Six places to check, in order, with the question to ask at each.
Start with the money, not the activity. A busy shop, a full warehouse and a growing email list can all sit on top of a business that is losing margin somewhere nobody is looking. Here are six places to look, in the order I would check them, with the question to ask at each.
Is the margin in each category higher or lower than a year ago, and do you know why? A fall you can explain, such as a deliberate price cut, is a decision. A fall you can't explain is a leak.
For each line, how many weeks of sales are on hand? Lines holding more than a season's cover tie up cash and tend to end up in markdown. Lines with almost none are where you lose sales. The questions to ask are on the stock and planning page.
Measure a promotion by the margin it earned compared with what you would have earned anyway, after the discount and the cost of running it. Sales lifted is not the test. The marketing page lists the questions.
What share of your customers buy once and never return, and what is a repeat customer worth compared with a first-time one? If most of your spend goes on finding new customers, check whether the ones you already have are being looked after.
Add up freight, fulfilment and returns. Online, include any delivery you don't charge for. These costs sit in several places in the accounts, which is why they are often never seen as one number.
List every supplier or service cost that has not changed in two years or more, and ask for quotes. A print tender for promotional mailers that I ran cut costs by 18% and shortened lead times.
Put a dollar figure against each leak and a rough estimate of the effort to fix it. Start with the largest figure that is cheap to fix. Where you can't put a figure on a leak, you have found a gap in your measurement, and closing it is the first job.
I know what the industry benchmarks are, so I know what to go looking for and what to expect.
One example. At Briscoe Group the leak was the cost of getting online orders out the door. Fulfilment wages were 8.4% of online sales. Four years later they were 7.7%, on much higher sales, and two-day dispatch held at 87% while volume grew 13%. Over the same four years the online profit margin doubled, from 7.2% to 14.0%.
A second one. At EziBuy the leak was cash, tied up in stock and in supplier terms. Working with the CFO, I changed the terms and managed inventory more closely. That took more than $10m out of working capital in about six months.
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