“Without big data analytics, companies are blind and deaf, wandering out onto the web like deer on a freeway.” – Geoffrey Moore, management consultant
As a busy small-to-medium-sized retailer, it is challenging to keep track of your overall business performance and make informed decisions about where to invest in your operations. While revenue and profits are undoubtedly vital financial metrics for any retailer, additional indicators may provide valuable insights when gauging the success of your retail business. This blog looks at five crucial financial metrics all retailers should consider tracking to identify areas of opportunity and growth. Read on to gain an understanding of their importance, how best to measure them, and the practical implications each has for small-medium-sized retailers.
Financial Management for Small & Medium Sized Retailers
“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” – Warren Buffett
Financial management in the retail industry covers budgeting, forecasting, profitability, leverage management, asset management, and optimum resource allocation. The goal is to make enough money to cover expenses and grow the business. This means that revenue must cover the cost of goods sold, operating expenses, and taxes. Moreover, as a best practice, remaining funds are reinvested into the business to support growth initiatives.
What are Financial Metrics?
Financial metrics are quantifiable measures used to track the performance level of a business. These metrics help managers make informed decisions and can assess business performance. Further, metrics provide the necessary insights that show if a company is on course to meet its financial goals.
Key Financial Metrics
“Beware of little expenses; a small leak will sink a great ship.” – Benjamin Franklin
Each of the following metrics provides critical insights into a company’s financial performance:
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- Sales Revenue,
- Net Income
- Cash flow forecast
- Return on Investment (ROI)
- Earnings Before Interest and Tax (EBIT)
These metrics help organizations improve efficiency by reducing costs, improving profitability, and maximizing the return on investment.
I) Sales Revenue
Sales Revenue is a fundamental metric a manager uses to gauge retail sales performance. In retail, sales revenue is critical since sales are the primary source of company revenue. From marketing to operations and product selection, sales revenue measures the performance and effectiveness of an entire retail organization.
How to Calculate Sales Revenue
The sales revenue formula calculates revenue by multiplying the units sold by the average unit price.
Revenue = Sales x Average Price of Service or Sales Price
II) Net Income
Net income indicates a business’s profit after all expenses have been deducted from revenues. Net income is a good measure of profitability and company performance, aka “bottom line.” Net income is significant because it shows a company’s profit (for a given period) when considering all aspects of the business.
How to Calculate Net Income
To calculate net income (NI):
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- Take the company’s total revenue.
- Subtract the business’s expenses and operating costs from this amount to calculate earnings before tax.
- Deduct tax from this amount to find the NI.
Revenue – Cost of Goods Sold – Expenses = Net Income
III) Cash flow forecast
Cash flow is the amount of money coming in and out of your retail business. When a manager’s cash flow is managed effectively, retailers can accurately plan expenses (such as labor, vendors, etc.) In addition, knowing who the business can pay and when makes it easier for managers to focus on achieving business operations, sales, and growth targets.
How to Calculate Cash Flow Forecast
To calculate the cash flow forecast, subtract planned expenditures from estimated revenues. This figure will determine “net cash flow.” A positive number indicates the business will receive more revenue than it will spend.
Beginning Cash + Projected Inflows – Projected Outflows = Ending Cash
IV) Return on Investment (ROI)
Return on investment (ROI) is a basic ratio that divides the net profit (or loss) from an investment relative to its cost. ROI is part of data analytics and serves as a benchmark for shaping future managerial strategies. This metric allows managers to determine which sales strategies are effective and which areas need improvement.
How to Calculate Return On Investment
ROI is calculated by subtracting the beginning value (of assets) from the current value and dividing the number by the beginning value.
ROI = Net income / Cost of investment x 100.
V) Earnings Before Interest and Tax (EBIT)
EBIT is an important measure of a company’s operating efficiency. Since EBIT does not consider indirect expenses (such as taxes and interest due on debts), it shows how much the business makes from core operations.
How to Calculate EBIT
To calculate EBIT, subtract the cost of goods sold (COGS) and operating expenses from the total revenue.
EBIT = Revenue – COGS – Operating Expenses
“Finance is not merely about making money. It’s about achieving our deep goals and protecting the fruits of our labor. It’s about stewardship and, therefore, about achieving the good society.” – Robert J. Shiller.
As a busy small-to-medium-sized retailer, it can take time to keep track of your overall business performance and make informed decisions about where to invest in your operations. However, by tracking the five key financial metrics discussed in this blog post, you can identify areas of opportunity and growth for your retail business. Doing so will help you allocate your resources more effectively and ensure that your business remains successful in the long term.
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