Friday, February 22, 2008

Managing Your Biggest Expenses - Payroll and Occupancy Costs

After your cost of goods, a retailer's largest expenses are payroll and occupancy costs. These two areas if not controlled, can choke a retailer's cash flow and eventually lead them into bankruptcy.

While the retail industry standards for these expenses vary greatly, they should fall within the following ranges:
  • Payroll Costs: between 10 - 15% of gross sales
  • Occupancy Costs: between 7 - 10% of gross sales

Controlling Payroll
Some things you can do to make sure your payroll costs are being controlled:

  • Monitor your payroll costs monthly to make sure they are in-line relative to gross sales. On a month-to-month basis your payroll costs as a percentage of gross sales will vary but on a yearly basis your overall labour costs should fall within the industry guideline.
  • Review your sales trends by day of the week and hours of the day to determine when you need to add extra staff or where you can cut back.
  • When scheduling use shorter shifts instead of full days across the board. This will give you more flexibility to have more staff at peak periods of the day or react to cut back on staff on slow days, especially due to bad weather.

Controlling Occupancy Costs
Unlike payroll costs, your occupancy costs are often not controllable other than at the time of negotiating your lease. However, there are a few things you can do to make sure your occupancy costs are within the industry guideline:

  • Make sure that you understand all of the lease costs you are responsible for when negotiating your lease. Common area costs, management fees or rates based on gross sales often become contentious issues if not clearly understood at time of signing.
  • Review your controllable variable costs such as utilities. Install efficient thermostats that reduce the temperature at off-hours. Use timers for your outdoor lights so that they are off for a few hours in the middle of the night.
  • Maximize the space you are renting by reducing non-selling space: storage, office, or any other use other than selling floor.

If you can contain your occupancy and labour costs as well as your inventory levels, you should be on your way to a profitable year!