Identifying Expense Cuts

uspscutsIt isn’t unusual for retail operators to take a close look at store performance in May and make adjustments.  If you have been challenged to cut expenses, here are some ways to approach that unenviable task.

Expenses should be evaluated against the company’s strategic goals.  For example, if the plan is to offer outstanding customer service that is equivalent or slightly higher priced than the market, it would be advisable to cut advertising expenses before cutting store employee hours.  The advertising cannot put you in the best possible light, in terms of price, and cutting hours will likely lead to a reduction in careful customer service.  Each expense needs to be justified by upholding the company’s strategic goals when there are shortfalls and cuts need to be made.

The primary places to search for expense cuts are the non-primary marketing and operating expenses that do not directly support either the bullseye in the center of the target market or the operational plan.  Usually, these involve the owner’s pet projects and are difficult to address.  However, “nice to have” donations to local sports teams or community events are not critical if sports teams and their members are not the target market.  There is usually some argument about getting the store’s name in the community, but each event or donation must be looked at as a marketing investment, not a charitable contribution when a retailer has to make budget cuts.   Look at marketing and advertising budgets and critically review the payback for your investments.

Next evaluate the inventory and operational costs within the store.  Use measurements that tie investments to sales.  Look at the Gross Margin Return on Inventory (GMROI) and Gross Margin Return on Advertising (GMROA) when making decisions.  Both of these concepts consider the profits generated per year in a dollar invested in inventory or advertising.  Changes in sales rates, pricing and costs can change the measurement.  Many point of sale systems have a standard report on GMROI for customers who are using their system correctly.

Operating costs (garbage removal, electricity, taxes) cannot be negotiated, but there are may choices about operating standards that can be adjusted to impact those costs.  Different lighting fixtures, interior thermostat settings, frequency of cleaning services and others can be changed if cost cutting is dire.

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