The profitability indicator reflects the efficiency of the business. It must be calculated before making a decision to open a clothing store, and constantly analyze the dynamics of profitability for the owners of already operating outlets.
Calculating the profitability of a clothing store
The key indicator of the performance of any store is the return on sales. It is calculated as a percentage as the ratio of net profit to revenue. Thus, this indicator clearly shows what share of the proceeds goes to the formation of profits.
It is quite easy to calculate revenue - this is the sum of all receipts from customers in cash and non-cash form, excluding the cost of purchasing clothes. Whereas net income does not include all the costs associated with running a business. For a clothing store, these are most often rent, salespeople's salaries, tax payments, etc.
Many entrepreneurs confuse the concepts of profitability and markup. Meanwhile, they have fundamental differences. For example, a store buys T-shirts at a price of 100 rubles, and sells them for 150 rubles, 20 T-shirts were sold per month. Accordingly, the markup for the product is 50 rubles. Whereas, if the salary of the sellers and the rent of the premises in total amounted to more than 3000 rubles, then the profitability of sales was negative.
It is advisable to analyze the profitability of sales separately for each product group. The criteria for their selection can be very diverse. For example, in multi-brand stores, you can analyze the profitability of sales for each brand. Or separately calculate the profitability of sales of various goods - T-shirts, skirts, accessories or women's and men's clothing. This approach allows you to identify the most unprofitable and profitable areas and make adjustments to the assortment.
The return on sales can be calculated not only based on the current performance of the store, but also on the basis of hypothetical projections for the opening of a new store. This allows you to predict the expected performance from opening a store. Also, when assessing the opening of new outlets, the indicator of return on investment (the ratio of net profit to total costs) is analyzed.
Ways to Increase Your Shop's ROI
It should be borne in mind that the return on sales can have both positive and negative values. If the indicator tends to zero or went into the negative, the management of the clothing store urgently needs to take measures and work to increase the profitability of sales. Often, low profitability indicates an incorrectly chosen pricing strategy.
If the prices in the store cannot be increased, because this will make the store uncompetitive against others, it is worthwhile to turn to the cost structure and consider its key components. If it was revealed that the main expenses are related to salaries, it may be advisable to optimize the number of sellers. It may be worth moving to a different location with a lower rent.
You can also try to get better deals from clothing suppliers or work on the assortment. For example, include starting to sell related products at a higher markup. These include, for example, a variety of accessories (bags, sunglasses) and jewelry.
