Customers keep coming through the doors, and you’re continually reordering pointe shoes and leotards. Does that mean your business is profitable? That you’re growing? That you don’t face financial problems ahead? You can answer these questions only if you know your numbers—specifically, a set of metrics called your key performance indicators, or KPIs.
These KPIs can be different depending on your type of business. For local dance retailers, here are eight numbers to watch so you know whether your store is moving in the right direction—and how to calculate them.
Numbers That Tell You About Your Customers’ Behavior
1. It may not seem like a technical KPI, but you should be tracking the number of customers you get each month (keeping seasonal sales in mind). The amount of foot traffic you get, and how many of these visitors are or become customers, can tell you if you’re on the right track (when the numbers are growing) or whether changes need to be made (if the numbers are stagnant or diminishing).
2. Another KPI is the customer-conversion percentage, which is the number of store visitors who actually make purchases. You figure it out simply by dividing the number of transactions by customer traffic; then multiply by 100 to get a percentage. Hopefully you see a percentage between 15 and 25 percent (meaning that if you’re on the high end, one visitor in four is buying items from you).
How Healthy Sales Are
3. Another basic KPI is simply the amount of sales you’re doing. Mitch Summer, owner of The Leotard, in Portland, OR, which has been in business since 1975, doesn’t necessarily count customers. He looks at sales each day and compares them with the amount sold on the same day the year before. There are daily sales goals, which are set based on previous sales, and employees check on whether these goals are being met. These sales goals tie into inventory, another KPI discussed next.
How Fast Your Inventory Is Turning Over
4. Look at your sell-through rate as a KPI. If you have sold everything, you have a 100 percent sell-through rate. But it’s likely your rate is lower. You’re doing OK if you have an 80 percent rate (before you begin to mark down stock). Monitor this rate to know when to reorder inventory so your shelves will be well-stocked. And be sure to modify your reorders based on seasonal needs. Jane Hallick, owner of Jane’s Dance Boutique, Inc., in Stuart, FL, keeps a close eye on inventory by putting stickers on pointe shoes when they come in so that she can determine how long they’ve been on the shelf. “I will not sell pointe shoes that are past two years old,” she says.
5. As a complement to the sell-through rate, you need to know how many weeks you can expect your existing inventory to last. Usually you want to have a supply of 10 to 12 weeks. Look at your total inventory and divide this by your average weekly sales (in units).
Your Cash and Profitability
6. Cash flow follows the money coming in and going out of your business. It usually changes daily. You need to determine your company’s operating cash flow ratio so you’re sure to have the funds on hand to pay your bills when they’re due. Staying on top of cash flow helps you avoid the need to dip into a credit line or otherwise go into debt. It also helps you maintain a good credit rating. Don’t assume that because your sales are solid, your cash flow is too, as delayed payments for sales can hurt your cash flow. Hallick checks her cash flow daily through her accounting system.
The operating cash flow ratio is figured by dividing your cash flow from operations (what’s on your cash flow statement) by your current liabilities (what you owe as listed on your balance sheet). If the ratio is less than 1, it shows the company has less cash on hand than needed to pay off short-term obligations.
7. Another basic KPI is your gross margin, or sales profit before costs. It’s the difference between your revenue and what it costs you to make the sale (before taking certain costs into account). Basically, it’s the selling price of an item minus the cost of goods sold. This margin is vital to your business because you need a comfortable one to cover your operating costs. You probably need a gross margin of 30 to 50 percent (after factoring in discounts). It’s axiomatic that the fewer items you sell, the greater your gross margin needs to be.
8. Finally, a very useful KPI for retailers is gross margin return on investment, commonly called GMROI. It helps you determine whether your sales are generating the profits you expect from the inventory you’ve invested in. You can do this on a total store basis, and it can also be very useful for analyzing what produces the most return on your investment: By figuring GMROI for categories of inventory, product lines, individual store locations or even vendors, you can compare how each is performing. Many POS systems make this easy to do.
Figure your GMROI using the following formula for a defined reporting period (usually annual): GMROI = (total sales – cost of goods sold) ÷ average inventory at cost. If you are getting $2 back for every $1 invested in inventory, you’re doing well. If the number is lower, it should tell you the items aren’t selling fast enough or maybe your pricing is too low to generate a good profit.
The Bottom Line
Besides these eight numbers, other KPIs may prove useful in determining how your store is doing. For instance, for your brick-and-mortar store, you may want to track your sales floor shrinkage rate, while for online sales you will want to know about your shopping-cart abandonment rate. The best approach is to tailor your KPIs to the specific goals for your company, so you can measure your progress toward achieving them. Work with your CPA or business advisor to help monitor your KPIs and create strategies for improving them.
Barbara Weltman is an attorney and trusted professional advocate for small businesses and entrepreneurs. She is the publisher of Idea of the Day and monthly e-newsletter “Big Ideas for Small Business,” and a best-selling author.