Copyright © 2014 Ted Hurlbut

If there’s a common thread between the range of clients that I work with day in and day out, it’s that sales increases are hard to come by, and when they come they seem to come in spurts that don’t always last very long. This puts even greater emphasis on managing expenses in order to consistently generate positive cash flow.

As I’ve written before, in the world we now live in, financial success requires a commitment to proven retail business fundamentals, operational discipline, and a heightened attention to detail. Further, financial success requires a commitment to continually enhancing managerial capability, including the ability to manage your retail business expenses.

Here are 6 tips to help you better manage your expenses.

1. You can’t manage what you don’t measure. Proficiency with Quikbooks or some other bookkeeping/accounting software is an essential skill set that must be in the managerial tool kit. Proficiency with Quikbooks includes maintaining an appropriate Chart of Accounts, and the discipline that every expense is entered into the right account for the right month, on a timely basis. Only then will you be able to generate the financial history needed to develop realistic expense budgets.

2. Effective expense control begins with establishing realistic budgets. A basic familiarity with Profit & Loss Statements (sometimes called Income Statements) and Balance Sheets is a necessary starting point for developing an expense budget. Here is where the financial history of the businesses is reported out far more comprehensively than checking every bill and watching every penny. The Income Statement is where expenses can best be reviewed, on a monthly, quarterly or annual basis.

3. One of the most effective ways to control expenses is to budget and measure each expense line not just in dollars, but also as a percent of sales. (Quikbooks has the option of reporting each line item on the Profit & Loss as a percent of sales.) Evaluating expenses as a percent of sales sheds a whole new light on expenses. Recognizing that significant expense categories like payroll and rent cannot exceed specific percentages of sales in order for the business to remain profitable allows you to establish critical benchmarks.

4. Thinking about expenses as a percent of sales puts specific emphasis on the importance of maintaining gross profit percentages, and highlights the importance of markup and markdown percentages. When gross margin percentages are increasing that means there will be more percentage points available to cover expenses (and to flow directly to the bottom line)> Increasing gross margin percentages take pressure off expense levels, while shrinking gross margin percentages increase 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 chew up a significant percentage of sales. One technique is to structure expenses to be step-variable, 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 percentage rent.

6. Today’s expense is tomorrow’s disbursement. Expenses must be managed at the time the liability is incurred. This comes into play with many vendor dating programs, but applies to other expense categories as well. Even if you don’t have to pay the bill until later, you will still have to pay the bill. The Profit & Loss reflects when the expense is incurred. Cash, on the other hand, is impacted when the bill is paid. If cash gets pinched when the bills come 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.

Ted Hurlbut is a retail consultant, coach and speaker who helps independent retailers increase sales, profitability and cash flow by leveraging his deep expertise in the core retail disciplines. To learn more about how you can benefit from Ted’s proven retail know-how, visit his website at http://www.hurlbutassociates.com or download his report “The 16 Essential Elements of a WINNING Independent Retail Strategy”.

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Copyright © 2014 Ted Hurlbut If there's a common thread between the range of clients that I work with day in and day out, it's that sales increases are hard to come by, and when they come they seem to come in spurts that don't always last very long. This...