Retail Council of Canada gratefully acknowledges VISA Canada, J.C.

Williams
Group Limited and Evolusent Inc for their contribution to this project.

Visa Canada is a proud sponsor of the Retail Council of Canada Thought Leadership Series. Visa
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Copyright © Retail Council of Canada / J.C. Williams Group Limited

All rights reserved.

ISBN 978-0-9739492-9-2

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Telephone: (416) 922-6678
E-mail: education@retailcouncil.org
About Retail Council of Canada:
Retail Council of Canada (www.retailcouncil.org) is the Voice of Retail. Founded in 1963, RCC is a not-
for-profit association, which represents more than 45,000 stores of all retail formats, including
department, grocery, independent merchants, regional and national specialty chains, and online
merchants.

Retail Council of Canada gratefully acknowledges VISA Canada, J.C. Williams Group
Limited and Evolusent Inc for their contribution to this project.

About Visa:
Visa Inc. (NYSE:V) is a global payments technology company that connects consumers, businesses,
financial institutions and governments in more than 200 countries and territories to fast, secure and
reliable digital currency. Underpinning digital currency is one of the world's most advanced processing
networks-VisaNet-that is capable of handling more than 20,000 transaction messages a second, with
fraud protection for consumers and guaranteed payment for merchants. Visa is not a bank, and does
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offices in Toronto, Montreal, Chicago, and South East Asia with joint ventures in the Middle East. The
company has Senior Advisor specialists in market research, strategy, new concepts, branding, retail
operations/ merchandising/human resources, website and social media, omni-channel, real estate, and
financial that are attuned to retailers’ needs. http://www.jcwg.com

About Evolusent:
Evolusent specializes in creating software tools, strategies, and content to engage the three layers of the
audience matrix: customers, subscribers, and employees. We work with some of the largest
associations, governmental agencies, Fortune 500 companies and leading retailers to engage their
audiences. Our focus lies in our balanced team dynamic. We pair creative inspiration with a technical
foundation – offering dynamic products and services which look great, and function even better.
http://www.evolusent.com/

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To become a member, please contact RCC’s Membership department at 1-888-373-8245 or

membership@retailcouncil.org
 Retail 4G

About “Retail Math”

Retail Math covers key financial concepts such as managing your cash, optimizing your sales with
merchandise planning, managing your store salaries and managing your real estate occupancy
costs—all of which are vital topics for you to keep on top of. We will continue to refresh all content
for your inspiration and to keep you informed of new and important developments in all key
financial concepts as they appear or evolve. This eBook has been written by Terry Henderson,
President of the Quebec and Atlantic division of J.C. Williams Group.

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 Retail 4G

Table of Contents

1. INTRODUCTION

2. OUR CASE STUDY

3. CHAPTER 1: MANAGE YOUR PERFORMANCE BY MANAGING YOUR CASH

4. CHAPTER 2: OPTIMIZING YOUR SALES WITH MERCHANDISE PLANNING

5. CHAPTER 3: MANAGING YOUR STORE SALARIES

6. CHAPTER 4: MANAGING YOUR REAL ESTATE OCCUPANCY COSTS

7. YOUR RETAIL MATH “HEALTH EXAM:” HOW FLUID IS YOUR BUSINESS’ BLOOD (CASH)
FLOWING?

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 Retail 4G

Introduction
In today’s complex and ever-changing marketplace, retailing is both an art and a science. To
succeed and thrive, retailers must develop and maintain a clear-cut management focus.

The purpose of this eBook is to give you an understanding of the financial concepts that need to be
managed by an independent retailer and how these concepts should integrate with your business
strategy. Our goal is not to make you a financial expert, but to make you comfortable with the
concepts, numbers and formulas used to run a successful retail business. Within each section,
where appropriate, there are examples of each concept with numbers.

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Our Case Study

Helen Martin is active in sports and has a passion for technical sportswear, sportswear that provides
functional benefits such as moisture wicking and maximum comfort. She has degrees in marketing
and technology and has worked as a retail market researcher with a focus on omni-channel
retailing.

Her family have been entrepreneurs for their entire lives, and they have global businesses involved
in the apparel supply chain sector. They have been encouraging her to take the leap and create a
technical sportswear retail chain because they feel she has the talent and the drive to do well. The
family has offered to support Helen financially to start a business as long as she provides them with
a business plan.

Helen decided to open a small omni-channel lifestyle retail chain focusing on the technical
sportswear segment. She decided to name the chain SUPO TECH-WEAR.

In eBook 1: Retail Strategy, you chose one of the four Es to drive your business (shown below).

The J.C. Williams Group’s Strategic Compass Model

Helen chose the E-xperience strategy. She wants to delight her customers by providing them with
quality products and a seamless and engaging omni-channel experience.

Based on her own research, Helen knows she is living in a customer-connected world and thus the
more inter-connected her strategy and operations, the better her performance will be.

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To get the performance that she wanted, Helen decided from day one that she would invest in
market research and the related technological tools required to push her business in a strategic
E-xperience direction. Helen used the following chart as a guide.

Exhibit 0-1: The 4Es Customer and Technological Tools

Internet Tools Easy Ego Experience Economical

Do it Myself Done for Me
New retail channels
online stores X n/a X X n/a
mobile X n/a X X n/a
New business models
auctions X n/a n/a X n/a
social networks X n/a X X n/a
Real time Internet- based comm X X X X X

Demand and supply chain tools: Easy Ego Experience Economical

Do it Myself Done for Me
Price and Inventory Optimization X X X n/a X
Vendor collaboration tools X X X X X
RFID supply chain X X X X X
Customer tools: Easy Ego Experience Economical
Do it Myself Done for Me
Smart shopping tools
Self checkout X n/a n/a n/a X
New payment solutions X X X X X
Digital signage X X X X n/a
Self-service kiosks X n/a n/a n/a X
Customization tools n/a X X X n/a
Intelligence Tools: Easy Ego Experience Economical
Do it Myself Done for Me
Customer intelligence n/a X X X n/a
Customer segmentation X X X X n/a

After two years of operations, Helen, her family and her bankers were happy with how the business
had performed. Good financial planning and management have contributed to her success.

Helen created her Strategic Compass Model for SUPO TECH WEAR (see below) and determined from
her customers’ perspectives that at present she is a 4 on E-xperience; a 3 on E-asy; a 1 on E-conomic;
and falls around 2.5 on E-go. As E-xperience is her main strategy she will continue focusing her
resources to increase this aspect of her business and work towards reaching a “5” in the future.

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SUPO TECH WEAR will be used as an example while we demonstrate the various financial concepts
in this eBook. At the same time we will add examples of how retailers with an E-asy, E-conomical or
E-go focus on their business would perform.

The following exhibits include SUPO’s Earnings Statement and Balance Sheet. These financial
statements are used to calculate cash flow and other important ratios and measurement tools.

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Included in Exhibit 1-1 is SUPO’s earnings statement from the date of opening to the end of Year 2.

Exhibit 1-1 Supo Earnings Statement (First 2 Years)

2010 2011
YEAR 1 YEAR 2 % SALES
January January YEAR YEAR
29-11 28-12 1 2

Sales 1,260,000 2,721,600 100% 100%

In-Store 1,200,000 2,520,000
Direct To Consumer 60,000 201,600
Cost Of Goods 567,000 1,197,504 45% 44%

Gross Margin 693,000 1,524,096 55% 56%

Expenses
Store Costs 336,480 688,589 27% 25%
General And Administrative 191,540 320,030 15% 12%
Depreciation & Amortization 64,500 129,012 5% 5%
Financial (347) 23,879 0% 1%
Total Expenses 592,173 1,161,510 47% 43%

Earnings Before Income

Taxes 101,827 362,586 8% 13%

Income Tax Provision 29,217 105,129 2% 4%

Net Earnings 71,610 257,457 6% 9%

The Earnings Statement, also known as the Income Statement, shows how much revenue a
company has earned over a specific period of time and the expenses associated with earning that
revenue.

