Managing the Finances of Retail Stores

Financial Management in Retailing

Financial Management in Retailing - The book "Retail Truths" by Chip Averwater

Truth #381: The past, present, and possible are all in the numbers.

Historical numbers define where we’ve been; they show us the effectiveness of what we’ve done and help us recognize and rectify our mistakes.

Current numbers show us what we have to work with and help us assess what we can afford to risk.

Projected numbers let us weigh our options and opportunities, foresee challenges, choose our directions, and set our strategies.

Our numbers are the most objective descriptions we have of our stores and contain far more insights and financial management opportunities than we’ll ever extract.

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Truth #382: Projections are experience made affordable.

Almost any scenario can be projected, much quicker and at far less expense than living it.

Projections show us what results we can expect from store expansions, price wars, recessions, lay-offs, new or diminished competition, discounting, changing merchandise, and most other potentialities. Even when they don’t lead us to radically new and different strategies, they help us understand the possibilities—and that goes a long way in relieving anxiety and creating confidence.

Calculated outcomes are seldom what we expect. Sometimes they disappoint by showing an exciting plan to be hardly worth the effort; occasionally they uncover surprising profits in unsuspected opportunities; and not uncommonly, they warn us away from tempting catastrophes.

Committing to expensive long-term ventures and strategies without projecting their potential and probable outcomes means spending years of our lives and incomes discovering what a few simple projections might have revealed.

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Truth #385: A little success creates a lot of overhead.

When times are good we tend to add people, give raises, lease more space, add more inventory, upgrade equipment, create new bonuses, and increase benefits. The moves make sense when sales are growing.

But they are also long-term commitments to continuing expenses that are hard to shed if necessary later. And they set precedents and establish an operational philosophy that becomes entrenched.

When we hire more people, work expands and we soon wonder how we ever got it done without them—indeed we often can’t again. Making leasehold improvements, replacing computers and software, and buying new equipment are paid for with today’s cash, but the depreciation expenses drag down profitability for some years into the future.

Good results also allow us to overlook weak departments and locations, excuse poor performance, and put off needed but unpleasant changes.

Fat and happy is often dangerous and temporary; many retailers prefer lean and mean as both safer and more efficient.

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Truth #387: Patient growth, impatient profitability.

We have an innate tendency to focus on growth as the Holy Grail and answer to all our profitability challenges. If we can just sell a little more, we’ll be able to cover our expenses and maybe even make a little money.

But growth is as often the way into trouble as the way out. Chasing sales with high expenses and insufficient margins only increases our problems; more sales bring more losses, often in the same old proportions.

In most cases the solution to unprofitability is to step off the sales treadmill and fix the business—the sooner the better. After it’s running smoothly and profitably we can grow again.

Growth can wait; profitability cannot.

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Truth #391: Turnaround plans aren’t innovative.

Getting out of financial trouble is always unpleasant but seldom ingenious. The basic steps are:

1. Correct the books. Troubled companies rarely have accurate financial statements. Verify all numbers on the balance sheet, including especially receivables, inventory, and payables, and create accurate income statements. Until we know where we are, we can’t know what to fix and when we’ve fixed it.

2. Determine which activities are making money and which are losing. Divide the financial statement by locations and departments, and allocate expenses all the way to the bottom line.

3. Create a plan to get rid of the losers. We can’t go soft here; we get support to fix it once but not twice. We have to do the whole job the first time.

4. Get buy-in from managers, employees, vendors, and creditors.

5. Execute the plan quickly, boldly, and resolutely. We’re heroes if we follow through, misguided losers if we back off.

Turnaround plans don’t include radical new concepts. The ship must be righted and stabilized before it sets off in new directions and on new ventures.

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Truth #395: There is no such thing as a fixed expense.

Any expense can be reduced or eliminated, usually much faster than we assume.

The concept of fixed and variable expenses comes primarily from manufacturing. Raw material and labor are variable expenses because they increase and decrease with production. Machinery is a fixed expense; the cost of buying and installing a machine is the same whether we use the machine or not.

Retail has no “fixed” expenses. Payroll, retail’s largest expense, is not—people can be redeployed in seconds, and unemployed if necessary. Rent is not—space can be used for other purposes, or subleased or sold. Even equipment leasing and depreciation are not, as equipment can be sold when necessary.

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the book "Retail Truths: The Unconventional Wisdom of Retailing"
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