Now that trade show season is over and we’ve had the opportunity to speak to several retailers,we find it astonishing how many don’t have a good grip on their retail business’s profitability. Their P&L statements show profit, but they cannot figure out why they have no cash. They can’t keep up with their payables and they haven’t had a raise in years or (even worse) they’re not taking a paycheque at all!
The Definition of Profitability
The true definition of profitability doesn’t involve measuring your maintained margin or your net income – real profitability comes down to only one thing: cash flow.
Generating strong cash flow is the only answer to profitability, and it comes from maintaining healthy gross margins and turning over your inventory at a level that not only supports your expense structure but also grows profitable sales in every classification in your store.
How do you measure inventory performance?
The best measurement for inventory performance is GMROI (gross margin return on investment). This calculation measures the gross margin dollars (available cash in excess of cost of goods) for every dollar you invested in your inventory. Anything less than 3.2 typically means you are operating at less than your breakeven and cash is probably non-existent in your business.
Need help calculating your GMROI?
If you don’t know how to figure out your GMROI or how profitable you really are, we can help! Contact us today for a no-cost, no-obligation inventory analysis and let us show you how we can help you grow your profitable sales and achieve stronger cash flow.
Dan Holman is a certified Winning@Retail™ consultant with twenty-plus years of success in diverse business development, new ventures, business expansion and strategic sales planning.