The percentages in the right hand columns are the values expressed as a percentage of sales. This is
a calculation that gives you a glimpse of the size of the items on the income statement as well as
how they evolve over time as a proportion of sales.

Gross margin is calculated by deducting from sales the costs directly related to the product, which
include the direct cost of purchasing the product, duty and freight to receive the product,
markdowns and discounts, employee purchases, and shrinkage. In SUPO’s case, the gross margin
percentage has increased from 55% to 56%, primarily because of Helen’s ability to: 1) improve her
supply chain processes; and 2) to buy the right product for her customers by using the data she
gains from market research and the related technology that she has put in place.

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Expenses to operate the stores, general and administrative expenses to run the infrastructure to
support the stores, and financial costs are then deducted to determine earnings before income taxes.
SUPO’s expenses have decreased as a percent of sales from 47% to 43%. This decrease resulted in the
earnings before income taxes rising to 13% from 8%. This means that the company has been
productive because the costs have not evolved as fast as the sales. Looking at the next layer of
expenses relating to the two primary expense categories, as seen in Exhibit 1-2, we see this
productivity has come from SUPO’s employees and space. We will explore these aspects in later
chapters. We can also see in this exhibit that they have focused on investing in marketing at 6% of
sales on a consistent basis.

Exhibit 1-2: Selling, General And Administrative Expenses (First 2 Years)

2010 2011
YEAR 1 YEAR 2 % SALES
January January YEAR YEAR
29-11 28-12 1 2

Sales 1,260,000 2,721,600 100% 100%

Store Expenses
Salaries & employee related 120,000 252,000 10% 9%
Rent & occupancy related 186,000 372,000 15% 14%
Other store expenses 30,480 64,589 2% 2%
336,480 688,589 27% 25%

General & Administrative

Salaries & employee related 72,000 76,000 6% 3%
Marketing 75,600 163,296 6% 6%
Other 43,940 80,734 3% 3%
191,540 320,030 15% 12%

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 Retail 4G

Included in Exhibit 1-3 is SUPO’s balance sheet from the date of opening to the end of Year 2.

Exhibit 1-3 Supo Balance Sheet

2010 2010 2011

Opening Year 1 YEAR 1 YEAR 2
January January January
31-10 29-11 28-12

ASSETS
Current
Cash in bank 260,000 - 379,737
Prepaid 15,000 30,000 45,000
Accounts receivable - 14,706 31,766
Inventory 130,977 333,323 318,675
TOTAL CURRENT ASSETS 405,977 378,029 775,177

Non Current
Property & equipment 422,000 792,000 1,162,000
Intangible assets 53,000 58,000 63,000
TOTAL NON CURRENT ASSETS 475,000 850,000 1,225,000
Accumulated depreciation 0 64,500 193,512
475,000 785,500 1,031,488

TOTAL ASSETS 880,977 1,163, 529 1,806,665

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 Retail 4G

2010 2010 2011

Opening Year 1 YEAR 1 YEAR 2
January January January
31-10 29-11 28-12

LIABILITIES
Current
Bank advances - 69,906 -
Accounts payable 137,526 290,458 367,877
Accruals – non-current asset purchases - - -
Deferred revenues - 5,000 10,500
Salaries payable - - -
Income taxes payable - 29,217 75,906
GST/HST payable (receivable) (6,549) (52,661) (35,201)
Short term portion term loan 44,043
TOTAL CURRENT LIABILITIES 130,977 341,920 463,124

Term Debt
Term loan from bank - - 264,474
Advances from shareholder - - -
TOTAL LONG TERM OBLIGATIONS - - 264,474

SHAREHOLDERS' EQUITY
Capital stock 750,000 750,000 750,000
Retained earnings - 71,610 329,066
TOTAL SHAREHOLDER’S EQUITY 750,000 821,610 1,079,066

TOTAL LIABILITIES AND

SHAREHOLDER’S EQUITY 880,977 1,163,529 1,806,665

A balance sheet provides detailed information about a company’s (a) assets, (b) liabilities and
(c) shareholders’ equity. It shows a snapshot of these elements at a point in time. It does not
show the flows in and out of the accounts during a period. These can be seen in the cash flow
statement as explained in the next section.

(a) Assets

Assets are things that a company owns that have value. This means that they can either be sold or
used by the company to make products or provide services. Assets include tangible items such as
cash, inventory, property and equipment. They also include things that can’t be touched
(intangible) but nevertheless exist and have value, such as computer software and trademarks. They
are generally listed by how quickly they can be converted to cash within one year.

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 Retail 4G

Current assets are all those items that can be converted to cash within one year of the date of the
balance sheet.

All other assets not included in the current assets section are those that take longer than one year to
sell or use up. These are referred to as non-current assets. These assets get used up over time and lose
some of their value. The estimate of this loss in value is called depreciation. All companies have a
rate of depreciation that they use to reflect this aging process and to calculate the market or
replacement value of the asset. Most companies divide their assets into different groups, known as
classes, with different rates of depreciation. Class rates are determined based on the life expectancy
of the asset type. In SUPO’s case these are:

Property & Equipment

 Store fixtures 7 years straight-line
 Leasehold improvements 10 years straight-line
 Computer equipment 5 years straight-line

Intangibles
 Software 3 years to 5 years straight-line

Depreciation is known as a non-cash expense. It is added back in the cash flow statement to help
you reconcile to how your cash has evolved over time.

(b) Liabilities

Liabilities are amounts of money that a company owes to others. This can include all kinds of
obligations such as money owed to suppliers for inventory, money borrowed from a bank, payroll a
company owes to its employees, and taxes owed to the government. They also include obligations
or credits to provide goods or services to customers in the future. An example of the latter is the
deferred revenue line item, which includes amounts for gift cards and gift certificates purchased by
SUPO’s customers.

Current liabilities are obligations a company expects to pay off within one year.
All other liabilities not included in the current section are those due more than one year of the date
of the balance sheet.

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 Retail 4G

(c) Shareholders’ Equity

Shareholders’ equity represents the shareholders’ investments in the business and the businesses
earnings, known as retained earnings, which have been accumulated over the years.

The balance sheet Formula: Assets = Liabilities + Shareholders Equity

Other key formulas relating to balance sheet items will be described in the next section. These are:

Profitability
 Return on assets (ROA)
 Return on equity (ROE)

Cash flow management

 Cash conversion cycle
 Days sales outstanding
 Days inventory outstanding
 Days payables outstanding

Asset productivity
 Inventory turns

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 Retail 4G

Chapter 1:

Manage Your Performance by Managing

Your Cash
Your Cash Flow Statement – The Blood That Flows Through the Veins of Your
Company

Whenever most people look at their financial statements they start with the profit and loss
statement. Not Helen. She had learned from watching Cuba Gooding Jr. in the movie Jerry Maguire
that when she would meet with her accountant she would tell him to “Show me the money.”

A company’s financial statements show where the company’s money came from, where it went,
and how much is left.

By focusing on how your cash flows through your company, demonstrated by the various
statements, you are focusing on “the blood that flows through its veins.” The moment the cash
flow begins to slow, you know that there is a blockage in one or several of the “arteries in your
business.”

Helen’s business has done quite well from a cash flow provided by operating activities perspective in
the first 2 years.

