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Shrinkage in the retail sector has a major impact on the profitability of supermarkets and other stores. Shrinkage is the result of theft by customers and staff, and is also caused by damage to goods as a result of poor ordering and handling practices. It can be equal to three per cent of sales at some independent supermarkets. The shrinkage problem tends to be worse in smaller stores with an average shrinkage factor of around five percent. If retailers want to improve profitability they first need to understand shrinkage.
A recent case study revealed a supermarket business turning over 10 million dollars per year while poor shrinkage control contributed to losses of 10 thousand dollars per week off its bottom line. It seems the smaller a supermarket is, the higher the shrinkage problem. As independent supermarkets increase their turnover, the shrinkage problem reduces to an average of around 1.75 percent. Better quality systems, and better management of the factors that drive shrinkage, contribute to the lower figure in larger supermarkets. Best practice operations are achieving shrinkage levels of less that 0.5 percent.
In reality, most supermarket operators do not know the true cost of shrinkage. Often this is the difference between success and failure of the business particularly when profit margins are so tight. An improvement in shrinkage management of just one per cent of sales can improve profitability by thirty-three percent. This type of saving can enable retailers to channel their resources into areas which will make a positive impact upon their cash flow.
Shrinkage can be defined as the loss in margin due to poor stock management procedures, reporting practices and internal controls. It is measured by comparing the gross margin from the Point of Sale (POS) Report to the financial accounts or internal stock management reports.
Some of the factors that contribute to shrinkage include theft by customers and staff in the supermarket, inconsistent pricing practices, excessive and uncontrolled discounting, absence or infrequent stock taking, as well as damage to goods as a result of poor handling and ordering practices. For managers and owners, shrinkage is a very attractive area to address as the benefits flow straight to the bottom line. We advocate benchmarking the store to identify the gravity of the issue.
Some of the best practice operators have achieved low shrinkage levels by implementing stock management systems, which are compatible to existing POS systems, allowing for automatic re-ordering, regular rolling stock-takes on high-risk items, and stock management procedures. These systems are supported by staff training and job descriptions and assigning responsibility to selected staff, thus delivering tangible benefits to the supermarket owner.
Just some of these benefits include improved cash flow from reduced stock levels, as a result of ordering of stock consistent with sales demand, reduced theft by making high risk items more visible to staff, and providing an early detection of pilferage through instant stock management reporting.
This type of improvement enables the retailer to then direct their resources into other areas, such as improving their supermarket layout and design. Shrinkage efficient supermarkets are most likely to survive and thrive in a competitive market. To improve profitability allows retailers access to funding for supermarket refurbishments, which is an essential part of competing for market share against national chains.
Financial benefits show as soon as a supermarket addresses its shrinkage problem. The best way to begin this process is for the retailer to talk to a professional adviser, or seek advice from industry specialists to develop an action plan to implement better operational practices.
Most retailers are time-poor and work long hours so the most effective way to develop a shrinkage plan is to identify your immediate goals, determine what resources are required (money, people, and time) and allocate tasks to responsible persons. One of the biggest shrinkage issues is that supermarket owners do not compare their management account gross profit (GP) percentage with what comes out from their POS system. This is a big mistake. We found most retailers were unable to produce accurate management accounts on a timely basis and most often conduct stock-takes once a year for tax purposes.
Shrinkage loss really hits home when retailers compare their GP in the financial accounts provided by their Accountant to POS reports. The key is to develop a stock management system that allows for timely and accurate management reporting. Our industry manager recently saw supermarket figures showing a nine percent difference between the POS GP percentage and accounting GP percentage.
For example, regular weekly stock-takes of high wastage and theft items (e.g. meat and fruit/vegetables and tobacco) and cyclic stock-takes on other items will allow for effective monitoring of GP variances.
Adopting a standardised chart of account and journals will improve management reporting of shrinkage as scanning systems ignore the issue. Some supermarket chains have front-end systems that record all customer returns and place the reason for the return and reports at the back office each day and for the week. Further ‘reduced to clear items’ are also all managed via the front end.
Some chains also ensure its cleaners to place floor waste into a separate bin. This separate bin is then checked to see what products the cleaners have swept up and if these products can be reclaimed. It is important that staff take the time to monitor stock, even if it does mean checking the dairy fridge more frequently. You can use technology to keep track of perishables within the supermarket.
For business owners, running a successful business is often challenging enough, but for many succeeding in business in tough times becomes even harder. What makes the difference between why businesses succeed and fail, particularly in a tough economic environment? Managing through difficult times is an uphill struggle for sure. However, there is good news: there are a few simple measures you can implement to improve the probability that your business will succeed even when the going gets tough.
Often the factors that lead to success in a business come down to some basic but fundamental principles of business management. Implementing these four tips could make the difference between why businesses succeed and fail when the economic environment takes a downward turn.
Contact your key customers and ask them how their business is faring. Meet regularly with high-value customers and offer your support. Understanding their situation means you will be better informed about what you can do to assist them and thus protect and potentially grow your business’ revenue. To grow your own revenue, invest in new innovative (low cost) sales strategies, increase (low cost) sales. Develop marketing strategies and show leadership by spending more time with your customers and sales team.
A reduction in revenue and/or profit means you will need to examine your cost structure to maintain your profitability. Be prepared to make some hard decisions. Low fixed and high variable cost is the ideal cost structure for doing business in tough times.
Non Trading Costs – try to reduce or eliminate non-trading costs. For example, examine wage productivity reports and restructure non-productive roles or encourage multi-skilling to maximise your employee return per hour. Staff reduction is not necessarily a given in tough times!
Variable Costs – examine all your expenses and investigate ways to transfer your business’s fixed costs to variable costs. Outsourcing is a variable cost strategy.
