Why is Cash Margin is a much better indicator of improvement than year over year sales

Why comparing last years sales and margin is NOT effective in evaluating the success of your store!

How do you measure the success of your retail business? 

For many retailers success means an increase in sales over the previous year… 

Or higher sales margins… 

Well I hate to burst your bubble – but if those are the only metrics you are looking at to see if you are on solid ground and successful in your store – you can be sorely mistaken! 

I have had this discussion countless times with my clients during our monthly strategy sessions.  When I ask them how the previous month was – they are all doom and gloom because their sales were under the same month last year. 

They are deflated…  like the wind has been taken out of their sales. 

THEN I get to tell them a totally different story and explain to them that even though topline sales were less than the previous year – they were still MORE SUCCESSFUL than last year! 

Let me explain by sharing a case study with you… 

You see looking at overall store sales and margin reports only gives you part of the story.  What it fails to show and take into account is the amount of inventory investment you have made to capture those sales…. 

Margin reports only look at the margins once products are SOLD… 

Top line sales reports do not show how much inventory you had on hand last year versus this year to make those sales… 

Do you see where I am going with this? 

So… you might be asking what metric is more helpful in determining the success of your store then? 

The answer is…..CASH MARGIN 

Let’s have a look at that case study I was mentioning above. 

Here I had a client who was complaining that sales were way down the first half of the year when compared to last year…

Which was true IF you were only looking at TOP LINE sales during that time period. 

2017 2018 DIFFERENCE
Sales $211,335 $174,582 ($36,753)

 

So you can see why they were a little upset – right? 

HOWEVER, if you start adding some additional information the numbers tell us something entirely different: 

2017 2018 DIFFERENCE
Sales $211,335 $174,582 ($36,753)
Markdowns $144,869 $73,898 ($70,971)
Inflow @R $278,652 $147,270 ($131,382)
Inflow @C $134,955 $68,205 ($66,750)

 

So what does this tell us? 

In the first half of 2017 this client may have had $36,753 MORE in sales over the same time period in 2018 HOWEVER… 

They did significantly MORE in markdowns (to the tune of $70,971)… to get those sales (effectively buying sales) 

They ALSO brought in $66,750 at cost MORE in inventory to generate those sales. 

So now let’s talk about CASH MARGIN – the other metric that I recommend using to evaluate the success of your store. 

CASH MARGIN = SALES – INFLOW @ COST 

So in the example above this is what the Cash Margin looks like 

2017 2018
Cash Margin$ $76,380 $106,377
Cash Margin% 36.14% 60.93%

 

So my question of course was – are you still upset that your sales are down in 2018? 

Naturally they agreed that although their sales were down – the fact that they brought in less inventory and had less by way of markdowns – ultimately made the sales that they did do in the first half of 2018 put more CASH in the bank! 

So the big takeaway? 

STOP looking only at the year over year sales to measure how successful your store is.  Start looking at the bigger picture and calculate your CASH MARGIN to really see how well your store is performing! 

To your success!

 

Kirsten Hynds - Retail Coach
Kirsten Hynds

Kirsten’s wealth of knowledge encompasses all aspects of retail business. In Kirsten’s 20 years in the industry, she has overseen sales, merchandising, marketing, buying, operations and management. Kirsten has been involved in taking businesses from start-up to chain, including hiring, opening new stores, and crafting policy and procedure. When she first started at CRS 12 years ago, Kirsten assisted retailers in making the best Point Of Sale software choice for their businesses. Over the last couple years Kirsten has helped to propel clients towards success with the Winning@Retail program. Kirsten’s experience in Retail gives her a distinct advantage in helping Retailers succeed.

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