ARE YOU MEASURING YOUR PERFORMANCE?

Hopefully, your business is humming along, achieving your sales objectives, meeting payroll and paying the bills on time. It would also be great if after meeting all financial obligations there is also a profit. If this describes what’s happening at your shop, congratulations. 

If it doesn’t, then what follows might be for you. Even if you think your business is doing well, what follows might make it even better.

Two of the most important documents a business needs are a budget and a cash flow statement. In subsequent articles I will address those documents, how they can be created, what they should include, and how often they should be reviewed and/or revised. 

This article will delve into something a little different, something that will use milestones from your budget and cash flow statement and data from other systems to measure the health of your business; establishing and using Key Performance Indicators (KPIs).

When running a retail business and its day-to-day operations, it’s easy to lose sight of strategic goals and their progress. As a business owner/manager, you may not even notice a gradual drop in your retail business’ performance until it’s too late to fix things. KPIs can give you the needed visibility to keep your business on target, or show you where changes need to be made.

KPIs can be anything you think is important. As you establish the KPIs you want to use, they should be aligned with the strategic objectives you have for your business. Below you’ll find some suggested KPIs for a retail business but these are just suggestions. 

For a KPI to be relevant, the data points that will allow timely measurements against the objectives set for the business have to be defined and accessible. Likely, most of the needed data points are available from the systems you have to manage your business. You also need to determine how often you’ll measure any particular KPI. It may make sense to measure some on a weekly basis, or a quarterly basis but most will make sense to measure on a monthly basis.

SALES PER SQUARE FOOT

The formula is Total Net Sales/Total Square Feet. Obviously, you’ll need to determine how many square feet are assigned to your sales areas. To further this analysis, you may wish to consider product sales versus service sales and establish the square footage used for each. This KPI measures how effectively you are using the area you have and is a good indicator of your store’s productivity.

AVERAGE TRANSACTION VALUE

The formula is Total Sales from Transactions/Total Count of Transactions. As above, you will probably want to have separate analysis for bicycles, accessories and service. This performance indicator shows what your customers are buying and how much they spend each time. If your employees can encourage customers to increase their average purchases through merchandising strategies, identifying popular products or promoting service programs, then those efforts will likely boost your profit and enable your company to grow.   

INVENTORY TURNOVER  

The formula is Total Cost of Inventory Sold/Average Inventory Cost. Measuring inventory turnover will allow you to figure out how fast your inventory moves. You should determine how you wish to categorize your inventory and to establish turnover targets for each. Slow-moving inventory likely is costing you money, as you have spent money on inventory that does not sell through. If you have inventory that moves too quickly you may not be able to meet the market demand. This is a good metric to use over time to help understand which inventory items are affected most by seasonality. 

CONVERSION RATE

The formula is Total Number of Transactions/Total Number of Visitors. Every person that comes through your door has the potential to contribute revenue. This gives you insight into the efficiency of your sales process. It is important to know how many visits convert to sales.

SHRINKAGE

The formula is Inventory Losses/Inventory You Should Have. This measures the amount of inventory lost, not invoiced or stolen over a specific period of time. As with turnover KPI, you may wish to categorize your inventory to isolate specific shrink issues. Shrinkage can occur due to a variety of reasons, including theft, administrative errors, or damage. High levels of shrinkage can have a significant impact on a retailer's bottom line, as it represents a loss of revenue that could have been reinvested in the business. This specific KPI also highlights the need to do inventory cycle counts.

SALES PER EMPLOYEE

The formula is Net Revenue/Number of Employees. Tracking sales per employee can help you track employee performance and revenue generated by the staff. Data from this retail metric can help you make decisions regarding training, compensation, and promotions. This indicator will work for both sales employees and service employees. If you are paying commissions and/or spiffs the data points for this may be available from your payroll and POS systems.

It’s important to keep track of your essential retail KPIs. They are used to determine if your retail business is on the right path toward its goals and achieving the overall business strategy. They also help you conduct benchmarking to identify areas for improvement.  

As mentioned earlier, KPIs can be anything you think is important. If you have some you use and find valuable that I haven’t mentioned let me know at: steve@humanpoweredsolutions.com.