Inflation, high interest rates, increasing staff costs… there are many challenges retailers are grappling with as they seek to remain profitable in 2023. But while retail businesses can’t control the economy, what they can control is their own numbers. Last year our retail thrive series looked at various trends in retail and how to incorporate them into their retail business. This year we’re focussing on the priority accounting matters for retailers - how to manage your numbers and cash flow to make sure that you can remain profitable, despite the economic uncertainty currently in play in Aotearoa.
With the minimum wage set to increase on 1 April and inflation impacting the cost of products, overheads and wage costs are top of mind for retailers currently. So what can you do to ensure you remain profitable, despite the increased costs of doing business?
Overcome uncertainty by reviewing your numbers regularly
“The impact of Cyclone Gabrielle and other recent flooding events on the NZ supply chain have added to what was already an uncertain economic environment,” explains Justin Martin, BDO Head of Retail. “Prices are increasing, and inflation is taking its toll. To counter this, retail businesses should increase their focus on their numbers.” This means looking both backwards and forwards – around once a month, retailers should be looking at their previous month’s results, specifically at sales and overheads, and using this to update their 12-month forecast – and making business decisions based on this.
Specifically, you should break down every dollar of sales value into:
- Cost of sales
- Salary costs
What’s left from this will be your net profit. For every dollar of sale, you want to maximise the component that is left to you as the owner. Reviewing all the other components and holding yourself to a budget which you regularly come back to is the best way to ensure you remain profitable.
Your overheads make up all of the costs associated with selling the product, that don’t include the cost of acquiring the product itself. Examples of overheads include insurance, rent, power and internet bills and marketing costs. Especially in times of high inflation, it’s important to run a careful eye over your overheads to make sure you’re getting the best deal, while also good quality service. As Justin explains, “we recommend at least annually going line by line through each item of expenditure and asking yourself, ‘is this essential to the business?’”
Staffing costs are a significant component of your total overall profit margin – so it’s an important cost to keep an eye on. The minimum wage is set to increase to $22.70 per hour from 1 April 2023. It’s important to understand the impact, particularly how it will influence holiday pay calculations and the associated increases in ACC, KiwiSaver, and other entitlements. Retailers should ensure that their employees are taking holidays – not only is this good for mental health, it also lessens the impact should you have to pay out any annual leave balances if they leave. Encouraging staff with high level balances to take holidays before the 1 April increase will lessen the financial impact on your business.
Ensuring you have a strong payroll software that can accurately monitor areas like salary and annual leave balances is key to ensuring you are staying on top of your wage costs.
Cash flow and profitability
Your overheads and wage costs will all impact your cash flow, and it’s this that will determine whether you are profitable. To manage your cash flow, it’s best practice to implement a three-way cash flow system. This is a fully integrated forecast that brings together your profit, loss and balance sheet into one report. This will give you a much more accurate picture of how the business will look in 12 months’ time than simply looking at profit and loss.
“It's also a good idea to assess your KPIs so you can have a fuller picture of how well your retail business is doing,” says Divya Pahwa, BDO Retail Partner. “Most retailers will have 3 – 5 KPIs, and these should be directly tied to the core areas that will drive your profitability, so not just sales but also things like staff, customer retention and inventory turnover.”
Focus on what you can control
It can be easy for retailers to feel like they don’t have a lot of control in today’s economic environment – but the best way to counter inflation, interest rates and other external economic factors is to manage your numbers effectively. This means regularly reviewing your overheads, wage costs and cash flow to ensure you can remain profitable.
From budgeting and business planning to KPIs and cash flow management, our specialist retail business advisory team can help you understand your numbers and make meaningful changes to help your retail business thrive, no matter what comes your way. Reach out to your local adviser today to learn more.
Profitability – quick tips
- Review your financial results on an ideally monthly – and at the least quarterly – basis, looking at your previous results to inform predictions for the next month.
- Break your dollar sales value down into cost of sales, salary costs and overheads
- Review your overheads to ensure you’re getting the best deal
- Understand the implications of the minimum wage increasing – and encourage your employees to take their holiday leave
- Implement a three-way cash flow system
- Create KPIs directly tied to the areas that drive your profitability