3 Ways to Improve Profitability In Your Retail Boutique
Alright, you’ve got your business off the ground and all the operations seem to be running smoothly. You’re getting a steady stream of customers and sales, however, you are ALWAYS seemingly short on cash. Where is it all going?? Let’s look at ways you can improve profitability!
If that sounds familiar, then listen up. Just because the sales are rolling in doesn’t mean that you’ll always have a healthy flow of cash. If you’re feeling the need to pinch your pennies, then it might be time to take a hard look at your PROFITABILITY.
Your profitability is going to be the bottom line in your business. It’s calculated by the following:
Total Sales
– Cost of Goods Sold (i.e. the cost of the products you sold above)
= Gross Profit
– All overhead/operating expenses
= Net Profit
For very simple numbers sake, let’s use the following as an example throughout this lesson:
$10,000 Gross Sales
– $5,000 Cost of Goods Sold
= $5,000 Gross Profit (50% margin)
– $5,000 Operating Expenses
= $0 Net Profit
If you’ve got a healthy stream of sales coming in, but not a lot left over at the bottom, let’s take a look at some ways that we can improve profitability in your retail business.
Increase Total Sales
This is often the default solution many business owners turn to if they’re short on cash. They think they just need to rev up their sales to bring more in the door! And while there may be some truth to that, it’s not the WHOLE truth.
Yes, you can increase the total number of customer orders you have. That could look like:
$12,000 Gross Sales
– $6,000 Cost of Goods Sold
= $6,000 Gross Profit (keeping 50% margin)
– $5,000 Operating Expenses
= $1,000 Net Profit
But, if you have to increase ad spend to get that extra $2,000 in sales, then that eats into your profits. Just hustling harder to bring in more sales won’t always directly correlate with increased profitability, especially if you’re “spending more to make more” by increasing ad spend to get it done.
Another option would be to mark up each item an extra $1. If all other costs stayed the same, that would result in an additional $1 of pure profit for each item you sold. $1 may not seem like much, but it can add up pretty quick if you sell hundreds, or even thousands of individual items a month. Let’s say you sold about 500 items to get your $10,000. If you increased your prices by $1 each:
$10,500 Gross Sales
– $5,000 Cost of Goods Sold
= $5,500 Gross Profit
– $5,000 Operating Expenses
= $500 Net Profit
Some things you may be able to mark up even more! Remember each dollar you mark up is additional profit in YOUR pocket, if all other aspects stay the same.
Decrease Cost of Goods Sold
This one might take a little more strategy, but if you can purchase your inventory for slightly lesser costs per item, you will be able to increase your Gross Profit.
This could look like buying popular items in larger quantities and reducing the shipping costs. Or maybe you can find great deals on destash sites. The cheaper you can get your products (no, I’m not saying to buy cheap quality products), the greater the margin potential when you turn around and sell them. Let’s take our initial example again, and tweak it for this scenario:
$10,000 Gross Sales
– $4,500 Cost of Goods Sold
= $5,500 Gross Profit
– $5,000 Operating Expenses
= $500 Net Profit
If you could figure out a way to just slightly reduce your cost per item, again, that’s money that goes directly into your pocket! If this example represented another 500 items sold, that’s just saving $1 per item. So, get creative and figure out the best buying strategies to help you save those dollars!
Decrease Overhead Expenses
The final way to improve profitability today is to decrease your overhead expenses. I always recommend doing an expense audit at least once a year – take a look at all the subscriptions & software you’re paying for, to make sure that you’re actually USING everything you’re paying for.
See if there are any savings available if you switch your monthly subscriptions to annual subscriptions (oftentimes, you can save up to 2 monthly fees worth!). Make sure that your advertising dollars are spent in a way that are producing sales for your business, and earning you a healthy return on that investment.
If you can find a way to save $500 dollars, if would have the following effect on your bottom line:
$10,000 Gross Sales
– $5,000 Cost of Goods Sold
= $5,000 Gross Profit (50% margin)
– $4,500 Operating Expenses
= $500 Net Profit
Let’s Put Them All Together to Improve Profitability
Now that you’ve seen the 3 primary ways you can improve profitability in your business, let’s look at what it would look like if you were able to implement all 3 methods.
Let’s take our initial example, increase each of our product prices by $1/item, decrease the cost of our inventory by $1/item, and decrease our overall overhead expenses by $500.
$10,500 Gross Sales
– $4,500 Cost of Goods Sold
= $6,000 Gross Profit (50% margin)
– $4,500 Operating Expenses
= $1,500 Net Profit
By making all 3 of these “small” tweaks, we turned a $0 net profit into $1,500 of bottom line, money in YOUR pocket!
Remember, it doesn’t have to be all or nothing. Start small. If you’re experiencing some tight cash flow this time of year, then it may be time to consider making one of these slight changes in your business.
If you need some help analyzing your financials and looking for ways that you can improve profitability, then I’d love to chat with you! You can schedule a free coffee chat consultation with me here.
Hi, I’m Megan!
Bookkeeping for the retail industry has some unique complexities that take extra time to manage to ensure accuracy. At Finding Freedom Financial Services, I provide done-for-you bookkeeping services for boutique owners that accurately track these complexities for you so you can have more time and focused energy to dedicate to running your stores. If you’re ready to get your time back, apply to work with me today!
