Crafting Your Path to Profit

to 3 Keys

Employee Success

Consider values, roles and accountability when hiring and keeping staff.

FFor most retail shops, having employees is a fact of business. Trying to cover the sales floor, complete the office work required to run a business and maintain any semblance of a “normal” life is nearly impossible for a single individual. Hiring the right employees, managing their day-today activities and maintaining the relationship over time can be both time-consuming and challenging.

tunately, many small-business owners have little or no experience hiring, training and maximizing their employees, plus few have had excellent experiences being an employee. While these considerations may make the chance for successful staffing seem small, it doesn’t have to be that way. Thoughtful evaluation of values combined with intentional processes clarifying roles and establishing accountability can transform employees from a dreaded necessity to a treasured addition.

Do Your Values Line Up?

What are the values of you and the business? This may seem like a strange question, but often when a business faces a challenging people situation, it ultimately is around a conflict of values.

In a small, privately owned, owner-managed business, it is not uncommon for the business values and the owner’s values to be aligned. Even so, until they are specifically identified and named, it is easy to overlook them.

Naming and descr ibing values is not a time for wishful thinking, but instead a time for specific, critical, reality-based discernment. What are your nonnegotiables? What are the value-based words that friends, family, customers and employees would all agree consistently describe you and your behaviors?

“When hiring employees, it is important to start with values even though our tendency and often the standard practice is to focus on skills.”

—Gwen Bortner

For example, if you believe promptness is an important value, do your actions demonstrate that? If you are always arriving at the last minute or offering apologies and excuses for not being on time, then you may aspire to promptness, but it isn’t a personal value. If on the other hand, you arriving late is actually cause for concern for others, then promptness probably is a value.

Another way to discern values is to look at the words you would use to describe your very best employee(s). As you look as those words, which also resonate with your own values?

When values align it is much easier to work toward broader goals. When they don’t, often an inordinate amount of time is spent on relationship issues instead of the work at hand. An individual’s values can rarely, if ever, be adjusted—particularly within a work environment.

When hir ing employees, it is important to start with values even though our tendency and often the standard practice is to focus on skills. In many cases, the skills can be trained. But trying to adjust values is a losing proposition.

Is the Role Clearly Defined?

Assuming you find or have an employee that is good fit in the value category, the next area to focus on is clarity of the role(s) within the business. Roles are more than just job descriptions; they are clearly defined tasks, responsibilities and accountability.

It can be helpful to list all the roles within the business, keeping in mind that most people within a small business will be responsible for multiple roles on most days. The key is to break down activities to the smallest group of tasks that logically go together.

For example, one role might be to ensure the bathroom is clean and appropriately stocked. Another could be to ensure that product shelves are neat and organized with product returned to its proper place. A third role could be to provide sales support on the sales floor. And a fourth could be to run the cash register.

With two people working the floor it might be tempting to give them both all four roles, but that might result in the less desirable roles (like dealing with the bathroom and neatening the shelves) almost never getting done. With both people being responsible, it is easy to assume the other person is handling it.

Although it is possible and likely that you need multiple people handling sales, the other roles often require only a single

person on any given day. Clearly identifying who is responsible for which roles greatly reduces the opportunities for conflict.

Who Is Accountable for Results?

The other benefit of well-defined roles is clearly establishing accountability. Creating accountability is one secret to effective employee management. When employees are accountable to specific, predetermined results, it is easier to get buy-in and less time is spent micromanaging details.

When something is done well, it is clear who deserves recognition with well-defined roles. When an outcome for a given role does not meet expectations, it is also easy to identify who needs additional training or correction.

Creating true accountability also allows the owner and/or manager to fully delegate tasks and responsibilities. As employees demonstrate appropriate accountability, they can be encouraged to create their own improvements to the processes based on their experience and understanding of the ultimate goal. The more tasks that are fully delegated, the more time that is freed up for addressing higher level issues.

Unfor tunately, fully incorporating values, roles and accountability will not eliminate all employee issues. Employees are people, and the complexity of human interactions means issues will arise. But experience has shown that when values, roles and accountability are utilized consistently, problems are greatly reduced and handled much more effectively.

The tr ick is to not wait until a problem arises. If you only have one or two part-time employees or “everyone gets along great,” it is tempting to think investing in defining values, clarifying roles and establishing accountability is not worth the effort. But that couldn’t be further from the truth. Implementing these processes is so much easier when things are running smoothly. So don’t put it off.

The time you invest now in creating a highly effective team will pay off for the entire duration of the business. An investment in your people will never go to waste.

