Shop Talk: Practical answers for tough business questions
Question: I am creating a budget for 2013 (our first, I am hesitant to admit) and I want ask to about planning for profit on the bottom line. How much do you plan for? I want to be realistic, but in the past we have been so happy just to break even that I have never considered planning for profit. I remember hearing you speak a few years ago at INATS (International New Age Trade Show) in Denver, and you said if we don’t plan for a profit, it is less likely we will have one. Can you give me some guidelines?
Answer: Kudos to you for creating a budget and planning for a profit! It’s a great idea to have a financial plan you can refer to throughout the year. It helps with making purchasing decisions and seeing if your business is on your envisioned trajectory, or whether you need to tweak some expenses. Knowing this in advance can save you from difficult challenges!
You didn’t say how long you have been in business or the size of your annual sales, so I will answer your questions generally and then share my personal philosophy.
According to Forbes magazine, specialty retailers were among the most profitable sectors of the retail economy in 2009, with a 3.2 percent average profit margin even in the midst of a recession; 2012 figures, although not yet available as we go to print, are expected to be close to 6 percent. Data from Sageworks, a private-sector financial trends analyst, echo Forbes’ data: the 2012 average net profit margin of privately held U.S. companies with under $1 million in annual sales was 9.1 percent, up from 3 percent in 2010, and the net profit of retailers alone had nearly doubled. So, the good news is things are definitely looking up, especially for small business in general and for specialty retailers in particular.
In our store, prior to 2007, we used to plan for 8 percent profit. In 2008, 2009, and 2010, we were thrilled to show any profit at all, even if it was very small (about 1 percent per year). In 2011, we planned for 3 percent; in 2012 we were on target for 5 percent; and now in 2013, we have increased our profit goal to 7 percent.
Remember, making a profit is healthy for your business. It helps you put money aside to get through the economic fluctuations and unforeseen challenges that may arise. It also helps you replace equipment, upgrade computer systems, increase employee benefits to retain great people, and breathe a little, instead of always scrambling to cover that unexpected expense.
First published in Vol. 27 No. 1 of Retailing Insight. © 2013 Continuity Publishing Inc. All rights reserved.