Expenses Percent To Salesby Udit Jain on June 13, 2007
There are three major components to a retail Profit and Loss (P&L) statement. These are sales, cost of goods and expenses. Hence there are three major ways to improve
profitability —grow sales, reduce cost of goods or reduce expenses. Reducing or containing expenses is vital.
The calculation is:
Total Non-Merchandise Expenses x 100 = Expenses %
Expenses generally run out between 20% and 45% of sales, depending on retail format. (Warehouse clubs are much lower). There are three important measures to track:
• Expense percent to sales verses plan or budget (see below).
• Expense percent to sales verses last year.
• Expense percent to sales verses competitors.
The first two bullets should be measured and monitored weekly. In the case of the first one, comparisons should be made between this week this year and the same week last year, and then year to date this year verses year to date last year.
For the second bullet, the comparison should be this week verses plan for this week and this year verses plan for this year.
The third bullet can only be reviewed half yearly or annually. Annual reports (or half yearly statements) should be obtained for public companies in the same retail segment and their expense percent to sales calculated. This can then be compared with your company’s figure to yield valuable information. When making the comparison, it is important to remember that higher service operations have a higher expense percent as service costs more, so the right companies should be selected for comparison. Generally speaking small and medium retailers mostly need to focus on assortment and service, since they don’t have the economies of scale to lead on price. This may result in a higher expense percent (but it may not—see below).
Having looked at total expenses, it is important to repeat the exercise for each line item in the P&L. For example, store labor is the biggest expense item for all retailers and ranges between 8% and 16% of sales. Four main categories of expenses—staff, space (or occupancy), marketing and distribution account for the lion’s share of all expenses. The items listed below should be calculated as a percent to sales with comparisons done as follows:
• This week verses this week last year.
• Year to date verses year to date last year.
• This week verses plan this week.
• This year verses plan this year.
In the US, it will generally not be possible to compare this level of detail with other retailers, as public companies do not publish their results at this level of detail. In some other countries, such as the UK, it is possible to compare staff percent to sales. Smaller retailers can sometimes economically sustain a higher staff cost percent to sales (and give better service than big chains) because they don’t carry the headquarters overhead that big chains carry.