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 Retail 4G

Exhibit 1-4: Supo Cash Flow Statement

2010 2011
YEAR 1 YEAR 2
January-29- January-28-
11 12
Cash provided by operating activities
Net earnings 71,610 257, 457
Depreciation & amortization 64,500 129,012
Net cash inflow from operations 136,110 386,469

Changes in operating accounts

Prepaids (increase) decrease (15,000) (15,000)
Accounts receivable (increase) decrease (14,706) (17,060)
Inventory (increase) decrease (202,346) 14,649
Accounts payable (decrease) increase 152,932 77,419
Accruals - fixed assets purchases (decrease) increase - -
Deferred revenues (decrease) increase 5,000 5,500
Income taxes payable-current (decrease) increase 29,217 46,689
GST/HST payable (receivable) (decrease) increase (46,112) 17,459
NET CHANGES IN OPERATING ACCOUNTS (91,015) 129,656
PROVIDED BY OPERATING ACTIVITIES 45,094 516,125

Investing activities
Property and equipment additions (370,000) (370,000)
Intangible asset additions (5,000) (5,000)
(USED FOR) INVESTING ACTIVITIES (375,000) (375,000)

Financing activities
Term loan - 308,517
Shareholder investments - -
PROVIDED BY FINANCING ACTIVITIES - 308,517

Increase (decrease ) in cash (329,906) 449,642

Opening balance 260,000 (69,906)
Ending balance (69,906) 379,737

The cash flow statement is divided into 3 sections: (a) Operating Activities, (b) Investing
Activities, and (c) Financing Activities.

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 Retail 4G

(a) Operating Activities

The Operating Activities section of the statement reconciles the net income (as shown on the
earnings statement) to the actual cash the company received from or used in its operating activities.
To do this, net earnings is adjusted for non-cash items, such as adding back depreciation and
amortization expenses, and cash items that were used for or provided by operating assets and
liabilities.

When the balance of an operating asset increases from one year to the next this means that more
cash is tied up in this asset. As a result, the variation will show up as a (negative) amount in the
cash flow. As an example, the prepaid asset balance increased by $15,000 in year two from year one
and thus the variation shows up as ($15,000) usage of cash in Exhibit 1-4. When the balance
decreases from one year to the next, it shows up as an increase as this represents a generation of
cash.

When the balance of an operating liability increases from one year to the next, less cash is tied up
in this asset. As a result, the variation will show up as a positive amount in the cash flow. As an
example, the accounts payable balance increased by $77,419 in year two from year one and thus the
variation shows up as $77,419 in Exhibit 1-4. When the balance decreases from one year to the
next, it shows up as a (negative) as this represents a usage of cash.

Various stakeholders in a business, such as investors, bankers and creditors, look at the cash flow
provided by operating activities to evaluate the health of the business.

Cash Flow Ratio

Cash flow ratio, expressed as a percentage, compares a company’s operating cash flow to its sales
and gives an indication of the company’s ability to turn sales into cash. SUPO’s cash flow ratio in
2010 was 4% and increased to 19% in 2011.

Formula: Cash Flow provided by operating activities / sales

$45,094
2010 0.0357 4%
$1,260,000

$516,125
2011 0.1896 19%
$2,721,600

Recall:
Earnings Statement: Sales 2010 = $1,260,000; Sales 2011 = $2,721,600
Cash Flow Statement: Cash provided by operating activities 2010 = $45,094
Cash provided by operating activities 2011 = $516,125

As can be seen above from the operating cash flow ratio, SUPO’s cash flow from operating activities
has shown significant improvement for a company in a start up mode.

What explains this improvement?

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 Retail 4G

The improvement comes from net earnings improvements driven primarily by store sales
productivity, new store and direct to consumer sales growth and improvements in gross margin,
and how well the operating assets and liabilities used to generate these sales were managed.

These elements can be seen in the following ratios:

Profitability Ratios

Profit Margin
Profit margin measures how much out of every dollar of sales a company actually keeps in earnings.
Net Earnings for SUPO in 2010 and 2011 were 6% and 9% respectively.

Formula: Net Earnings / Sales

$71,610
2010 0.0568 6%
$1,260,000

$257,457
2011 0.0946 9%
$2,721,600

Recall:
Earnings Statement: Sales 2010 = $1,260,000; Sales 2011 = $2,721,600
Earnings Statement: Net Earnings 2010 = $71,610; Net Earnings 2011 = $257,457

The profit margin improvement is explained by the following:

Sales per Square Foot

Sales per square foot is a measurement that calculates the efficiency of a store’s management in
creating revenues with the amount of sales space available to them. The improvement comes from
the first store’s (3,000 sq. ft.) comparative sales increasing by 10% and the second store (3,000 sq.
ft.), which opened and began selling at $400 per square foot.

Formula: Sales (in-store sales only) / Store Square Footage

$1,200,000
2010 $400
3,000 sq. ft.

$2,520,000
2011 $420
6,000 sq. ft.

Recall:
Earnings Statement: In-store Sales 2010 = $1,200,000; In-store Sales 2011 = $2,520,000
Store Square Footage Year 1 = 3,000 sq. ft.; Store Square Footage Year 2 = 6,000 sq. ft. (store 1 + store 2)
Note: Direct to Consumer Sales are not included in sales for this ratio

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 Retail 4G

There does not have to be a rule of thumb for sales per square foot. However, the more interesting
and appealing your store is the more productive it will be (e.g., Apple does $6,000 per square foot!
Lululemon does $2,000 per square foot.).

It’s all about driving sales.

Leading E-conomy stores produce $500 per square foot; E-go stores can approach $1,000 per
square foot, as can E-asy stores.

Retail productivity is all about retail tactics!

Same Store Sales Increase

Same store sales increase, which is a growth ratio expressed as a percentage, compares the sales of
stores that have been open for at least one year and measures management’s ability to create
revenues with the same stores. Same Store Sales Increase does not apply to Year 1; Same Store Sales
Increase in Year 2 is 10%.

Formula: (sales existing unchanged store / sales existing store prior year for the same time period) -1

$1,320,000
2011 1 1 10%
$1,200,000

Note:
These sales numbers reflect the actual sales results for Store 1 for Year 1 2010, $1,200,000, and for Year 2 2011,
1,320,000. This is the only store that will have a same store %.

Sales Growth
Sales growth, which is expressed as a percentage, gives an indication of the company’s ability to
increase its sales over a comparable period of time. When sales grow and the related costs to
generate these sales do not grow as fast, net earnings will grow significantly. This is the case for
SUPO, which has seen a sales growth from 2010 to 2011 of 116%.

Formula: (Sales Current Period - Sales Prior Period) / Sales Prior Period

$2,721,600 $1,260,000
1.16 116%
$1,260,000

Recall:
Earnings Statement: Sales 2010 = $1,260,000; Sales 2011 = $2,721,600

In addition, in an omni-channel business, it is important to calculate sales growth separately for

‘Total Sales’ and ‘Direct to Consumer’ sales (i.e., selling products directly to consumers away from
a fixed retail location; e.g., online sales). In this way, you can clearly see how each channel in your
business is performing. In SUPO’s case, Direct to Consumer sales growth from 2010 to 2011 is
236%!

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 Retail 4G

$201,600 $60,000
2.36 236%
$60,000

Recall:
Direct to Consumer Sales: Sales 2010 = $60,000; Sales 2011 = $201,600

Gross Margin
Gross margin, expressed as a percentage, represents the proportion of each dollar of revenue that
the company retains as gross profit. In SUPO’s case, gross margin has increased from 55% in 2010 to
56% in 2011.