Gwen Bortner is a business consultant focused on the craft enthusiast industry. For more information on how she helps her clients build profitable businesses and to get more down-to-earth business advice visit gwenbortner.com.

Manage Your CA$H FLOW for Long-Term Success

Understand how this step in managing your business is critical.

BY Jacob Curtis, CPA

CCash

flow problems

are a significant factor in the demise of new businesses.

According to the Bureau of Labor Statistics, 20% of businesses fail in their first year. That number reaches 30% by the second year, and 50% will have failed by the fifth year and 70% by the 10th year.

The best way to overcome cash flow problems is to have a cash management system that is simple to implement, easy to understand and has a proven record. The Profit First system meets those requirements. While Mike Michalowicz wrote the book Profit First, he did not invent its core principles.

The Foundation

Cash is the foundation of every business. Business owners need cash to buy product, hire employees and grow the business. But increasing sales is not necessarily the solution to increasing the cash.

Cash flow problems can occur when one of two things happen: sales slow or sales speed up.

When a business is operating check to check and sales slow, the problem is obvious. You won’t have enough cash to cover your expenses.

When sales speed up, costs escalate to fulfill those sales needs.

A booming quarter of sales can trick you into believing your business is on a permanent upward swing. You might start spending like this is the new normal, but drought periods can come quickly and unexpectedly, causing a significant gap in cash flow. Your greater expenses may be locked in, and you may start borrowing money on a high-interest credit card and hoping for things to turn around.

Finding a truly profitable business is rare, even among multimillion-dollar companies. Most are just covering their monthly expenses or accumulating debt. Without an understanding of profitability, every business, no matter how big, is a house of cards. One stormy wind, and it all comes tumbling down.

Profit is not an event. Profit is not something that happens at the close of the year or at the end of a five-year plan

or someday. Profit must happen all the time. It must be baked into the business every day. Profit should be a habit.

Four Core Principles

In 2012, Koert Van Ittersum and Brian Wansink in the “Journal of Consumer Research” concluded the average dinner plate size in America had grown 23% between 1900 and 2012. They explained that if this increase in plate size encourages an individual to consume just 50 more calories per day, that person would gain an extra five pounds of weight each year.

But plate size is just one factor. A Twinkie on a small plate is still a Twinkie. A healthy diet is based on four core principles of weight loss and nutrition:

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1.Use small plates. A smaller plate encourages smaller portions and fewer calories.

2.Serve sequentially. Eating the nutrient vegetables first will satisfy hunger and cut consumption.

3.Remove temptation. Eliminate junk food from the house.

4.Enforce a rhythm. Instead of waiting until hunger hits to eat, which causes binging and overeating, eat regularly to avoid the feeling of hunger (many researchers suggest five small meals a day).

You can transform these principles to apply to quilt shops to create a financially healthy business.

1. Use small plates. Author and historian C. Northcote Parkinson theorized that demand for a resource increases to meet its supply. This is why when given two weeks to do a project, it takes two weeks, and when given eight weeks to do the same project, it takes eight weeks. That is why

ONLINE BONUS!

Check out the Profit First sheet for quilt shops at CreativeRetailer.com for more resources.

when given $1,000 to complete a job, it gets done with $1,000, and when given $10,000 to complete the same work, it takes $10,000. Profit First makes Parkinson’s Law an asset. By taking profit first, the money available for expenses lessens, and businesses are forced to find ways to get the same things done for less money.

2. Serve sequentially. The Profit First system teaches you to take your profit first and then use the remainder to run the quilt shop. Just as personal financial advice recommends contributing to savings and retirement plans automatically, the “pay yourself first” premise works for running a business.

3. Remove temptation. You should review and correlate your business’s income statement, balance sheet, and cash flow statement monthly (or more frequently), but few shop owners do. Most resort to “bank balance accounting,” checking the bank balance every day and making financial decisions based upon those numbers. Per Parkinson’s Law, you then consume what you see in the bank account.

Profit First encourages business owners to continue “bank balance accounting” by first allocating money to profit (and other accounts) to see the actual portion of deposits that are available for expenses and then automatically adjusting their spending accordingly.

4.Enforce a rhythm. Establishing a rhythm means avoiding the reactive

mode of crazy spending when big deposits arrive and panic in the face of big cash dips. Finding a rhythm does not mean money will automatically appear or cash will always be available, but it will get you out of the daily panic. Establishing rhythm will also be a great indicator of overall cash flow. You can measure your cash flow by just checking your bank accounts, which you do anyway.

When the waves are small, you’ll notice. And when the waves are roaring, you’ll notice. You will always know because you will continue to do what you usually do: log into your bank account.

