Retail Business Planning from Concept to Profit

Overview

In the previous chapter, we discussed the basics of retail business — its operations, various types, challenges, and opportunities. Let’s now focus on retail business planning in this chapter.

The ultimate goal of running a retail business is to make a profit. To ensure long-term success in serving customers, laying down the groundwork that will lead you to this goal is vital.

1. Define your retailing success

When launching your retail business, establish a clear business goal. According to Dan Ramsey in The Everything Guide to Starting and Running a Retail Store, success in retail falls into three main categories:

1. Financial Success: This means making profits, managing costs well, and keeping the overall financial health of your business in good shape.

2. Personal Success: This is about the satisfaction and fulfillment of the business owner or anyone involved in the retail venture.

3. Community Success: Achieving this involves positively impacting the local community through your retail business. It includes creating jobs, engaging with the community, and contributing to local causes.

2. Assess your financial assets

Cash flow issues are a common problem for businesses. According to a study, poor cash flow management accounts for 82% of business failures.

To thrive, prioritize growing your retail store’s financial assets. Before choosing a concept, assess your cash reserves, convertible equity, and available credit.

Liquid assets

Businesses depend on liquid assets for flexibility and the ability to adapt to sudden market changes or settle debts. You use these assets to convert to cash without a significant loss of value easily.

Businesses must have enough liquid assets to handle responsibilities like buying inventory, paying bills, and dealing with unexpected expenses. These include cash on hand and easily accessible funds in bank accounts.

Equity asset

Although turning your home or property into cash may not be easy, you can leverage the equity in these assets. Equity is the gap between their current market value (after deducting selling expenses) and the remaining mortgage.

Utilize your home equity to get funds for everyday business needs such as equipment, technology, and operational vehicles, ensuring your business has the necessary working capital. But beware, if your business doesn’t succeed, you might risk your home and business.

Credit asset

Good credit is vital for your business — it helps you get loans, credit lines, and favorable terms with vendors. A strong credit rating in retail is crucial; it can make it easier to secure a store lease, set up utilities, get wholesale merchandise on credit, and open various business accounts.

If your credit isn’t great during the planning stage, it’s wise to delay opening your store until you’ve improved it. Good credit makes dealing with essential aspects of your retail business, like leases and vendor relationships, much smoother and more favorable.

Other asset sources

Explore these alternative avenues to solidify your financial assets:

1. Business Partnership: Bring a partner to pool resources, skills, and capital, fostering shared responsibilities and potential business growth.

2. Business Loan: Secure a lump sum of capital through a business loan to cover startup, inventory, or expansion costs without compromising ownership.

3. Supplier Financing: Seek financing from your merchandise supplier, possibly through an exclusive agreement, for additional financial support in launching your business.

An alternative route: franchises

Consider opening a franchise store if you have assets but lack retail management experience. A franchise license lets you use another company’s business know-how, methods, and brand.

In this setup, you can sell a product or service using the original company’s name, usually for an initial startup fee and yearly licensing fees.

Pros:

• Proven Success: Franchises come with a proven business model, boosting your chances of success.

• Market Insights: Franchise owners get detailed information about the market that regular businesses may not have.

• Training and Support: People who run a franchise get training and ongoing support to help them run things smoothly.

• Buying Power: Through collective buying power, franchisees can benefit from better supplier deals and cost savings.

Cons:

• Financial Impact: Franchise owners might make less money because they have to pay upfront fees and ongoing royalties.

• Limited Autonomy: Franchise owners must follow the franchise’s rules, so they can’t make all the decisions themselves.

• Long-Term Commitment: When you join a franchise, you usually commit for a long time, maybe 5 to 20 years.

3. Determine retail concept profitability

1. Identify your profit model

In the retail business, numbers are crucial. To run a store successfully, you must understand your profit model.

Here’s a simple breakdown: Profit is the money you have left after subtracting all your business expenses from your earnings. If you save more money after covering all costs, that’s your profit.

2. Analyze retail costs

Tracking and managing your retail costs is crucial in the early stages of your retail business. When your business expenses go up, your profits go down.

To boost your retail store’s profitability, keep a tight rein on costs such as inventory, fixtures, equipment, overhead, taxes, and licenses.