Formula: (Sales - Cost of Goods Sold) /Sales

$1,260,000 $567,000
2010 0.55 55%
1,260,000

$2,721,600 $1,197,504
2011 0.56 56%
$2,721,600

Recall:
Earnings Statement: Sales 2010 = $1,260,000; Sales 2011 = $2,721,600
Earnings Statement: Cost of Goods Sold 2010 = $567,000; Cost of Goods Sold 2011 = $1,197,504

Note: 55% gross margin is a good target for fashion (of all types) merchandise. Some chains with
supply chain integration will reach ±60%.

E-conomy strategy retailers might have gross margins around 20 to 30%, but will likely have high
sales.

E-asy strategy retailers will likely have typical markups and gross margins, which could be 35 to
40%.

E-go strategy retailers have very high markups and gross margins for some products at 80%.

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 Retail 4G

Operating Assets and Liabilities Ratios Used to Generate Sales

Operating assets and liabilities ratios used to generate sales are ratios commonly known as liquidity
measurement ratios. The most common ratio is known as the cash conversion cycle (CCC). This
liquidity metric expresses the length of time, in days, that a company sells inventory, collects
receivables and pays its accounts payable. These are all elements that affect cash flow generated by
operating activities. The lower the CCC, the quicker you are converting your working capital assets
to cash.

Formula: CCC = DSO + DIO – DPO

Where:

Days Sales Outstanding

DSO gives a measure of the number of days it takes a company to collect on sales that go into
accounts receivables (credit purchases).

DSO = Average Accounts Receivable / Sales per day

$10,356
2010 3
/365 $1,260,000/365

$22,370
2011 3
/365 $2,721,600/365

Recall:
Earnings Statement: Sales 2010 = $1,260,000; Sales 2011 = $2,721,000
The above numbers for “Average Accounts Receivable” do not appear in the various statements in this eBook.
These numbers come from calculating an average of the ending balances for this balance sheet item in SUPO’s
monthly financial statements.

Days Inventory Outstanding

DIO gives a measure of the number of days it takes for the company’s inventory to turn over; i.e., to
be converted to sales, either as cash or accounts receivable.

DIO = Average Inventory / Cost of Goods Sold per day

$142,915
2010 92
/365 $567,000/365

$236,620
2011 72
/365 $1,197,504/365

Recall:
Earnings Statement: Cost of Sales 2010 = $567,000; Cost of Sales 2011 = $1,197,504
The above numbers for “Average Inventory” do not appear in the various statements in this eBook. These numbers
come from calculating an average of the ending balances for this balance sheet item in SUPO’s monthly financial
statements.

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Days Payable Outstanding

Days Payable Outstanding, or DPO, gives a measure of how long it takes the company to pay its
obligations to suppliers.

DPO = Average Accounts Payable/ Cost of Goods Sold Per Day

$73,011
2010 47
/365 $567,000/365

$196,850
2011 60
/365 $1,197,504/365

Recall:
Earnings Statement: Cost of Sales 2010 = $567,000; Cost of Sales 2011 = $1,197,504
The above numbers for “Average Accounts Payable” do not appear in the various statements in this module. These
numbers come from calculating an average of the ending balances for this balance sheet item in SUPO’s monthly
financial statements.

SUPO’s improvement here is notable as can be seen below.

2010 2011
Cash conversion Cycle
DSO Days 3 3
DIO Days 92 72
DPO days 47 60
CCC days 48 15

Helen understood that to improve her operating cash flow she would have to focus on the elements
that had the biggest impact.

DSO, which relates to receivables and pertains to credit card receivables, was already low. The
amount outstanding relates to deposits in transit for the sales of Friday, Saturday and Sunday. The
big cash flow dollars were in the inventory and the payables.

During the first year of operations, SUPO worked on their supply chain processes as well as their
relationships with their suppliers. What was done will be described in other chapters of this eBook
and in other eBooks.

As a result, DIO improved by a whopping 20 days. This can be seen with another ratio, which is:

Inventory Turnover
Inventory turnover, expressed as a number of times average inventory turns over in relation to
sales, quantifies a firm’s effectiveness in buying and selling its inventory. The inventory turnover
ratio is an activity ratio, measuring how efficiently a firm uses its merchandise assets.

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Formula: Cost of Goods Sold / Average Inventory

Where:

Average Inventory = (Inventory Beginning Balance + Inventory Ending Balance)/2

$567,000
2010 4
$142,915

$1,197,504
2011 5
$236,620

Recall:
Earnings Statement: Cost of Sales 2010 = $567,000; Cost of Sales 2011 = $1,197,504
The above numbers for “Average Inventory” do not appear in the various statements in this module. These numbers
come from calculating an average of the ending balances for this balance sheet item in SUPO’s monthly financial
statements.

Inventory turnover tends to vary by strategy and industry commodity.

E-conomy retailers drive profit dollars by high throughput of sales and inventory turns at low
margins. (Throughput is the movement of inputs and outputs through a production process.)

E-go retailers in fashion (apparel and electronics) need to move inventory quickly so that they
always have new styles/models.

In Summary
Combined with the improvements in buying the right product at the right price, as evidenced by
the increase in the gross margin, the inventory productivity improvement resulted in the actual
amount invested in inventory decreasing, as the sales were increasing. As can be seen in the cash
flow statement, the actual dollars invested in inventory at the end of the year decreased by $15,000,
which shows as an increase in cash.

The DPO improved because Helen presented her business plan to her suppliers, who liked what
they saw. They decided to support her by increasing their payment terms without increasing the
costs they charged her for product, from approximately 45 days to 60 days from date of receipt.
The great performance in cash flow from operations has provided all the existing and potential
stakeholders of the business confidence to support Helen’s business plan. We will see evidence of
this later.

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(b) Investing Activities

The Investing Activities section of the statement shows the cash flow from all investing
activities (these generally include the purchases or sales of long-term assets such as property, plant
and equipment) and intangibles (these include software and trademarks). Purchases of these assets
show as outflows of cash and sales as inflows.

SUPO has continued to invest, particularly in new stores, during the first two years of business.
They have done this because: 1) their profitability and operating cash flows have been in line with
the forecasts in their business plan; 2) the investments in these assets and the overall investment in
the business, as evidenced by shareholders’ equity, have been productive as seen by the following
ratios:

Return on Assets (ROA)

Return on Assets, expressed as a percentage, gauges how efficiently a company can squeeze profit
from its assets. ROA for SUPO for 2010 and 2011 is 7% and 17% respectively.

Formula: Net Earnings/Average Total Assets

Where:

Average Total Assets = (Total Assets Beginning Balance + Total Assets Ending Balance)/2

$71,610
2010 0.07 7%
$1,022,253

$257,457
2011 0.173 17%
$1,485,097

Recall:
Balance Sheet: Average Total Assets 2010 = ($880,977 + 1,163,529)/2 = $1,022,253
Average Total Assets 2011 = ($1,163,529 + $1,806,665)/2 = $1,485,097
Earnings Statement: Net Earnings 2010 = $71,610; Net Earnings 2011 = $257,457

Return on Equity (ROE)

Return on Equity, expressed as a percentage, measures a corporation’s profitability by revealing how
much profit a company generates with the money shareholders have invested. SUPO’s ROE
increased by 18% (9% to 27%) from 2010 to 2011.

