Every store owner wants his or her business to grow, and the necessary element for growth is profitability. In the absence of sustained profits, growth is not possible.

Unfortunately, too many retailers view profits as a poker hand—you never know what you’ll be dealt. One’s profitability should not be a matter of luck of the draw, but rather the result of a well sculpted and executed profit plan. Expressed alternatively, if you want to enjoy copious profits, then you must plan on it!

Profit is the financial score card of your business endeavors. Profit can be evaluated in three basic ways: (1) The classic calculation: sales – cost of goods sold – expenses = profit, (2) Profit as a percentage of sales (net profit divided by sales) and (3) GMROI or gross profit as a percent of inventory investment (annual gross margin dollars divided by your average inventory for the year).

All three of these profit formulas can and should be used to evaluate profitability relative to operations as well as profits relative to sales and inventory investment.

The success of your business should not be a matter of discovery or surprise, but rather the result of a carefully crafted operational plan for merchandise selection, a purchasing budget, and an operational plan for product purchases, arrivals, displays, advertising, and promotions.
Another extremely vital component of profit production is timing. Not only is what you do important, but also when you do it. For example, bringing in seasonal merchandise too early or too late in the season will stifle sales and increase inventory carrying costs.

Profit production is not like looking for the surprise in the Cracker Jack box. It’s important to keep in mind that profit planning is just that—a plan for generating profits. It is not like making concrete (i.e., mix sand, cement, and water and you get concrete). Profit production is an ever-changing set of moves in response to market conditions, product availability, consumer demand, promotions, competition, and weather conditions.

My father use to tell me to “follow the money,” which was his way of saying promote anything that had strong consumer appeal and sales potential. Don’t get hung up on stocking only those goods which relate to fishing and/ or hunting. If product is in demand, give the public what it wants. This is how incremental sales are created.

Increase your inventory turn rate. As turns go up, your costs go down. Tackle stores tend to have a turn rate of around 2. If you can increase your turn rate, you’ll have more cash and less investment in inventory. Plus, your expenses for interest, insurance, handling, shrinkage, and obsolescence will decrease.

Here are the seven numbers you must know (sales, margins, cost of goods sold, expenses raw/percent to sales, turns, GMROI, net profit) in order to expand your profitability:

  • Sales: net of all returns and credits
  • Gross Margin: net sales (sales – markdowns) – cost of goods sold (COGS)
  • Cost of goods sold (COGS): beginning inventory + purchases – ending inventory all at cost values
  • Expenses: the raw number and expenses as a percent to sales
  • Turns: Cost of goods sold for the period divided by the average inventory at cost, in total and by department or class
  • GMROI (gross margin return on investment): gross margin dollars divided by average inventory, in total and by department or class
  • Net Profit: Sales – COGS = gross margin – fixed and variable expenses = net profit before taxes

If you don’t have these numbers or know how to calculate them or know what they mean, then you are leaving money on the table.
The most common problem associated with declining sales is product mix. It’s too narrow, too tired, too bland, wrong price points, or too many stock outs of in-demand items. Your product selection must be fresh, seasonal, attractive, and mostly stocked with “A” items versus “C” items. If your inventory is tired, so will be your sales.

In the end, the greatest threat to profitability is management complacency.

When selling personnel are complacent and inattentive about sales, margins, expenses, and timeliness of inventory, profits will erode. Make profits, not good intentions!