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Three Steps Toward Profitability

There are many business models from which we can borrow ideas. This document describes one that I particularly like because it is simple, easy, and produces results quickly. There are three steps in this model:

1. Gross Profit
2. Return-on-Investment
3. Sales per 1000 Gallons

Gross Profit

These are the traditional sales categories and their GP%ages [Gross Profit Percentages]:





1. Gasoline

6%-30%

8%-20% average

2. Beer

20%-30%

24% average

3. Cigarettes

30%-20%

30% typical

4. Vending

30%-40%

depends mostly on the neighborhood

5. Deli

50% and higher

Beer, Cigarettes, and Vending are collectively called “Inside Sales.” We think of Deli as a separate category. Stores that have mechanics have the following categories collectively called “Bay Sales”:


6. Tires

30%

7. Batteries

30%

8. Parts

30%-40%

9. Labor

some work may be formed out.

Some dealers call Tires, Batteries, and Parts “TBA” collectively for “Tires, Batteries, and Accessories.” I do not find this term useful.

Rule #1: Make sure that what you sell in these categories is making these GP%ages.


Understand that the GP%age is not the same as the Mark-Up Percentages. For example, if you buy an item for one dollar and mark it up 50%, then you sell it for $1.50. When you sell it for $1.50, then you make a Gross Profit of 50 cents. 50 cents is one-third of $1.50 which is a Gross Profit of 33%. The Mark-Up Percentage is 50% but the GP%age is 33%. Gross Wages Ratio A closely related benchmark to the GP%age is the “Gross Wages Ratio.” This is the ratio of Gross Wages over Gross Profit. This ratio tells you how much of the Gross Profit the cost of employees eats up. As one of my more successful clients says, “It is better to have too few than too many employees.” He is right that this is one of the most controllable expenses. Traditional wisdom is that the Gross Wages Ratio should be from 27% to 32%. Strive for less. Before leaving this first step toward profitability, I want to make these following points: 1. GP%age is the most important of the three steps. It is the one where the manager can make the most difference. 2. You do not ever “finish” this step. You can go on to the next two but you never leave this step. Return-on-Investment ROI [Return-on-Investment] is the percentage rate of money you get on investments. If you put $100 in the bank and at the end of the year you have $1.15, then your ROI is 30%. If you buy a business for $100,000 and your net profit at the end of the year is $20,000, then your ROI is 20%. Here is an illustration of why ROI is so important. Let’s say that your Beer sales are $2,000 and your cost is $1,500. Then your gross profit is $500, or 30%, which is good. But let’s say that your Beer inventory is $15,000. On an investment of $15,000 you only made a profit of $500. That is only 3%. This problem can also be illustrated in the following conversation: Manager: The accountant’s report shows that I made 30% on Beer sales this month. Owner: Yeah, but you’ve got $15,000 tied up in inventory. You are only selling $1,500 of that each month. That means you have about $12,000 tied up in inventory where it’s not doing anything. According to traditional wisdom, which I accept, you should have from 30 to 60 days’ inventory.

Rule #2: Watch your inventory.


A word of caution is appropriate here. Watch that the “specials” do not force you to overstock. I could have said you should only have 30 days’ inventory in stock. By saying instead 60 days, I allow you to buy “specials” to make extra profit. My feeling is that if you stock up to 90 days’ inventory on specials, then you have defeated the advantage of the profit. Sales per 1000 Gallons

Two dealers are talking about their profitability. One dealer says he made a 30% Gross Profit Margin on Beer and had his Beer inventory well trimmed without missing any sales. The older, wiser dealer asks what were his total Beer sales? “$2,000,” he answered. How many gallons of gasoline? “100,000,” he answered. The older, wiser dealer exclaims, “$20 per thousand gallons? Damn, son, you should be selling three times that amount!” It is no simple matter to say how much the Sales per 1000 Gallons should be per category, but there is a simple answer: “More.” Still, I am going to venture a chart of minimum acceptable Sales per 1000 Gallons.

Cigarettes

$ 75

Beer

$ 60

Vending

$150

Deli

$150

These are minimums. There are many stores that achieve three and four times these amounts.

Rule #3: Keep your Sales per 1000 Gallons up.

Characteristics of a practicing manager 1. By “practicing manager” I mean one who is practicing these Three Steps to Profitability.
2. The manager must spend “thinking and studying” time. For that he needs to be able to get the most out of employees by delegating without overstaffing.
3. It goes without saying that a good manager is willing to put in the hours. It is important to enjoy hobbies, family, and friends outside work. In fact when a manager does not do so, he often looses his fresh perspective. But he must be ready and willing to put in the emergency extra hours. Once the situation is secure, he may compensate with time off or doing favorite projects.
4. This, in my opinion, is the most important: he must develop a sense of balance. There are many opposing forces in running a business.
· Have what your customers ask for, but don’t overstock.
· Keep the number of employees down, but don’t let overtime run up.
· Don’t run out of merchandise, but keep inventory down.
· And the contradictions go on and on and on. Handling these things and finding the forever-changing middle ground is why you are the manager. You are expected to “manage.”
5. A practicing manager should adhere to the Three Steps to Profitability, but the very successful managers often break the rules. Knowing when is the trick.

Copyright © - 2002 Dutch Hawkins Mandeville, LA USA - All Rights Reserved

28 January 2002