Many business owners struggle to manage their cash, making them feel stressed, anxious and even incompetent. This simple cash management system encourages shop owners to see their finances at a glance, helping them manage their cash effectively. When quilt shops manage their cash effectively and grow, they can provide a comfortable livelihood for themselves and their employees.

For more resources, check out the Profit First sheet for quilt shops at creativeretailer.com.

What Are My Next Steps?

1. How is my current cash flow?

2. What adjustments do I need to make to improve my cash flow?

Jacob Curtis, CPA, is the co-owner of Utah Valley Quilting and the founder of Curtis Accounting Solutions. He is a certified Profit First professional with over seven years of experience working in the quilt shop industry.

HOW MANY EMPLOYEES CAN YOU AFFORD?

Employees always cost more than their wages—taxes, training, stress and so much more. Here’s a simple formula for determining whether you can afford a new hire or deciding if your quilt shop is currently understaffed or overstaffed.

For each full-time equivalent employee, your shop should generate annual revenue of $150,000 to $250,000 (this is the minimum). Think of this as the “magic number range.” This is just a ballpark number; every shop is unique. But do not use your super distinctive status as an excuse to hire more people.

The employee formula: Total revenue divided by the magic number range is the ideal full-time equivalent employee count for your shop.

Example 1: If your annual revenue is $150,000, you should have one full-time employee or two part-time employees (including yourself).

Example 2: If your annual revenue is $1 million, then you could have

Phrases to Understand

2-, 3- and 7-word phrases to guide your purchases

BY Tom Shay

TThe topic of the internet always spurs a lively discussion in today’s retail world. Many retailers seem to think internet retailers live in a very different world than brick-and-mortar retailers. While it would be easy to create a list of the differences between the two worlds, all forms of retailing share a major similarity: the challenge of inventory control

Point-of-Sale

Far too many retailers think that dealing with those two words must be done the same way it has for years. The lone change has been the advent of the pointof-sale system allowing a machine to do what the retailer used to do.

But the POS works only if the system has the correct inventory amounts; a count of all inventory should be taken on a regular schedule, be it on one day or in sections on a rolling basis throughout the year. It also only works if the parameters are properly established for the reordering of merchandise and the retailer knows how to read the information the POS system provides.

Stock Replenishment

The proper and most profitable way of dealing with inventory has been around for decades. Unfortunately, many retailers do not utilize the correct methodology.

Some retailers use a concept of stock replenishment, which works like this:

You determine the dollar amount of sales in any category (let’s use a fabric), note the margin (55 percent), multiply the amount of sales by the 45 percent, and that is the amount of money you spend to replenish what you sold. It is a concept with one sizable fallacy: Stock replenishment makes an incorrect assumption that you need to replace all the inventory sold.

The er ror is in not considering the four seasons of the year or products skewed to a holiday. Who wants an Easter egg fabric to arrive in May?

Open to Buy

Instead of stock replenishment, retailers should use open to buy. These three words take more into consideration in determining how much to buy, and the

method is the correct, best and most accurate for managing inventory.

Here’s how it works. Let’s start with the fabric. Not all vendors are the same!

How much inventory do you have to order? Vendors have minimum quantities, weight or dollar amount.You need to know if you are buying for the sales you anticipate in the next month or the next six months?

How long does it take for the inventory to arrive? Can you reorder this fabric or will this be a onetime order for the season? These answers will determine if you are ordering for just your immediate needs or for a longer period.

Is this a f abric that you stock year-round or one that you want a diminished amount or none on hand

When you confirm your POS is making the proper calculations, you won't need the Excel chart, or anyone who offers to track your inventory for you.

after its primary selling season? Some shops want to start with all new Easter materials; others want to keep some Easter-oriented fabrics on hand throughout the year.

Once these questions are answered, you get a feel for which months you are now ordering. It could be for the next month, for the next six months, or for six months from now.

Just as determining how much inventory to order is a guess, you make a similar guess (let’s call it an estimate) of what your sales will be. This will tell you how much of this fabric you are going to need to produce these sales for the month, or months, you determined with the questions about the fabric.

Once you get all this information together, you can begin to put together

the “open to buy.” At this point, you would rightfully ask, “Doesn’t my pointof-sale do this work?” It should, but are you willing to gamble the future of your store without knowing if the POS knows all of this. And if you have had your POS for only a couple of years, the computer cannot know which items are which; it only knows numbers.

The AQR website offers an Excel file (example shown above) that will help you understand how “open to buy” works.You can compare the answers produced in the Excel file to what your POS says to see if it is learning how to properly order for your store.

