by David Brown
Now that you have established the amount of Gross Profit you need (see GAP Analysis below) we need to calculate the difference between your current annual Gross Profit and your required annual Gross Profit … this difference being ‘The Gross Profit Gap’.
In the example shown, the store requires a total of $563,000 of Gross Profit to satisfy all of the owner’s expectations. (Refer to part 1 of this article for a full explanation and requirements) See below for an explanation of the ‘Gross Profit Gap’.
In this example, the store has annual sales of $960,000 and at a 50% gross margin is producing annual gross profit of $480,000 … $83,000 less than the $563,000 needed according to the new GAP analysis.
Note: We will talk about to ‘Bridge the Gap’ in a later issue.
- Using the example template above, calculate the gap between your current and required Gross Profit.
- Decide what gross margin you believe you will achieve this year. Note: If it is currently less than 55% you have plenty of room for improvement!
Congratulations on successfully completing Step 2.
The next step is to calculate your Sales ‘GAP’
Begin with the end in mind – Step 3
The next step in the process is to convert your gross profit target into a Sales target and then contrast this with your current sales … this difference being ‘The Sales Gap’.
Based on the need to increase gross profit by $83,000, we have several strategies available to us.
One such strategy is to increase gross margin so in this example I have worked on the assumption that margin will increase from 50% to 53%. Therefore, to increase gross profit by $83,000 at a 53% margin we only need to increase sales by $102,265.
So now we have a meaningful sales budget that will genuinely meet the owner’s needs and we can start to develop specific strategies to achieve it.
Important: If you intend paying commissions or bonuses based on sales then you need to allow for these in your original GAP analysis ie if you pay bonuses for achieving your new sales target of $1,062,265 and those bonuses have not been budgeted for, then in reality you are eating into the profits you need for retirement, return on investment etc.
We will discuss how to introduce highly effective ‘Profit Sharing’ incentives based on the GAP analysis in a future issue.
- Using the example template above, calculate the gap between your current and required sales.
- In preparation for dealing with ‘How to bridge the $102,265 Sales GAP’, please establish your sales KPI’s (key performance indictors). There are only two of them namely Quantity of Sales (the number of items you sold last year) and Average Retail Value (the average value of each item sold last year). Note: A typical US store is doing 5,000 sales a year at an average value of $200, i.e. 5,000 x $200 = $1m in gross sales. Once you know what your KPI’s are we will discuss various strategies for increasing them and thereby ‘bridge’ the $102,265 GAP.
Only now can you answer the question, “how much inventory do I need to achieve my sales budget?”
This concludes our 2-part series on knowing what you need to have in place, to retire successfully and with ease. Please reach out if you would like more personalized advice on your retirement plans.