Tagretail cashflow

Retail space usually costs between 11% and 15% of revenue, depending on the type of shop. For most retailers that makes it the biggest cost after stock and labour, yet plenty of shops have not looked hard at how that space earns its keep in years.

This is not advice you will get from your accountant, and you will not find it in your profit and loss. It is a practical exercise, done with paper and pen, that gives you a fresh view of your own business. Retailers who do it are almost always surprised by something.

We share this advice today to help local small business retailers look at the space use in their shop from a profit contribution perspective. Retailers we have done this with have made changes that have led to them making more money. It’s all about profitable space usage.

Here is the method we recommend.

1. Take a blank sheet of paper, ideally A3, and roughly sketch the layout of your shop. Mark in display units, wall shelving, the counter, everywhere you have products.
2. Include your back room if you hold stock there. That space costs you rent too.
3. Colour-shade the layout by department.
4. List the departments down the side of the floor plan.
5. Estimate the percentage of total space each department uses and write it next to each department on your list. Rough is fine. This does not need to be accurate to two decimal places.
6. Using your POS software, report on the gross profit dollars earned by each department over the last year. If your system cannot do this directly, calculate it from sales figures using the average gross profit percentage for each department. In our software, this is a standard report.
7. Work out each department’s percentage of total gross profit and write it next to the space percentage on your floor plan.
8. Circle the best performers in green and the worst in red. A strong department earns a significantly higher share of gross profit than the share of space it occupies. A weak one occupies more space than its profit contribution justifies.

Now stand back and look at the marked-up plan. Space and profit side by side, department by department. This is your shop as a landlord would see it if every department paid its own rent.

What you do next depends on what the page shows you. The work usually leads to one or more of these actions: moving a department to a better or worse position in the shop, giving a strong department more space, shrinking a weak one, improving a department’s margin through better buying, or working to lift sales in a department whose gross profit dollars are below its potential.

Be careful before shrinking a department solely on these numbers. Some low-margin departments drive traffic that shops the rest of the store. Newsagents know this well. The exercise is not a set of orders, it is information you did not have before, and it is up to you to weigh it against what you know about why customers walk in.

Once you have done the shop, you can go deeper: pick one department and run the same analysis by category within it. That is often where the most actionable findings sit.

Do this once a year, or ahead of any refit. Shops evolve, and space allocation tends to reflect the business you used to run rather than the one you run now. This exercise is one way to keep the floor working for today’s shop.

The gross profit reporting this relies on is standard in our POS software, by department and by category. If you would like to see it with your own shop in mind, book a demo at towersystems.com.au/pos-software-free-demo.html or call 1300 662 957 (AU), 0800 444 367 (NZ).