Do you know “The Rule of Twenty”?
Many retailers go through their daily ritual with no real comprehension of whether they’re profitable or not. After all, it’s a very difficult job to run a retail store today. Just keeping up with all of the new tax rules is a full time job in itself. Some make important decisions on expenses, such as software, trucks and new expansions, without ever truly evaluating how it may help or hurt them.
There is a quick and easy way to look at finances in a furniture business: Does it meet “The Rule of Twenty”?
Profitable stores usually net somewhere around 5% of sales, very few will be higher and in today’s business climate, most will be lower. Broken down, 5% is 1/20 of 100%.
SPENDING: If you “spend” $1000 on something for your store (needed or not), you’ll have to sell twenty times that number, or $20,000 in product, to generate enough capital to justify the purchase of the item. In other words, a $35 box of business cards actually costs about $700 in sales. It’s a very quick and simple way to look at expenses.
ADVERTISING: If you spend $5000 on an ad, how much business did it create? To get to zero, before any profit can be realized, you would have to do about twenty times the cost of the ad, or about $100,000 in sales. Obviously, building your brand has long-term value and it’s nearly impossible to gauge the value of an ad over a long period of time, however, short term, this is a good rule of thumb.
MARGIN EROSION: A consumer is pleading for a deal, do you give him the discount to close the deal? At what point does it “cost you” money to give up the margin? You can apply the Rule of Twenty here as well. For every dollar you discount an item (below your break even), you have to sell twenty more to get back to zero.
BORROWING MONEY: Everyone does it from time to time. You go through all of your reserves, maybe even mortgage your home or use personal credit cards. After all, it seems like business will recover, right? Why not borrow $300,000 to pay off the past due bills and shore up the business. Using The Rule of Twenty, if you borrow the 300,000, you will have to create 6 million dollars in “new” revenue to pay it off. Not only is this shocking to most, but it also fails to consider that the business was already losing money. There is very little chance that the borrowed money will make the retailer profitable again, it’s usually used to put out smoldering fires. Don’t forget the interest on the loan as well, plus the time that you’ll spend managing and servicing the loan.
For retailers that are too busy, wearing five different hats in their business, this is a quick and easy evaluation tool that we hope helps you!
A PFP consultation is free, confidential, easy to schedule and there is no obligation. Planned Furniture Promotions, call us today, we can help.