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How to turn a failing business around: five challenges of firearms retailing.

HOW TO TURN A FAILING BUSINESS AROUND

The Five Challenges of Firearms

Retailing

Making a go of a firearms store can be like threading your way through an obstacle course - while you're carefully skirting the quicksand, you might find yourself falling off a cliff! In this article, we're going to look at five management challenges. A weakness in meeting any one of them means trouble. It isn't easy to coordinate and control all five management areas at once, but this is what you must do if your goal is to run a successful business in today's economy.

CHALLENGE #1

"Profits cure a lot of ills, but cash flow pays the banker's bills." A very smart manager thought that one up. Cash management is your first challenge, because poor cash management is the number one killer of retail businesses today. Producing profits may be the sign of a good business, but profits matter very little if a business runs out of cash. What keeps a firearms store running is enough cash coming in so that purchases can be made and obligations met.

Mismanaged cash can quickly lead to the following problems: - Weakened relationships with suppliers

when payments become irregular. - Loss of cash and prepayment discounts. - Loss of revenue from investment.

(Excess cash is not put to work because

it is not known how much cash is

needed on hand.) - Weakened relationships with lenders.

Bankers are hesitant to deal with managers who don't indicate a working knowledge, on paper, of their cash flow. These managers generally haven't prepared and used a cash flow budget. This is a plan that forecasts cash balances, cash receipts, and cash disbursements. It is simple, but time consuming. It helps you anticipate how much money you will need to borrow, and when. A cash flow budget is the best tool you have for keeping a tight rein on the flow of funds into and out of your store. Unfortunately, many managers don't consider this budget a top priority. The consequence can be, and too often is, business failure.

CHALLENGE #2

What is as vital to the health of your business as Cash Management? You guessed it - Inventory Management. How carefully are you controlling inventory turnover (the rate at which inventory is sold and replaced)? Every time inventory turns over, cash is produced, which is why the frequency of these turns is of such great importance.

If you overestimate sales and wind up with too much inventory on hand, the following problems will result: - You will more likely make selling

price concessions. - Too much inventory will interfere with

keeping fresh merchandise on the

shelves. - Expenses such as storage costs, insurance

premiums, and interest incurred

on a larger-than-necessary short-term

loan will greatly increase. - Pilferage, damage, and obsolescence

will more likely occur.

Although it is more common to overstock a store with inventory than to understock, the dangers of understocking can be equally great. If you hold too little inventory, sales are lost. As sales decrease, the dollars you need to stock your store properly are not available. This destructive cycle ends not only with dissatisfied customers but with possible business failure.

If you don't regularly use an inventory plan, you are not "forced" to plan sales and track inventory turnover. Without this plan, your store's future inventory needs cannot be accurately predicted. Rarely will you have an optimum level of inventory on the shelves. Inventory planning, like cash flow planning, takes time and patience. But inadequate inventory planning can kill a firearms business fast.

CHALLENGE #3

It isn't enough to be aware of cash flow and inventory turnover. The third challenge is Gross Margin Management. As a manager, you must not ignore the message of your gross margin. You should ask not, "How are sales?" but rather the more important question of, "How are my sales dollars contributing to operating profit?" Is every shelf of handguns or aisle of hunting accessories earning the space you set aside for it? If you focus on sales instead of on each product's contribution to operating profit, you may run into deficits without understanding why. Increased sales do not always increase the bottom line.

Since it's your gross margin that ultimately covers your expenses and provides for profit, it's important to analyze and compare gross margins as percentages of sales. Have you calculated the Gross Margin Percent for each item that you stock? (Gross Margin divided by Sales equals Gross Margin Percent.) Are you getting the best possible margin on each line? It's a good idea to use percentages in your analysis, because inflation may distort sales or cost figures. What appears to be growth in sales may only be an inflation-affected figure reflecting price increases, not gross margin growth.

Since it must cover your expenses and profit, your gross margin is directly related to the size of your net profit margin. The net profit margin for firearms stores is slim. Now more than ever, you need to optimize your gross margin by stocking the right product mix and by properly directing marketing efforts. You can also use a tool called CMROI - Gross Margin Return On (Inventory) Investment - to compare departments, lines or products.

CHALLENGE #4

Productivity. Making each dollar count. Getting the greatest return on each dollar spent. Yes, I'm talking about Expense Management, the fourth challenge on the road to a successful firearms business. Expense management may sound like an old idea, but today it's more important than ever. Ignore it at your store's risk!

In the firearms retailing business, your major expenses may be fixed costs (premises, staff salaries). These costs must be covered whether sales are strong or weak. But there are areas in your business where you can cut costs. Be creative! You'll find that the employees involved in the day-to-day operation of your business are often the best source of ideas for continually controlling and reducing expenses.

Budgeting, of course, will be your main tool for keeping expenses pared down. Your cash flow plan contributes to controlling expenses, but a pro forma (projected) income statement is needed as well. Expenses must be forecasted and budget guidelines adhered to.

CHALLENGE #5

"Yesterday we were flying along with a booming business, and today we're on the brink of bankruptcy" ...is a story I have often heard. Words like these are only spoken by managers who fail to understand the importance of the fifth challenge: Growth Management.

If you're considering expansion into new lines, new departments, or new stores, you mustn't ignore the message of your balance sheet. Expansion is successful only when your balance sheet is strong. What is your Debt-to-Worth ratio? How do your Quick and Current ratios look?

Growth is an affordable option when it is the result of careful financial planning. Growth of any kind means an increase in assets, which are purchased with excess profits or an increase in debt. The anticipated profit increase can only cover a certain increase in trade payables and debt obligations; the balance must come from more debt.

THE PRICE OF SUCCESS

Yes, you can steer your firearms store safely through the hazardous terrain of today's economy. But not without a lot of planning, foresight, and plain hard work.

Cash flow management, inventory management, gross margin management, expense management, and growth management - take a long close look at how much time you're investing in these five critical areas. Have you taken the challenge of each, and gone on to coordinate your planning so that all the pieces fit together into one sound management plan? It isn't easy but it can be done. And doing it is the way to turn these five potential pitfalls into the five steps to success.

SUCCESS CHECKLIST

HERE'S A QUICK checklist to help you determine if you're using all the tools available to contribute to the success of your firearms business. If you can't check one of the following boxes, it probably points to a management area that needs some work!

CASH FLOW PLAN

Forecasts cash balances, cash receipts and case disbursements. Enables you to schedule your borrowing wisely.

INVENTORY PLAN

Plans future inventory sales and purchases. Enables you to accurately predict inventory needs and keep an optimum level of inventory on hand at all times.

GROSS MARGIN ANALYSIS

Gross Margin divided by Sales equals Gross Margin Percent. Calculating Gross Margin percentages enables you to determine each product's contribution to operating profit.

PRO FORMA INCOME STATEMENT

Forecasts expenses. Together with your Cash Flow Plan, enables you to design realistic budget guidelines.

RATIO ANALYSIS

Compares various figures from your financial statements as percentages. Enables you to spot trends - both negative and positive. Enables you to determine the relative strength of your firearms store.

If you draw a blank in any one of these critical areas, it's time to seek help. You may want to look into a self-study course in basic financial management, take an evening class, or hire a consultant. Whatever steps you take, be sure to assemble these basic tools - they're the ones you need to keep your business on track!

About the author: Richard F. Outcalt, CMC, is a retail financial consultant based in Seattle, Washington. Dick is dedicated to helping retailers more effectively manage their financial and human resources.
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Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Author:Outcalt, Richard F.
Publication:Shooting Industry
Date:Dec 1, 1989
Words:1537
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