Retail Analytics: The Meaning Behind the Numbers

As an independent retailer, it is important to evaluate your numbers to set yourself up for success. Having a strong understanding of the figures that power your business will help you with making informed decisions and setting appropriate goals. Knowing your numbers can also help you identify potential weaknesses in cash flow, profit margins, and issues that may impede your growth. 

No matter what size your business is, understanding the metrics behind it will be essential to its success. It’s important to have a good sense of how much money you plan on bringing in and spending. Knowing your revenue, cost of goods sold (COGS), expenses, profits, etc., can help you develop better strategies for running a profitable retail store.

It’s also important to track customer feedback to understand how your store is performing and what needs improvement. Gathering customer reviews will give you valuable insights into the quality of your product and service, allowing you to make changes and adjustments as needed. With all this data, you’ll be able to track progress, measure success, and strive for continuous growth over time. 

In this blog article, you will see a real-life example of the benefits of an indie retailer knowing their numbers and using the numbers to make well-informed decisions to achieve their goals.

Retail Business Terms to Know

As we get started, here are a few concepts to be familiar with.

Terms – Things To Know

Sales Revenue

Measures the total amount of money generated from the sale of goods and services during a specific period. It is a key financial metric that indicates the financial performance and success of a retail business. Retail revenue can come from various sources, including in-store sales, online sales, and other revenue streams such as advertising or licensing agreements. 

Inventory

The total stock of goods available for sale to customers. It includes all the products kept in storage or displayed in a store. Retailers use various methods like barcode systems and inventory software to achieve good inventory management.

Open-to-Buy

Open-to-Buy is a financial budgeting tool. It uses sales projections, inventory information, and budget specifications to show retailers available funds for new orders and other significant financial insights. 

Expenses

Refers to the costs incurred by a retailer while conducting their business operations. These costs are necessary for running the retail business and can include various categories of expenditures. Here are two types of expenses in retail:

Cost of Goods Sold (COGS)

Costs of Goods Sold includes the expenses associated with purchasing or producing the products that are sold to customers. It encompasses the cost of raw materials, manufacturing or wholesale costs, shipping fees, and any other direct costs related to the products being sold.

Operating Expenses

These are the ongoing expenses required to operate a retail business. They can include rent or lease payments for the store or office space, utilities, insurance, salaries and wages of employees, advertising and marketing expenses, maintenance and repairs, and administrative costs such as accounting and legal fees

Net Profit

Net profit is your revenue minus expenses. It represents the amount of money left over after deducting all costs, including the cost of goods sold (COGS), operating expenses, overhead costs, taxes, and other relevant expenses.

Net Cash Flow

Net cash flow is the amount of cash that comes into your business minus the expenditures in a given period. For example, you might receive cash into the business that’s not part of revenue, like sales tax.

Profit Margin

Refers to the percentage of revenue or sales that remains as profit after subtracting all costs and expenses associated with running a retail business. It is a key metric used to assess the profitability and financial performance of a retail operation.

To calculate the profit margin, you divide the net profit by the total revenue and multiply by 100 to express it as a percentage. The formula is as follows:

Profit Margin = (Net Profit / Total Revenue) * 100

Key Performance Indicators

KPIs are measurable metrics that help retailers assess their performance and track the success of their operations. These indicators provide insights into various aspects of a retail business, allowing managers and stakeholders to make data-driven decisions and identify areas for improvement. Here are some common retail KPIs:

Gross Margin

Calculates the difference between sales revenue and the cost of goods sold (COGS), indicating the profitability of products or services after accounting for direct production costs.

To calculate the gross margin, you subtract the cost of goods from the total sales. The formula is as follows.

Gross Margin = Total Sales – Cost of Goods

Inventory Turnover

Calculates how quickly inventory is sold and replaced within a given period, usually a 12-month period. It indicates inventory management efficiency while identifying potential issues such as overstocking or understocking.

To calculate inventory turnover, you divide the average inventory at retail by the net sales. The formula is as follows.

Inventory Turnover = Net Sales / Average Inventory Value at Retail

Retail Business Growth – How Can I Up My Game?

As an indie retailer, my client heard of open-to-buy, but she didn’t know what it was or how it worked. She attended an industry event and she decided to learn how to manage the store’s inventory better; she wanted to learn how to do open-to-buy planning to accomplish this. 

