David Brown: Begin with the End in Mind
Base your sales goals on your profit goals
BY DAVID BROWN
Published in the January 2012 issue
Good budgets don’t need to be complicated, but they do need to be thorough to make sure they cover your short-, mid- and long-term financial requirements.
The main driver of an attainable sales budget increase is a clear understanding of the profit needs of the business and its owners. We suggest starting with the end in mind. Think about how much profit you want, and then translate that to the amount of sales you need to deliver that bottom-line result. We call this process “The Gap Analysis,” which is simply a metaphor to help you identify the gap between the required financial performance of your business and its current performance.
When considering how much profit you need, be sure to include your retirement/exit plans (including a timeframe), the market salary for your role, and an appropriate return on the capital you have invested in your business. (A 26 percent return on your capital is appropriate.)
Add all these together along with your normal operating expenses, and you’ll know how much gross profit you need to generate. This will then form the basis of your sales budget. For example: If you need $500,000 of gross profit to deliver your required net return and your gross margin is 55 percent, you would need to do sales of $910,000.
Even putting this process to one side, we believe that if you are not aiming for a 20 percent increase in sales, you are not aiming high enough. If that sounds unrealistic, please consider just some of the many ways to achieve this:
- The average store has a closing ratio of around 18 percent. By making one extra sale from every 10 people who walk out, you would increase sales by 40-50 percent.
- Most stores make 50 percent of their sales from just 4 percent of their units. Typically, around 200 items account for half of your dollars, so if you could sell another 200 of these (or similar) items, you could boost sales by 50 percent.
- Most stores have one or two top salespeople who produce far more than the rest of the team. Those people prove it can be done. Too many stores put up with hiring mistakes and let non-performers keep out the next superstar.
When deciding what is possible for your store, one of the key factors to consider is the size of the immediate shopping precinct. Another is how much competition there is for the sales dollars, not only among jewelers in the area, but also among other retail stores.
A third factor is the size of your customer database. Is it being fully tapped? An underutilized database is often the most valuable asset any business has, and with the rising cost of acquiring new clients, it is an affordable way to drive traffic.
Next, think about opportunities within your business. For example, you may be looking to build your diamond business or introduce a “prototype” selection. The reason you are making these changes is to boost sales, so make sure they are added to your sales budget.
Last and most important, when setting a budget, look at the limitations you may be imposing on yourself. Get excited about the things you can influence, such as everything that happens inside your store, and ignore the things you can’t influence, such as everything that happens outside your store (the global economy, local unemployment, etc.).
It’s time to demand more from your business and for yourself!
About the Author: David Brown is President of the Edge Retail Academy, an organization devoted to the ongoing measurement and growth of jewelry store performance and profitability. For further information about the Academy’s management mentoring and industry benchmarking reports contact Carol Druan at carol@edgeretailacademy.com or Phone toll free (877) 5698657 Edge Retail Academy, 1983 Oliver Springs Street Henderson NV 89052-8502, USA