Formula: Net Earnings/Average Shareholder’s Equity

Where:

Average Shareholder Equity = (Shareholder’s Equity Beginning Balance + Shareholder’s Equity

Ending Balance)/2

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$71,610
2010 0.091 9%
$785,805

$257,457
2011 0.27 27%
$950,338

Recall:
Balance Sheet: Average Shareholder’s Equity 2010 = ($750,000 + $821,610)/2 = $785,805
Average Shareholder’s Equity 2011 = ($821,610+ $1,079,066)/2 = $950,338
Earnings Statement: Net Earnings 2010 = $71,610; Net Earnings 2011 = $257,457

There are different ways to play the retail game and come up with a high ROE—your ultimate goal!
This can be:
 E-conomy = low margins, low inventory, low costs, high volume (sell value products),
discounts
 E-asy = high margins, moderate inventory, medium-costs, good value (sell national brands);
e.g., typical specialty stores
 E-go and E-xperience = super high margins, high inventory, high costs, good volume (luxury
brands or unique stores); e.g., prestigious jeweller or fun restaurant

Gross Margin Return on Investment (GMROI)

This ratio, expressed as a number of times, is an inventory profitability evaluation ratio that
analyzes a firm’s ability to turn inventory into cash above the cost of the inventory.

Formula: Gross Margin / Average Inventory at Cost

$693,000
2010 5
$142,915

$1,524,096
2011 6
$236,620

Recall:
Earnings Statement: Gross Margin 2010 = $693,000; Gross Margin 2011 = $1,524,096
The above numbers for “Average Inventory” do not appear in the various statements in this module. These numbers
come from calculating an average of the ending balances for this balance sheet item in SUPO’s monthly financial
statements.

The current performance of all of these ratios is already in line with or exceeding certain aspects of
the E-xperience benchmarks.

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(c) Financing Activities

The Financing Activities section of the statement shows the cash flow from all the financing
activities. Typical sources of cash flow include cash raised by shareholders investing in the company
or selling stock or by borrowing from banks. Paying back a bank loan or repurchasing stock would
show up as a use of cash flow.

To get additional funding the investors and/or lenders will look at the performance of the company.
A number of people think that this means looking only at the income statement but shrewd
investors look at the cash flow statement to see what operating cash flow is being generated to see if
the company can pay a return on the investment or loan, either interest or a dividend, as well as
pay back the investment or loan. They also look at what assets are on the balance sheet to take as
security in case the cash flow dries up.

Helen and her advisor knew this all too well, which is why they optimized the cash flow from
operations and kept the inventory fresh, as evidenced by the DIO and Inventory Turnover ratios
that we saw previously.

The company was performing well and was well capitalized as evidenced by the following ratio:

Debt to Equity Ratio

Debt to Equity ratio, expressed as a number, indicates what proportion of equity and debt the
company is using to finance its assets and its ability to obtain additional financing. SUPO’s debt to
equity ratio for 2010 is 0.4, and for 2011 is 0.7.

Formula: Total Liabilities/ Shareholder Equity

Where Total Liabilities = Total Current Liabilities + Total Long Term Obligations

$341,920
2010 .4
$821,610

$727,598
2011 .7
$1,079,066

Recall:
Balance Sheet: Total Liabilities 2010/Year 1 = $341,920 + $0 = 341,920
Total Liabilities 2011/Year 2 = $463,124 + $264,474 = $727,598
Shareholder Equity 2010/Year 1 = $821,610
Shareholder Equity 2011/Year 2 = $1,079,066

As a result, in year 2 SUPO was able to secure a long term small business loan from the Royal Bank
of Canada and had already begun to pay it back. Because of the loan, the ratio went up to 0.7 in
2011, which is still healthy.

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The loan also helped improve another liquidity ratio which is:

Current Ratio
Expressed as a number, Current Ratio gives an idea of the company’s ability to pay back its short-
term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). SUPO’s
current ratio for 2010 is 1.1, and for 2011 is 1.7.

Formula: Current Assets / Current Liabilities

$378,029
2010 1.1
$341,920

$775,177
2011 1.7
$463,124

Recall:
Balance Sheet: Current Assets 2010 = $378,029; Current Assets 2011 = $775,177
Current Liabilities 2010 = $341,920; Current Liabilities 2011 = $463,124

All of this resulted in the cash balance increasing from $260,000 when Helen started the business to
$379,737 as of the end of year two.

As demonstrated above, if you focus on managing your cash, you will automatically do a good job
of managing your income statement and your balance sheet and thus your performance.

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Chapter 2:

Optimizing Your Sales with Merchandise

Planning
Helen realized that managing a retail store and a chain of stores would be a challenging task. You
must determine the customer demands for an entire season and plan all inventory purchases and
operations accordingly. Complexity increases when you have more than one store in different
geographic locations with various customer characteristics and preferences. On top of that,
customer preferences vary in terms of product needs, sizing and pricing tolerances. As a result Helen
knew that she had to invest in people, technology and processes to simplify this complexity of
planning and managing.

The What and the Process Of Merchandise Planning

Essentially, merchandise planning requires that you have the appropriate people, processes and
technology to have the right product at the right place at the right time to ensure that the financial
goals are met.

Overall Planning Process

Exhibit 2-1 shows you the overall planning process and how merchandise planning fits within it.

Exhibit 2-1 Overall Planning Process

Planning Horizons
The horizons can be broken out into the following:
 Long Range – over one year and usually the strategic plan horizon
 Annual – the annual plan that links to the financial budgets and to the long range plan
 Seasonal – the seasons that cover and in some cases overlap the annual
 Monthly – commonly known as period when you are following a retail calendar
 Weekly – the weeks that comprise the month or period

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The Retail Calendar (an Optional Idea)

Retailers are a different breed of businessperson so they decided to come up with their own
calendar.

An additional element of planning is the use of a retail calendar for planning and reporting. This
calendar is also known as the 4-5-4 calendar. This is one of the more prevalent techniques used for
planning and reporting financial and merchandising data. It allows a more consistent correlation
for reporting periods such as weeks, months, quarters, years and seasons. Under this concept, unlike
the conventional calendar, the year starts on a Sunday in the latter part of January or early
February. Each week and month begins on Sunday and ends on a Saturday. The year is divided into
4 13-week quarters with the first month containing 4 weeks, the second 5 weeks and the last month
4 weeks. Based on this approach, historical, actual and forecasted data become more relative as each
reporting period contains corresponding Fridays and Saturdays that represent a significant portion
of each selling week.

SUPO implemented the systems to support the data and processes required to follow a retail
calendar. You will also notice in the financial statement Exhibits 1-2, 1-4, and 1-5 that by using the
retail calendar the dates of the fiscal year end normally change every year.

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Merchandise Planning Hierarchy

To understand fully the approaches to planning you need an understanding of the merchandise
planning hierarchy. Exhibit 2-2 below gives you an indication of what SUPO’s hierarchy is.

Exhibit 2-2 Merchandise Planning Hierarchy

Approaches to Merchandise Planning

There are three approaches to merchandise planning:

1. Top-Down
Under the Top-Down approach, a gross dollar value for total sales is determined in line with the
company’s long-range plan objectives for the time period being reviewed. Store sales are
allocated into departmental sales, which are then allocated between the various
classifications and sub-classifications and then store plans.

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2. Bottom-Up
With the Bottom-Up approach, the unit sales are estimated at the classification and sub-
classification levels and then translated into sales using history and/or market data when
available. The total departmental sales figure is determined by the sum of the dollar sales
of all the classifications.

3. Hybrid
The Hybrid approach combines the first two approaches. The long-range is combined
with the detailed bottom up review. The business strategy provides information on economic
and competitive trends and distribution channel changes, such as store expansion and direct-to-
consumer sales growth. This is incorporated into the detailed unit and dollar plan created by
the people planning and reviewed and adjusted until the overall guidelines of the long-range
plan are attained. This approach results in the most realistic merchandise plan.

Developing A Sales Forecast

To develop merchandise plans, you need to develop a category sales forecast over a period of time
in the future.

To develop the sales forecast, you need to consider, in accordance with the business plan, how the
business is positioned and what impact this may have on its product categories.