Collecting cash from your customers may become more difficult. Avoid business cash flow problems and consider amending your policies for debtor collection and stock management.
Debtors Collection: place tighter limits on the amount of credit you extend to your customers. If you have exposure to large customers, seek assurances and guarantees on how they will pay their account. Enter repayment schedules and offer ‘cash only’ terms until your customer accounts are in order. If the decision is between being flexible and survival there is really only one choice.
Stock Management: don’t over-invest in stock. Place strict controls over stock ordering and management. If customer sales slow down so should your ordering.
When looking at why businesses succeed and fail in difficult times, it is important you move quickly to minimise your business risk. The first step is to re-examine or develop a new Business Strategy or Plan to review and assess your current situation and plan the future. When preparing your Business Strategic Plan seek guidance from your accountant who is best positioned to provide this advice. Seeking advice early will mean the difference between your business thriving or simply surviving.
The team at MGI South Queensland have helped many businesses not only survive but thrive through difficult times. We have business coaches as well as experts in tax and risk management. Our outsourced CFO and financial management service gives you access to specialist support who can help you improve your financial procedures and improve your bottom line. Give us a call on 07 3002 4800 or book a consultation online today.
Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Readers of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. MGI accepts no responsibility for any loss suffered as a result of any party using or relying on this article.
Did you ever ask yourself this question during any stage of your practice career? Long gone are the days of starting a business out on a limb and hoping for the best, with the release of Royal Australian College of General Practitioners (RACGP) 5th Edition, a business plan is listed as one of the new standards required.
Indicators in the RACGP Standards 5th edition provides the following guidance on business planning:
Criterion C3.1A – Our practice plans and sets goals aimed at improving our services.
You must:
You could:
Criterion C3.1B – Our practice evaluates its progress towards achieving its goals.
You could:
Whether you are just starting out in a new practice or other stages of the practice life cycle, establishing a business plan is not merely for meeting the new RACGP Standards 5th edition requirement but is critical to achieve your business goals.
Whilst the initial phase of developing a business plan can be overwhelming, a well-developed business plan will set the roadmap of the business progression and guide/support the operational success of a practice.
We have listed some top tips for you to consider before you embark on the journey of developing a business plan.
With extensive experience in helping medical and dental practices to thrive, the team at MGI South Queensland can help you with your existing plan or the development of a business plan to concrete your roadmap to success.
Poor performing products or services can be a serious detriment to your business, diverting valuable resources and finances from more successful ventures and pulling down the overall profitability of your entire business. So knowing when to pull the plug on a poor performing product or service is important.
Some signs which may indicate that a product is a dog and should be considered for divesting include:
Our recent article Product lines…how much profit is enough? provides more guidance of how to assess whether a product is a dog, cash cow, star or wild cat.
Once you have identified a product as a dog it’s time to take action…but what exactly does that look like? Here are three common strategies for divesting a product.
If you have a product that has lower profitability and slowly declining market share, but is still generating a positive cash flow it could be appealing to look at harvesting the product rather than eliminating it completely. Harvesting involves gradually phasing out a product by taking action to reduce production costs or increase the unit price without increasing costs. The benefit of this strategy is that you get to enjoy the profits from the product line for longer but you are starting to divert resources and attention to more profitable business opportunities. Once the product you are harvesting starts to generate negative cash flows, you need to divest it completely.
Sometimes product lines become less profitable because they are too complicated. For example, a company may have a number of product variations which require limited production runs, additional inventory and a larger marketing budget. To combat this it may be possible to simplify the product line by reducing the number of variations with a view to “standardising” the product and thus reducing associated production costs. The challenge however is maintaining your market share with reduced product options.
If there isn’t an opportunity to harvest or simplify your product lines you have one further option left – total line divestment. This means completing getting rid of a product that is not performing well. This can have a large knock on affect for a business as it may result in staff changes, negative sales growth and the perception of failure. However at the end of the day it’s a hard decision that may need to be made to protect other more successful product lines in your business.
Total line divestment can also mean selling the part of your business that manufactures that particular product. If you are in a high growth market or if you have a profitable product, but that no longer aligns with your company vision or is facing future technical disruption/elimination, this may be an option to consider.
Knowing which divestment strategy is right for your business is dependent on having a sound understanding of the financial performance of your product portfolio and the market attractiveness. If you are not confident about this, the starting point is to undertake a detailed product portfolio analysis with an experienced accountant/business consultant.
There are two types of accounting methods accrual and cash accounting. Which type your company uses can have a major impact on the total revenue and expenses that appear in your financial reports. So what are the benefits and drawbacks of cash vs accrual accounting?
Typically cash-basis accounting is used by smaller businesses who prioritise simplicity. Using cash-basis accounting a company records expenses and income as the cash is actually paid out and received.
There are some advantages to using cash-basis accounting such as:
The major disadvantage is that it doesn’t capture money owned to you or that you owe to others so it can be difficult to get an accurate picture of how the business is performing financially. Take a business we met recently which delivered training funded by various different governments and received lump payments on a few occasions a year. Using cash-basis accounting it was extremely difficult to track the health of their business because they either had ample cash or had been incurring expenses but were yet to receive payment.
Accrual accounting, whilst a little more complicated, is much better suited to businesses larger than microbusinesses or businesses who don’t get paid straight away.
Using accrual accounting you record expenses and sales when they take place as opposed to when cash is paid or received. For example using Accrual accounting our training business would apportion lump payments throughout the year depending on when the actual training was carried out. Now income and expenses are matched and the business has a true picture of their financial position.
A word of warning though, if you are using accrual accounting you need to keep an eye on your cash flow because any issues won’t necessarily appear in your financial statements.
If you are already using an accountant or bookkeeper you simply need to ask them to start providing you with accrual accounting financial statements. Contact the team at MGI to make this happen.