easier to prepare tax returns and minimize the risk of penalties or audits.

3. Better Cash Flow Management:

With accurate financial records, small business owners can better manage cash flow by monitoring expenses and income. They can identify areas where they can reduce costs and increase revenue, which ultimately leads to better cash flow and improved profitability.

4. Access to Financing:

Lenders and investors require accurate financial statements before providing any financing or investment to a small business. Good bookkeeping ensures that these financial statements are accurate and up-to-date, which provides a clear picture of the business’s financial health and helps secure financing.

5. Legal Protection:

In case of legal disputes or audits, good bookkeeping provides small business owners with legal protection. It ensures that all transactions are properly recorded and documented, reducing the risk of legal issues and disputes.

Overall, good bookkeeping is essential for small businesses to stay organized, comply with tax laws, manage cash flow, access financing, and protect themselves legally.

4. Do Cash Flow Projections Regularly

Cash flow projections help retailers make informed decisions about things like inventory and expense management. By projecting sales and expenses, retailers can determine how much inventory they need to order and when to schedule promotions to generate more revenue.

Overall, cash flow projections are a critical tool for independent retailers to manage their finances, anticipate changes in sales and expenses, and make informed business decisions. They should be reviewed regularly and updated as needed to ensure accuracy and help retailers stay on top of their financial health.

5. Manage Your Mindset

The marketplace is always changing and you, as a business owner will have an easier time navigating these changes when you are flexible and open to seeing and doing things differently.

Remember, understanding your Breakeven Volume is key to achieving positive cash flow and overall success. Knowing when you’ll make money can be the determining factor for your business’s success — so take the time to understand it and use it to your advantage. With a little bit of effort, you’re sure to enjoy the rewards that come with being a successful indie retailer!

Do I need it? Free Inventory Evaluation

Effective inventory management is a critical piece to achieving financial stability, success, and a viable Breakeven Volume.

Whether your business has been open for one year or ten years, the savvy indie retailer is always looking for ways to improve, make progress, and grow their business. 

It does not matter where you are in your journey of entrepreneurship if all of this is new to you and you would like to have an objective Inventory Evaluation to:

• • Have outside eyes to see the potential in the business.
  • Determine if there are any obstacles to manifesting that potential, or any red flags that require immediate attention, or what additional resources may be needed to help the owner build the value they desire. 
  • Having outside eyes confirms the right steps are being taken.

Click here to schedule a strategy call with me. 

To your Improvement, Progress, and Growth!

Audrey