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Sneak Preview: Run your business by the numbers

By Lisbeth Calandrino

[Editor’s note: Here’s a taste of what presenter Lisbeth Calandrino will discuss during her upcoming webinar “Run Your Business by the Numbers” to be held Tuesday, May 17 at 9:30 a.m. It’s not too late to register for this enlightening event or for June’s webinar on inventory management! Just visit retailcouncilnys.com and click on “Retail University” for more information and to register. Or call the Council’s office at (800) 442-3589 and we’ll get you signed up.]

When times are slow, businesses often resort to holding more sales to improve the bottom line. Business owners feel it’s necessary to discount prices to try to attract more customers. But how often do owners calculate the impact discounting has on their business? 

Businesses run sales, lower merchandise prices and produce an increase in volume. Although this increase in volume may improve cash flow it often disguises a larger problem: Businesses that run on sales also decrease margins and the end result may be not having enough cash to cover the break even. Without looking at the relationship between margin and profit, a business can actually sell itself out of business!

Before a business makes its first dime of profit, it must cover its expenses. This is called a business’ break even. Basically a company has broken even when its total sales revenue equals its total expenses. This calculation is critical for any business owner, because the breakeven point is the lower limit of profit when determining margins. Before a company can make a profit, the break even must be satisfied.

The goal of any business is to produce “bottom line” profit. In a successful business, price must be sufficient to cover total cost plus some margin of profit. The revenue of any business is a direct reflection of the sales volume and the price of your product. What’s important to acknowledge is the relationship between costs and selling price and the amount of margin a business must do to “break even” and then make a profit. A small change in price can drastically influence total revenue; by understanding the relationships of different factors, you can significantly influence “the bottom line.”

The relationship between your sales margin and sales staff

Before running a sale to increase volume and cash flow, it might be wise to look at the relationship between sales margin and your sales associates. Do your salespeople sell at high enough prices to cover your break even and add to your bottom line or do they need to improve their sales skills? If your salespeople are caught up in the price wars, it will ultimately cut your profits, reduce your products to a commodity and erode your margins. Again your salespeople are selling you out of business.

If salespeople are compensated on volume, these incentives create a drain on a company’s profit. If your salespeople believe the only way they can sell is by negotiating price, your business will quickly be in trouble. They will always be leaving money on the table by dropping prices to “get the deal.” Again when cash flow is tight, owners get caught up on telling their salespeople to get the deal at any cost. As profits diminish, so will your business. To be profitable companies need to redefine the salesperson’s job as maximizing profit. One way to do this is to provide the tools for salespeople to be more skilled at selling at higher margins and then incentivizing them on the basis of the higher the margin the higher the sales compensation.

So before you cut your prices examine the skill level of your salespeople and your overall training program. To ensure the success of your business you will have to teach the importance of retaining margins and provide salespeople with the tools for success.

Back to May 2011 Retail Link