Friday, November 18, 2016

Nothing But Net (Tradecraft)

We're approaching the time of year, as store owners, when we're asking two important questions: How do I get rid of all this excess, taxable inventory before January 1st? Followed by, "How should I spend all this windfall holiday money?" I want to combine the answer to those questions into the focus of this piece, net profits.

As small business owners, I think we're obsessed with gross. Gross is easy to see and track. You know your gross at the end of the day. It's a nut in need of cracking. It's a bragging right. Net? While gross is an ingredient going into the cake, net is the cake itself, the finished product. Net is what a business should strive for, but it's complicated enough to calculate that it's often a by product of your business. Whenever you measure something, you skew the results towards that measurement, and focusing on gross over net is a prime example.

I mention this now because you have an opportunity to clear a lot of inventory and decide how you will spend a lot of money following the holidays. The game trade is growing fast, spiraling upwards really, and there are those who will help you grow your net and those who will take advantage of your sales channel with low margin product.

As you you sell through inventory this season, you have the opportunity to dump low margin mistake product and re-focus that energy into more healthy areas. We dropped our 40% gross margin Yugioh a couple years ago, letting go of $100K of annual sales, but coming out at the end healthier with better cash flow and our highest net ever.

Same goes for low turning product lines, like many miniature games. You have to accept that you're going to upset some customers with this decision, but if it leaves you healthier, it's better for everyone. Our one turn Warmachine line got dropped this year, and although I constantly look at ways to make it work, it's better off left in the past (but I haven't given up).

Finally, anyone whose not giving you a strong margin (I think 45% should be the floor), needs to be carefully examined and measured against extremely high performance metrics. We recently had the most epically low tiny margins recently, when we were informed Gamelyn Games would be reducing margins to 25%. Don't know whose fault that is, don't much care. Just say no or mark it up.

Product is easy to focus on because you can tweak it on the fly. Other areas to increase your net:

  • Labor. Minimum wage increases for me means labor is increasing 11+% a year, which means almost 4% of growth goes just to maintain profitability (the average retail growth is less than 3%). Consider dropping unproductive shifts. Send people home early, if necessary. 
  • Debt. Retire as much debt as possible, especially high interest loans and those with higher payments. That's where most of my holiday windfall cash is going this year.  If you're serious about net, work on being debt free first.
  • Unnecessary Costs. So many people are afraid of credit in this industry and happily pay for COD tags. There are also those who don't have a primary distributor, spreading their orders across too many suppliers to where they're not obtaining higher tier discounts. Work on these things.
  • Unnecessary Expenses. Our payroll service has gotten expensive and we recently sold our van to save $99 a month on auto insurance plus an average of $100/month on other auto expenses. That was like retiring $10,000 of debt for me. Pound on your expenses. 
What is a good net profit? 5-9% is the general consensus. Would you rather have a $500,000 a year store at 9% or a $1,000,000 a year store at 4%? I'll take the low bragging rights $500K store every time. Focusing on net can mean turning your back on gross profits, something you'll need to explain to those who follow such things (like your spouse or investors).

Any other ideas on increasing net?

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