How Do You Double Your Profits?

“Double my profits? Nonsense . . . can’t be done! I knock myself silly just to generate my current profit levels. Doubling my profits just can’t be done!”

Sorry, but I will argue that point. I’ve done it in my business and I have consulted for other retailers who did it. That said, in all cases, you usually cannot double your profits by simply doing the same thing as you previously did.

Let’s take a realistic look at specifically what you can do to significantly increase profits:

Know Your Profit Sources

Let’s review the source of profits which are the interactions of sales, margins, expenses and inventory velocity. If you increase your sales, margins and/or turns (inventory velocity) profits will increase. If you reduce your expenses, profits will also increase. This is retailing 101.

You can increase sales by adding new merchandise categories, promoting more aggressively, participating in joint vendor retailer promotions, changing your pricing methodology and/or refreshing your in-store merchandising and signing activities.

The positive effects will expand exponentially if you couple the sales increase with a companion margin increase. How? Change your product mix to include more high margin categories such as apparel, footwear, accessories and high margin closeouts. The act of simply asking for lower prices or joining a buying group will also augment overall margins and thus net profits.

Lower Operating Expenses

One of the easiest and fastest way to increase profits is to lower operating expenses. Generally, you can do this by challenging the need for each expense and/or investigating lower cost alternatives. Ask every expense vendor for a better deal. If only 15% of your expense vendors give you some relief, that’s money in your pocket. Note, if you are a veteran, thousands of firms will offer special military discounts to you. I am a veteran, and it is amazing how many discounts are available for expense items.

For both fixed and variable expenses, put your needs out for bid; this often uncovers considerable savings. Also challenge the assumption that each of these expenses are needed or cannot be reduced.

Accelerate Inventory Velocity

The fourth component of profits is inventory velocity (aka turns), the speed at which inventory comes into and out of the store via sales. The longer inventory sits on the shelves before the sell, the more cost is incurred by the retailer.

Consider an average inventory level of $750,000 sitting on the store shelves. If the store is doing $1,500,000 in sales with an inventory turn of 2, that means the average in store inventory is $750,000. 

There is a cost for $750,000 worth of inventory sitting on the store shelves. The cost is known as “carrying costs” and consists of interest, insurance, obsolescence (ultimately markdowns), shrinkage, handling and opportunity costs (money you could have made if you had invested those funds in other investments or faster moving inventory). 

In retrospection, if you increased your sales and/or margins, lowered your expenses and/or increased your turns you would have enjoyed significantly more profits. Couple these efforts with product mix changes, hard promotions, vendor incentives and an aggressive online sales effort . . . doubling your annual profits will not be out of your reach.

Remember, doubling your profits won’t happen just because you envision it. Thus, make a plan, execute well, follow up, measure results, make adjustments and in the end pat yourself on the back because you made it happen!