Controllable Versus Uncontrollable Expenses
You Cannot "Cut" Your Way To Profitability
There are two main types of expenses in your retail store - those that are controllable and those that are uncontrollable. Knowing how to effectively manage each is the key to profitability in your retail store.
Controllable expenses are ones that can be adjusted or "influenced" by someone. These are expenses that can be increased or decreased based on a retailer's business decision. For example, turning the lights off at night can control the costs of electricity. If the closing store manager forgets, then the cost goes up. If he remembers, then the cost stays down. So, an action by this person can "control" this cost.
I was consulting with a home improvement retailer who put in air conditioning to make a more comfortable shopping environment. We wanted to make sure that we kept it cool, but not too cool. It was amazing how much difference 1 degree of temperature would make on the electric bill. We spent some time experimenting with different temperature settings and listening to customer feedback before settling on an official policy.
Uncontrollable expenses, on the other hand, are ones that cannot be influenced by someone during the normal rhythm of business. Rent is a great example of this one. You negotiate your rent expense at the beginning of the lease, but it is five years before you can change it. True, you can always go back and renegotiate your lease to get a more favorable rate, but this requires the action and approval of a lot of people and not just the store manager. So, it's not a simple business decision like controllable is.
There are many tools that you can employ in your store to help you control expenses. For example, using an open to buy process, controlling retail markdowns, setting your product pricing right for the market, controlling discounts for friends and family, a good store policy manual describing lighting and temperature settings and many more. Even something as simple as replacing older light bulbs with newer more efficient models can help control expenses.
When a retail store gets in trouble financially, often times the owners try and "cut" their way to profitability. In other words, they try to reduce expenses or control costs as a way of getting to a profit. The trouble with this is that the biggest expenses are usually not controllable (rent, salaries,) therefore the expenses that get cut (reduce employee hours or benefits) directly impact the customer experience creating a cycle of decline. Remember, it is not the P&L (profit and loss statement) at the end of the month that matters; it is the cash flow you have during the month.
Retail is a cash-flow management business. You have to become an expert at managing cash flow. This is done through balancing your approach to expenses. First, make sure you can cash flow your business. Even the (labeled) uncontrollable expenses can be manipulated like a controllable expense to meet cash flow. An example of this would be asking the landlord for an extra 14 days to pay rent or your vendors for an extra 30 days of dating on your purchases.
One of the best ways to control expenses is through incentives. If your employees have an incentive to control expenses, then they will help you. If not, then you are on your own. Remember the old adage, what gets rewarded gets repeated. Make expense control part of every retail manager's compensation plan. Give incentives to the other employees for ideas to reduce costs. The front line employees often see things the store manager does not and can provide an idea that can save thousands.
The key to incentives is the size of the incentive. A $10 gift card to Starbucks is not enough to get your employees motivated. Make the reward relevant to the savings as well. In other words, if the idea saves you $5k per year, then give the employee $500. Never give the same incentive for every idea. Employees will catch on and this is not an incentive anymore. Incentives are used to drive behavior. If I save you $5k and you give me $50, that is really an insult. After all, you can afford it!