SUPO is positioned as a lifestyle business and a retail segment in the growth curve. When building
sales forecasts you should consider where its current and future product offerings will be within that
product’s lifecycle and how the summation of all these products’ sales plans will help the company
attain its business plan. The product lifecycle concept, seen in Exhibit 2-3, describes a products
sales pattern over time and is divided into four stages: introduction, growth, maturity, and decline.

Exhibit 2-3 Product Lifecycle

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Where a product is in the lifecycle and what its trajectory is will help the planner determine
whether the product should be stocked, stocked in more or less quantities, or removed from stock.

The Six-Month Merchandise Plan

In preparing a six-month merchandise plan, we generally build up classification plans to the

department level.

Exhibit 2-4 shows a six-month merchandise plan for SUPO for its first season in Year 1.

For every classification, you develop planned sales and planned reductions. Planned beginning-
of-month (BOM) and end-of-month (EOM) inventory levels can be derived from the sales and
reductions plan by using inventory objectives.

Exhibit 2-4 Supo’s Merchandise Plan

# of weeks
4 5 6
Period 1 Period 2 Season Total
Ref Units $ Units $ Units $
BOM* Inventory A Plan 244,245 307,545
Last year
Actual
Sales B Plan 81,415 101,769 529,200
Last year
Actual
Reductions
Markdowns C Plan 10,771 13,464 70,013
Last year
Actual
Employee
discounts D Plan 814 1,018 5,292
Last year
Actual
Shrink E Plan 1,628 2,035 10,584
Last year
Actual
Total Reductions F= C+D+E Plan 13,213 16,517 85,889
Last year
Actual

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# of weeks
4 5 6
Period 1 Period 2 Season Total
Ref Units $ Units $ Units $
EOM** Inventory
Required G Plan 307,545 307,545
Last year
Actual

Open to receive H= G-A+B+F Plan 157,929 118,286

Last year
Actual
On Order I Plan 142,136 106,458
Last year
Actual
Open to Buy J=H-I Plan 15,793 11,829
Last year
Actual
Cumulative
Gross Margin K Plan 44,591 100,330 289,843
Last year
Actual
*BOM = Beginning of month
**EOM = End of month

Exhibit 2-5 Supo’s Merchandise Plan Summary

# of weeks
4 5 26
Period 1 Period 2 Season Total
Units $ Units $ Units $
Ratios
IMU% 61% 61% 71%
CUM% 61% 61% 71%
Markdowns % 13% 13% 13%
Employee purchases % 1% 1% 1%
Shrink % 2% 2% 2%
Gross margin % month 55% 55% 55%
Gross margin % cumulative 55% 55% 55%
Stock to sales 3 3 3
Weeks stock 13 13 13
Inventory Turnover period .34 .34 42

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Controlling What You Buy with an Open-to-Buy (OTB)

The primary control mechanism, once the six-month merchandise plan has been set, is a tool called
the open-to-buy (OTB).

The OTB represents the dollar limit to which a buyer should spend for receipt of merchandise
during the period (normally a season or a month) being managed. As the season progresses, OTB
becomes the financial instrument for monitoring actual performance against plan.

With an OTB you can react to market conditions.

The specific objectives of an OTB are to:

1. Control commitments made against the limits you have set
2. Determine how much more, if any, you should purchase
3. Highlight variances between planned and actual performance and to permit you to decide
on what actions to take to stay in line with your financial objectives

An example of SUPO’S planned OTB is included in Exhibit 2-6.

The example demonstrates to you how you calculate the OTB. The BOM inventory levels come
from the six-month merchandise plan and are based on planned sales and the turnover target, and
related weeks stock target that was established in the business plan.

The OTB is calculated for all of the merchandise classifications.

Normally people do not commit 100% of their purchases up front. As you can see from item I in the
OTB, SUPO had committed 90,127 or 90% of their needs for period 1, leaving 10%. This level may
vary based on the type of inventory, the period, the season as well as the level of confidence you
may have in your sales, and/or inventory quality, and/or supplier ability to supply you.

If the OTB amount on line J ends up negative, it means that you have too much inventory. To
adjust you can reduce your future purchases and/or you may increase your level of markdowns,
which will reduce your gross margin.

Although you have to look at the total of all your classifications to see your total OTB, you should
not necessarily take the same decision for each individual classification or for the overall OTB. For
example, if you are in the giftware business and you overbought in fine china, it doesn’t mean that
you should stop buying crystal stemware.

Although Exhibit 2-6 shows period information, an OTB is also managed at the week level. By
managing this information every week you ensure that you are managing your period and season
results effectively. SUPO had put in the processes and technology to do this on day one because
they wanted to make sure they had what they needed to expand profitably.

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Exhibit 2-6 Supo Otb

# of weeks
4 5
Period 1 Period 2
Ref Planned Actual Planned Actual
BOM inventory A 244,245 307,545
Sales B 81,415 101,769
Reductions
Markdowns C 10,771 13,464
Employee discounts D 814 1,018
Shrink E 1,628 2,035
Total reductions F= C+D+E 13,213 16,517
EOM inventory required G 307,545 307,545
Stock to sales 3 3
Weeks stock 13 13
Inventory turnover period .34 .34
Open to receive H=G-[A+B+F] 157,929 118,286
On order I 142,136 106,458
Open to buy J= H-I 15,797 11,829

Planned Reductions
Planned reductions are comprised of markdowns, employee discounts and stock shrinkage. There
are two reasons for including all of these components in the six-month merchandise plan. First,
they directly affect the gross margin. Second, they represent reductions to inventory and thus
should be factored into the planned purchases to ensure that adequate merchandise is on hand to
meet sales targets.

1. Markdowns
Planning markdowns is a difficult task. In planning markdowns, you should review industry
standards and last year’s results. In SUPO’s case, they used industry standards and their “best
estimates” because they were in a start-up mode.

Questions you should ask are:

1. What were my markdowns, as a percentage of sales by week? By period? By season?
2. How aggressive were pricing policies last year and what will they be for the planning period?
3. What was and what will be the timing of major promotions and clearances?
4. How deep were the first markdowns and how deep should they be?
5. Did we have receiving or timing problems with our merchandise and what impact did this
have on markdowns?

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Formula: Markdown for the period / Sales for the period

EXAMPLE
$10,771
1 0.132 13%
$81,415

The resulting percent is applied to the sales plan by period to come up with the reduction figure for
markdowns.

2. Employee discounts
Employee discounts remain fairly constant from year to year when expressed as a percentage of
sales, unless the company employee discount program has changed.

Formula: Employee discount for the period / Sales for the period

EXAMPLE
$814
1 0.009 1%
$81,415

The resulting percent is applied to the sales plan by period to come up with the reduction figure.

3. Stock Shrinkage
Stock Shrinkage is factored into the plan in the same way as employee discounts. Unless the
company is making substantial changes to its shrink programs, you will apply the same percent as
your historic experience. If you have no history, you can apply an industry standard for your type
of product.

Formula: Annual or periodic stock shrinkage / Sales for the year of the corresponding period

EXAMPLE
$1,628
1 0.0199 2%
$81,415

The resulting percent is applied to the sales plan by period to come up with the reduction figure.

E-conomy strategy retailers cannot afford any shrinkage. They should control their “shrink” to
close to 0%.

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Planned BOM and EOM Inventory Levels

A retailer’s primary investment is in inventory so careful planning is required to ensure an adequate
return on investment.

In planning inventory levels, several different techniques can be used depending on the
characteristics of the merchandise and the availability of historical information. The three
techniques are:

1. Stock-to-Sales method (S/S)

This method is often used to plan monthly stock levels for highly seasonal merchandise because it
allows stock levels to vary according to the needs of the business. But it is also used for staple
products.

