Friday, August 17, 2012

Three Buckets

I was reading an article about the restaurant business and how they could divide up their expenses into three buckets: food, labor and everything else. It got me wondering if retail had three buckets, or at least small retail like what we do. The advantage is a kind of shorthand. A huge part of retail is constantly pounding down expenses and reducing costs. We've got net profit margins in the single digits, so there's little room for excess.

Envisioning several buckets is a lot easier than the 125 consumable supplies we use daily or even my 18 expense categories in Quickbooks. It keeps you from focusing too much on the small stuff, like office supplies, before tackling the big stuff, like re-negotiating your lease or cutting idle staff. Three buckets; I like that.

The three buckets would be rent, labor and everything else. Cost of goods isn't included, which is fine with me, since I budget that separately. I've seen stores who don't budget it separately. You know the stores that get new product eventually? Yeah, they've got four buckets. They buy product, the lifeblood of their business, after they've filled those other three buckets, which sometimes means they don't get anything new at all. Product does not belong in a bucket. Imagine if you did your personal budgeting like that and put food in a bucket (Monty Python references aside).

The closest I've been to perfectly sized buckets was my first year in my first store. Labor, rent and everything else was about equal. The following year I added labor, which increased that bucket size.  In the new store, our rent is low and our labor cost is higher, due to re-negotiating our lease and adding staff as we've grown. So bigger stores are likely to see labor exceed rent. Also, "everything else" is a smaller bucket for similar scale reasons in the bigger store.

So the bucket analogy stands, but there are no one size fits all buckets. Helpful at all?

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