When you confirm your POS is making the proper calculations, you won’t need the Excel chart, or anyone who offers to track your inventory for

you or teach you how “open to buy” works. It makes no sense to pay for a POS that can perform open-to-buy calculations and then hire someone to make the same calculations.

Dividing Your Store into Sections

Your store will need to have multiple “open to buys.” Here are guidelines to help you determine how many.

Most retailers divide their store into departments, fine lines or categories. Similar products are in each category. No category should have more than 10 percent of your overall sales. For example, if you sell sewing machines and they constitute half of your sales, it is very challenging to know which machines to order.

Instead, you should categorize the

sewing machines into groups. The same could be said for fabrics. If you had only one “open to buy” for fabrics, it would be very difficult to know which fabrics to order and when.

On the other end, each category you create should have a minimum of 3 percent of your overall sales. Less than this and you could find yourself with a lot of “open to buys.” The most we have seen was 287 categories in one store! Think how much time was spent managing all these categories.

Using these guidelines, your store will have between 10 and 34 “open to buys.”

Using Open to Buy Excel File

Here is the math for a sample category using the Excel file you can download from the AQR website.

In row 3 for the first month, insert the amount of inventory, at cost, on hand as you start the exercise. After the first month, the Excel file will be able to calculate the inventory on hand at the beginning and end of each month.

Row 4 is where you enter your anticipated sales for each of the next 12 months. An “open to buy” should be a calculation that is performed on a rolling 12-month basis, meaning you always have 12 months in front of where you are today.

Enter in row 43 your “maintained gross margin.” The word “maintained” is key as this represents what actually happened in your store as compared to what your initial gross margin was. Ever put merchandise on sale? Of course. The margin when the merchandise arrived is different from the day you sold the merchandise; that is the maintained gross margin. It will not be the same number for each of the 12 months.

Row 48 is the key component to achieving an accurate “open to buy.”

It is where you determine how much inventory, at cost, you want on hand at the end of the month. From the series of questions asked initially, you determine

how much inventory you will need; be it for the next month, two or three months, or for an entire season.

Now the calculator is ready to work. Enter in rows 6 through 38 each of the purchase orders you write for this category. Put the dollar amount, at cost, in the month where you expect the inventory to arrive.

All of this works together to give you a very important answer on row 50— how much money you have left to spend this month for inventory. Or it could show how much you have overspent your budget.

Never expect the number in row 50 to be zero, meaning you have perfectly performed the exercise.You could never guess the exact sales for a month; you will have inventory that arrives earlier or later than the month you expected; your gross margin will vary; and you will definitely have a vendor that does not ship the order in its entirety. There will be variations.

And with the completion of each month, you will look ahead to what you have put in rows 4, 43 and 48 to make the adjustments as you learn from each month. Inventory control is an ongoing project.

However, whatever variance you have, as shown on row 50, will carry forth to each of the succeeding months. This becomes an ongoing effort to get row 50 to be as small a number as possible, be it positive or negative.

This may look like an overwhelming task, but it is not that time consuming. Once a month, look at rows 4, 43 and 48 to make appropriate adjustments.You make an entry with each purchase order you write. And, once a year, you should be inventorying that category to make sure your information-entry process is correct as well as watching for internal or external theft of inventory.

We are sold out for the season

One last inventory control item to be considered consists of seven words: We are sold out for the season.

Few retailers realize that always having enough inventory on hand is a very costly proposition. Using an Easterthemed fabric as an example, when do people stop buying something for Easter? How many customers wait for a store to put the fabric on sale and then make a purchase? How many are buying fabric on sale this year to be used next year?

While you would understandably say, “They will go somewhere else to get their fabric,” you have to ask if this “always a price shopper” is a customer you want to cultivate.

Just as all the calculations above are a calculated guess, you now must consider that another business is going to be discounting merchandise at the end of a season. It is challenging to try to sell at full margin when someone has already begun discounting to get rid of certain inventory for the season.

Instead, what if you were selling at full margin and then ran out of inventory? Granted, you would miss some sales, but how many of those sales would be at full margin and how many would be at discounted prices? When discounting low-margin items, you can quickly find yourself selling items at below cost. This means you are eating away the margin you earned on the same item sold at full price.

You have to decide if “We are sold out for the season” is an acceptable answer to a customer’s inquiry at your store. This answer can also leave the customer thinking, “I had better get here earlier before they run out.”

Two, three, or seven words—they all deal with what is the biggest asset for most retailers. Using these 12 words properly can mean you get a lot more of one word: profit.