Formula: Retail stock on hand at a specific date (e.g., BOM or EOM) / Sales for the period
EXAMPLE

$244,245
/ 1 3
$81,415

The resulting number is applied to the sales plan by period to come up with the $ inventory figure
for the period. In Exhibit 2-5 you can see that SUPO’s S/S ratio for period 1 was 3. An S/S ratio of 3
corresponds to an annual turnover figure of:

12 periods / 3 SS = 4 Turnovers

2. Weeks-of-Supply (W/S)
This method is often used to plan monthly stock levels for staple merchandise. It assumes a
relatively constant level of demand and supply over a longer period of time than the S/S method.
You may use a constant number or one that varies by period. Once the target W/S has been set,
period EOM stock levels can be calculated. The planned EOM stock level for any particular period
should equal the amount of sales and reductions for the next X weeks depending on what W/S ratio
is determined. For example, if you want 13 weeks of supply at the end of period 1 you need to know
what is planned for sales and reductions for the next 13 weeks. Normally the W/S ratio is based on
your annual turnover number.

Formula: Number of weeks in planning period / Stock turnover in planning period

SUPO set their annual turnover target at 4 times. As a result their W/S ratio was:

52 weeks / 4 turns = 13 W/S

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3. Stock Turnover (T/O)

This method measures the rate at which inventory is acquired through purchases and then removed
from stock through sales.

The T/O for inventory at cost was shown in chapter 1. The formula for this ratio for retail
inventory, which will end up at the same T/O number as at cost, is:

Formula: Total period sales and reductions /Average retail inventory

1 $81,415 $13,213
1
1 $244,245 $307,345 /2
.34

SUPO had set a target of 4 turns for year 1 when it developed its business plan. At the current turn
rate of .34 turns per period the annual turn for 12 periods will be = 12 X .34 = 4 times.

Planned Purchases – Open to Receive

Once you have completed the job of planning sales, reductions and inventory levels, a planned
purchases figure per period can be calculated, which in Exhibit 3-1 is called the Open to Receive.

Formula: Open to Receive = Planned EOM inventory – [BOM inventory + Planned sales for period
+ Planned total reductions for period]

Planned Initial Markups (IMU) and Gross Margins (GM)

Initial Markups (IMU) is the difference between selling price and cost and is targeted based on what
gross margin you need to generate to cover your other costs. In SUPOS’ business plan they had
determined that they wanted to target a gross margin of 55% starting in year 1.

They had estimated that their annual rate of sales reductions would be approximately 16%. Using
this information they determined what IMU they had to buy their inventory at.

Exhibit 2-7 demonstrates how the gross margin was derived for SUPO’s period 1 sales in year 1.

Exhibit 2-7 Supo Purchases and Sales Example Period 1 Year 1

PERIOD 1
$ % gross %
Selling Sales
Gross selling 94,629
Reductions 13,214 14% 16%
Sales 81,415
Cost 36,824 39%
Gross margin 44,591 55%

IMU 57,805 61%

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The formula to calculate IMU is:

Formula: (Gross Selling value – Cost) = Markup / Gross selling value

= ($94,629-$36,824) / $94,629 = 61%

The formula to calculate Gross Margin is:

Formula: (Sales – Cost) = Gross margin / Sales

= ($81,415- $36,824) / $81,415 = 55%

As can be seen above, based on the fact that Sales reductions were estimated at 16% of sales, SUPO
would need to have an IMU on its purchases of 61% to attain its targeted gross margin of 55%.

Keeping the Product “From Shrinking”

Shrink relates to the loss of your inventory. It is normally identified by your loss reports that you
obtain from your stores and adjustments to your inventory records. It is also identified when you
take a physical inventory and the amount counted is not equal to what you have in your records.

Formula: Inventory Variance Dollars or Units / Estimated Dollars or Unit Inventory per Records

The resulting percent should then be compared to industry norms for your category. To compare to
industry norms you should then convert your shrink number into a percent of sales for the period
related to the variance.

This percent will also be used when you write your merchandise plan. When deciding what rate to
use for percentage of shrink you can use your latest actual rate, an average rate for a period of time
(e.g. the average rate for the last 3 years) or whatever rate will most appropriately represent what
you think may occur in the current planning cycle as a result of the historical results and the
actions you have taken. The key is to use a realistic rate.

The average for most retailers is close to 1.04%, but can range from .02–4%. Retailers should
normally target their shrink percentage to come out at around 1%.

There are four primary sources of shrinkage:

1. Employee theft
2. Shoplifting
3. Administrative error
4. Supplier fraud / theft

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The keys to managing your shrinkage is to ensure you have good processes and procedures
pertaining to inventory control regarding the following areas:
1. Human resource management
2. Merchandising
3. Supply chain
4. Technology
5. Store operations
6. Loss prevention

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Chapter 3:

Managing Your Store Salaries

Linking Salary to Sales

Store salaries comprise a significant portion of your store operating costs. While markdowns may
salvage something from a bad buy, there are few ways to regain an hour of wasted employee time.

The cost of employee time rises as competition for full- and part-time employees causes employers
to meet the increasing demands of the workforce. With the cost per labour hour rising, it is more
and more critical to focus on getting the right productivity out of every hour.

The starting point of labour productivity is the selection and training of every employee. This is
covered in eBook #4: People.

What we cover in this section is how to manage your salary dollars in relation to your sales.

We will use year 2 of SUPO’s first store to demonstrate how to do this. Included in Exhibit 3-1 is a
summary of information pertaining to this store.

Exhibit 3-1 Supo Store 1 Year 2 Data

Store Data
A Store square footage 3,000 sq. ft.
B Sales per square foot $440
C Total annual sales $1,320,000
D Average weekly sales for 52 weeks $25,385

Salaries & employee related data

E % of sales 9%

F Annual wages based on % of sales $118,800

G Average weekly wages based for 52 weeks $2,285

Opening hours data

H Total opening hours per week 70
I Sales per store opening hour $363
J Salary & employee related wages per opening hour 33

To optimize your performance, you need to link your sales per square foot productivity of $440
(item B in Exhibit 3-1) to how much you should spend on annual salaries of $118,800 (item F in
Exhibit 3-1). To do this:

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Step 1: Determine your annual and weekly salary budget in line with your financial
plan

As part of their business plan SUPO had planned to have their store salaries and employee related
expenses (“Salary”) attain 9% of their total sales for year 2.

Formula: Store Salary % = Salary for the year /Total Sales for the year

2 $252, 000
% 2 0.09 9%
2 $2,721,600

To figure out your annual and weekly budget for a store you then apply this percent to your annual
sales for the store.

Formula: Annual Store Salary = Annual sales for the store × Store Salary %

1 2 1 % $1,320,000 9%
$118,800

*Note: For simplicity we have not considered the direct to consumer sales in this example.

Once you have this figure you can then calculate your average weekly figure.

Formula: Weekly Store Salary = Annual Store Salary / 52

1 $118, 800
1 $2, 285
52 52

Please note that the weekly salary value is an average for the 52 weeks of the year. Ideally, you need
to plan every week separately to properly plan all your activities and the related budgeted salary.

Step 2: Determine how much salary wages per hour for all the hours you are open
you have

To do this, the first thing you need to know is how many hours per week your store needs to be
open. Included in Exhibit 3-2 are the opening hours for store 1 for SUPO.

Exhibit 3-2 Weekly Store Opening Hours for SUPO Store 1

Store Store Total Hours Number Total Weekly

Opens At Closes At Open Per day Of Days Hours
Monday to Friday 10:00 AM 9:00 PM 11 5 55
Saturday 9:00 AM 5:00 PM 8 1 8
Sunday 10:00 AM 5:00 PM 7 1 7
Total 70

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Once you have this figure you can then calculate how much Salary wages per opening hour you
have.