Most business owners seek ways to improve and “up their game”; to find ways to be better, and more efficient in their business operations. When we began working together, the client’s business was stuck at 1.3 million and she wanted to grow; she wanted to get to 2 million in net sales but was unsure on how to do it.

To gain a working understanding of open-to-buy, you can read this blog post.

Retail Growth Strategy – Seize the Opportunities

A key component of my work is using merchandise planning, which is open-to-buy, as a tool to shed light on the business. The purpose of merchandise planning is three-fold:

• • To see where the business has been.
  • To understand where the business is now.
  • To be proactive about where the business is going. 

Using some pretty slick state-of-the-art software, which takes the store’s transactional data and transforms it into meaningful information that allows me to analyze and give the owner a deeper sense of the value of her business.

By meeting regularly to discuss the business in depth, we guided the business to higher heights. We cover so many things in our monthly meetings, but here are a few of the important things:

• • Ensuring we are spending our inventory dollars efficiently, I provided monthly spending budgets for the 15 profit centers of the business.
  • Inventory turn – the heartbeat of any retail store, having the right product in the right place at the right time.
  • Seeing consistent growth in the top-line sales and identifying emerging business opportunities.
  • Updating the store’s branding and image.
  • Finding new ways to expand existing profit centers, for example, adding a new gondola which created enough space to allow a 25% increase on a 6 figure profit center. And expanding a section of the business that was growing in pet food stores across the country. Using the merchandise plans provided insight into the emerging business opportunity.
  • We invested our inventory dollars deliberately by not funding certain categories because customer demand was not there.
  • Whether or not the store should shut down the website because they did not have the bandwidth to maintain it. The client and I agreed on a solution to take the administrative burden off the store staff and get critical work done to keep the website online.
  • New ways to reward the staff.

Working together monthly, hearing the numbers consistently, and getting fresh interpretations keep the owner in tune with the solvency of her business on a deeper level than reading the monthly profit & loss statements. Our monthly meetings tell her why or how the results on the P&L came about.

Working together gives the owner a sense of security and she can make decisions with certainty. 

Establishing the practice of knowing her numbers and taking deliberate action has led to significant growth and progress in her store.

Retail KPI Analysis – Getting It Done

Over the past eight years, we worked together month after month. We have achieved growth and success in many ways. Knowing her numbers, the key performance indicators and managing the business on sound recommendations, the store’s leadership team accomplished:

• • Hosting a major industry event.
  • Winning major accolades.
  • Becoming a leader in the community.
  • Successfully surviving the 2020 COVID-19 global pandemic.
  • Constant attention to payroll % of sales, setting up a line of credit to help navigate lean times, and having the store’s account payable invoices paid 20 days in advance, and so many others.

And last but not least improvement, progress, and growth summed up in achieving the owner’s goal of doubling her 7 figure business!

Working together, this indie retailer feels she is working with someone who is truly interested in her success. There are so many “hats to wear” or jobs to do in running a successful independent retail store. Regular conversations about merchandise planning does the job of providing constant attention to the store’s numbers, the monthly cash flow review, the annual breakeven analysis to confirm the business is on firm financial footing, and managing the monthly inventory investment to ensure the return on that investment is enough to keep the business solvent.

Being aware of retail metrics will help you build a better business and provide the best service possible to your customers. Staying on top of your data will help you make decisions based on facts, not guesswork. With the right metrics in hand, you can celebrate more wins and avoid costly mistakes!

The most important metric for any retail business is cash flow: how much money comes in and how much goes out. This will give you an indication of the money available to draw from and reinvest in your business. It’s also important to pay attention to profit margins, as this will show you how much money is left after covering expenses. Tracking these key metrics will help ensure that your business remains profitable over time. 

Do you know your numbers? Get a Free Inventory Evaluation

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

It doesn’t matter where you are in your journey of entrepreneurship. Whether all of this is new to you or if you’ve been at it awhile, an objective Inventory Evaluation will provide:

• • Outside eyes to see the potential in the business.
  • Determinations about any obstacles to manifesting that potential, any red flags that require immediate attention, or what additional resources may be necessary to help you, the owner, build the desired value. 
  • Outside eyes to confirm that you are taking the right steps toward the solution.

Want to learn more about open-to-buy, identify any roadblocks in your business, and address them as quickly as possible? Click here to schedule a free strategy call with me. 

Here’s to your Improvement, Progress, and Growth!

Audrey