4 KPIs YOU NEED FOR A RETAIL BUSINESS
Whether you are a new business or an established one, you cannot deny the fact that monitoring trends in your business is a good way to keep on top of things and implement changes to keep you competitive.
You’re likely inundated with a lot of data and information. There’s revenue and profit, sales per day, inventory data, and many more. With so many numbers surrounding your business, how do you know which ones to track, and take action on?. The answer to this is your Key Performance Indicators (KPIs).
A Key Performance Indicator (KPI) is a measurable value that demonstrates how effectively a business is achieving key business objectives. KPIs are the most important metrics in your business. They help you answer the difficult questions. These are numbers that you must regularly monitor so that you can determine if your business is in a good shape and heading in the right direction. Every business is different and different KPIs will be used according to the needs of your business. Let’s focus on the retail industry for a minute.
The following KPIs have been found to be relevant in a retail business. This list is by no means exhaustive.
The Cost of Goods Sold
This measures the actual profit margin on products and services by analyzing how costs such as labour or shipping affect your profit margin. This KPI is fundamental in determining the markup percentage for products. A lot of small retailers do not bother with this critical metric. They are simply interested in selling and making a profit and are happy when goods are flying off the shelves. It's important to remember that even if products are flying off the shelves, you still need to make profit on all those products.Suffice to say that selling does not equate to profit
The Sales per Square Foot
This is a good indicator of how efficient you are with the use of sales space and assets. It measures how much sales revenue you are able to generate for each foot of retail space provided.This a popular retail sales KPI because it clearly demonstrates how effective your store layout and retail personnel are at selling product. As such, this KPI is important when redesigning or touching up your retail outlets, and will be the ultimate indicator of whether that redesign was successful or not.
To give you an idea how this works, here is a simple calculation you can use:
Total Sales ÷ Total Floor Area
For example if a clothing retail store sold $1,500,000 worth of clothes and your total floor area is 1,800sq. ft. your sales per square foot would be:
$1,500,000 ÷ 1,800sq. ft. = $833.33 per sq. ft.
You can review this KPI regularly as you see fit but, most especially it will be relevant by comparing previous year with current year when it’s time to negotiate your rent or redesigning the store.
Customer Satisfaction Metrics
This measures the quality of your customer service and provide a reflection of the public and your customers perception of your business. It's important to remember that, when you provide a good service, on average a customer will tell 2 or 3 people. If you provide a bad service they will tell about 8 or more people. This is a key KPI to track. It is a qualitative KPI which is as important as all the quantitative KPIs which we place heavy value on.This data can be collected by distributing forms at the point of sale or by sending your customers short survey forms by email.Yes, a customer questionnaire is valuable to ascertain what your customers can tell you about your service or products.
Stock Turnover Rate
Inventory turnover refers to the number of times the average inventory of a product is sold in a year. It is an indicator of how quickly you are able to sell your product. In most cases the higher the stock turned over the better it is for your store. As we know, slow moving inventory is money tied down. This KPI helps you understand that.
To find out the ratio of your stock turn over the formula is: Cost of Goods Sold ÷ Average Inventory.
So for example let's say your average inventory is $50,000 and if your cost of goods sold in a year is $200,000. Then your stock turnover for the year is 4. Which means you have sold your inventory 4 times more in the year.This ratio should be compared against industry averages. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying.
High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall.
Things to Remember
- A low turnover is usually a bad sign because products tend to go out of fashion as they sit in your warehouse/store
- For more accurate inventory turnover figures, the average inventory figure, ((beginning inventory + ending inventory)/2), is used when computing inventory turnover. Average inventory accounts for any seasonality affects the ratio.
What To Do Next
Have a proper analysis of your business and determine which metrics you would like to use in getting the most out of your business. If you don’t understand any of the metrics get an accountant or a business advisor to put you through. Once you have identified the KPIs you want to track well, you need a solution that will help you bring it to life.
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