Formula: Salary wages per opening hour = Weekly Store Salary / Total Weekly Store Hours

$2,285
$32.64 $33
70

This $33 number includes all salaries paid in the store whether the store is open or not. What this
means is that when you keep track of your salary wages incurred every day you need to include
both employees who are paid for selling activities, such as sales associates, as well as those who are
paid for doing non-selling activities such as stocking.

In this case, if the store wanted to meet its 9% salary target, it could spend $33 for every hour the
store is open.

You can then use this number to determine the appropriate mix of labour hours and labour rates to
attain this target.

Linking Labour Schedules to Customer Traffic

This section examines how to have the right amount of labour at the right time.

For an E-xperience retailer where customer service is critical, scheduling is a core activity.

This is even more critical when you want to provide great customer service while at the same time
managing your salary wages targets that you established in the previous section.

At start-up, SUPO invested in POS software and traffic counting technology that supports this
activity.

Customer traffic is the number of people who enter your store over a period of time. It is tracked by
hour (i.e., how many people entered your store between 10:00 AM and 11:00 AM), by day (i.e., how
many people entered your store on Monday), and by week (i.e., how many people entered your
store the week of Boxing Day).

By tracking your traffic to this level of detail you will have a better idea of when to schedule
employees to service the volume of customers entering your store and to stock the store.

Over time, once you have some history you will be able to explain a portion of your sales variance
day to day, week to week and current year versus last year by looking at your traffic variance. You
will also be able to explain how you are managing your salary percentage.

Formula: Total number of people entering store over period of time / Number of units of time
frame (e.g., Hours, Days, Week, Month)

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EXAMPLE

160
20
8

Note:
These numbers are not included elsewhere in this module. They represent the traffic information, average per hour
traffic, for Store 1 for all the Saturdays that the store was open in September, which was taken from SUPO’s POS and
traffic counter technology.

The detail per hour can be seen in Exhibit 3-3.

Exhibit 3-3 Supo Customer Traffic Per Hour – Saturdays in September

Number of
From To Customers

9:00 AM 10:00 AM 5
10:00 AM 11:00 AM 10
11:00 AM 12:00 PM 10
12:00 PM 1:00 PM 20
1:00 PM 2:00 PM 25
2:00 PM 3:00 PM 30
3:00 PM 4:00 PM 40
4:00 PM 5:00 PM 20
Total 160
Traffic per hour for day 20

As can be seen from Exhibit 3-3, SUPO needed to optimize its labour schedule to meet a peak period
from between 12:00 PM to 4:00 PM on Saturdays in September. By not putting enough labour in
this period and too much in other periods they would not optimize the sales potential and would
probably not meet their salary targets.

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Chapter 4:

Managing Your Real Estate Occupancy

Costs
Occupancy costs for a retailer are a significant portion of the costs of doing business. In most cases
these costs are the most significant costs related to operating a store. They are usually fixed over
time but will have increases depending on what you have accepted to include in your lease
agreement.

The key concepts are occupancy costs per square foot and occupancy costs as a percent of sales.

Occupancy Costs per Square Foot

Landlords will normally quote you a cost per square foot. You need to understand what is included
in these costs.

Normally theses costs include an amount for base rent, an amount for percent rent if you exceed
certain minimum sales levels, and other costs for common area maintenance, normally named
CAM, property taxes, property insurance, utilities and marketing cooperative funds for the mall or
other location that you are in.

The formula to calculate your occupancy costs per square foot (OCPSF) is:

Formula: Annual Occupancy Costs /Store Square Footage

$186,000
2010 $62
3,000

$372,000
2011 $62
6,000

SUPO had done a good job of negotiating a fixed amount of occupancy cost per square foot when
they negotiated to open each of the 3,000 square foot stores in the first two years.

A key element to follow every year is how your occupancy costs per square foot vary from year to
year. They should not vary significantly. If they do, you should investigate why.

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Occupancy Costs as a Percent Of Sales

This ratio will vary depending on the change in your sales and your occupancy costs per square
foot.

The formula to calculate your occupancy costs as a percent of sales is:

Formula: Annual Occupancy Costs /Sales

$186,000
% 2010 15%
$1,260,000

$372,000
% 2011 14%
$2,721,600

As you can see from the above, the occupancy costs percent has decreased. This is because the
occupancy costs per square foot have stayed stable while the store sales productivity has improved
to $420 per square foot. Also, their direct to consumer sales have increased dramatically thanks to
their omni-channel strategy.

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Your Retail Math “Health Exam:”

How Fluid is Your Business’ Blood (Cash)
Flowing?

It is now time to send your business for a check-up.

You will be the intern on duty who is scheduled to perform this check-up.

Please follow the following steps:

1. Obtain your annual financial statements for the last three years from your accountant
and/or advisors. If three years are not available, use what is available to start.
2. Ensure the statements include a cash flow statement. If they don’t, ask them for one and ask
them why they aren’t already available!
3. Obtain other merchandise and store operating information that is not part of 1.
4. Complete the following table :

Intern Observations
Most 2nd (How have these evolved? Why?
Recent Prior Prior What impact? What can be
Year Year Year done?)
(1) MANAGING YOUR CASH

(a) Operating Activities

Cash Flow Ratio

Profitability Ratios
Profit margin
Sales per square foot
Same store sales increase
Sales growth
Gross margin

Cash Conversion Cycle

Days sales outstanding
Days inventory outstanding
Days payable outstanding
Cash conversion cycle

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Intern Observations
Most 2nd (How have these evolved? Why?
Recent Prior Prior What impact? What can be
Year Year Year done?)
Inventory Turnover
Note: If you don't have the monthly
inventory amounts you can use
beginning of year and end of year
amounts in your financial statements
(b) Investing Activities

Return on Assets

Return on Equity

Gross Margin Return on

Investment

(c) Financing Activities

Debt to Equity

Current Ratio

(2) MERCHANDISE
PLANNING
Initial markup %
Markdowns %
Shrink %
Stock to sales ratio
Weeks stock ratio

(3) STORE SALARIES

Store salary %
Salary $ per opening hour

(4) REAL ESTATE

OCCUPANCY COSTS
Occupancy costs per square foot
Occupancy costs as a % of sales

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Looking at the completed table, ask yourself, your team and your advisors the following questions:
1. How fluid is the business blood (cash) flowing through my business?
2. What has been blocking this flow and what has started to free up the flow? Learn from
both!
3. What are the key short-term and medium-term actions that we need to focus on?
4. Who will focus on what for when?
5. What financial impact will these actions have?
6. How frequently will you monitor your progress?
7. Are there any adjustments to be made in the quality and availability of the information you
need to monitor your progress?

Passing Your Retail Math Exam

To pass your retail math exam, you don’t need to be an accountant or an actuary. You only need to
focus on the key elements described in this eBook. By mobilizing your team and your external
advisors to provide you with the input as well as the information to monitor and manage these
variables, you will have everything you need to ensure your financial prosperity.

Don’t hesitate to obtain this information as quickly, as frequently and as concisely as possible.
These elements comprise your financial compass, which should evolve, be updated and be
communicated as quickly as your business journey evolves.

Your personal health is often detected by the quality of the blood that flows through your veins. As
demonstrated in Chapter 1 of this eBook, your cash flow statement is your business health compass
that integrates all the elements of your financial success (i.e., the elements described in this eBook)
and demonstrates how well the vital blood of your business—cash—is flowing.

The sooner you start your cash flow check-up today, the better chance you have of passing your
retail math “health” exam.

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