Inventory

Managing inventory is your store’s main expense; restock items promptly after selling them. If a product isn’t profitable, replace it with something more lucrative and better suited to your customers’ needs.

To ensure your store’s success, closely monitor your inventory, understanding what sells and what doesn’t. If you can cut costs without increasing expenses, your profits will rise.

Fixtures and equipment

When opening small retail stores, owners often invest in fixtures and equipment upfront for long-term utility. Retailers may choose to build, purchase used items, or lease to cut down on initial and ongoing expenses.

The expense for fixtures and equipment varies based on the type of retail store. For instance, a discount store may opt for simple or pre-owned fixtures, while a jewelry store could invest in top-of-the-line display cases, a sturdy safe, and high-quality lighting.

Overhead

Running your store involves daily expenses known as overhead, which covers essentials like rent or lease payments. Certain overhead costs may fluctuate based on your store’s operating hours and utility usage.

In bigger retail setups, employee wages can significantly impact expenses. Yet, for small retailers, taking charge during operating hours and minimizing vacations can help cut costs and reduce income loss.

Taxes

Inventory and equipment taxes are non-negotiable, whether you’re making a profit or not. Consider getting an accountant or tax advisor before starting your business. Neglecting taxes and licenses has led to the closure of many small businesses.

3. Calculating your target profits

Boost your retail store’s success by ensuring you earn more than you spend. Keep a close eye on your profits to keep your business on track.

• Target income: Align your profit goals with realistic revenue targets based on financial needs, and regularly assess the local market’s capacity to meet these targets. If goals seem unattainable, adjust profit expectations, reduce needs, or refine the business concept for viability.

• Target expenses: To succeed, make sure you cover your expenses, but be careful not to compromise on the quality of your stock and risk losing customers. Balancing expenses, inventory costs, and product quality is essential for retail success.

4. Figuring the ROI

Ensure your retail store’s return on investment (ROI) exceeds the loan interest, as lenders will likely require it. Remember that the potential return is linked to business risk, so evaluate your venture’s risk profile to set realistic expectations for investment returns.

Based on the associated risks, anticipate an 8-12% return on your retail store investment. This return compensates you for your investment and work, while external investors receive their share.

5. Estimating inventory requirements

Your most significant expense is inventory. As your business plan takes shape and your store is up and running, you’ll need more precise numbers. For now, use these figures to establish inventory targets.

Turnover

Find your store’s inventory turnover rate by calculating how many times you sell your stock in a year. Aim for a typical turnover rate, like the common goal of 2X (twice a year) for small retail stores. 

Get guidance on your expected turnover rate by consulting trade associations, wholesalers, or distributor salespeople, considering your store’s size and location.

Initial inventory

Determine your desired turnover rate, then use it to calculate the initial inventory for your store’s opening day. The accuracy of your inventory estimate depends on how accurately you define the turnover rate; the more precise the rate, the better your estimate will be.

Replacement inventory

Replenish sold-out items with similar products based on sales patterns. Good managers analyze sales data to restock items with higher profit potential. 

For example, if blue vases make $1.00 profit and green ones make $1.50, adjust the inventory by decreasing blues and increasing greens to boost the store’s growth.

4. Writing your business plan

Create a precise and accurate business plan to navigate the launch and operation of your retail store. Plan the specifics of how you will achieve your retail objectives.

Direct lenders, like banks, require a comprehensive business plan, while other investors need clarity on fund utilization and repayment. Major suppliers may request a business plan summary before offering credit for initial inventory.

Here are the key elements typically found in a successful retail business plan:

• Business cover page: Name, location, and participants.
• Table of contents: Guide to primary plan sections.
• Executive summary: Brief overview for quick understanding.
• Business concept: Detailed store description, including location, hours, staffing, and main inventory.
• Market analysis: Defines target customers, their demographics, and reasons for choosing your store.
• Management team: Identifies owner, manager, and key employees with credentials and experience.
• Financial projections: Estimates startup and operating costs, funding sources, sales, cash flow, and other financial details.
• Call to action: Concise statement specifying desired reader action.

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5. Adjust your retail business planning

When you do retail business planning, changes are inevitable. Don’t just assume customers will come if you build something; instead, focus on building what customers want. 

To guide your adjustments, you should consider these three questions:

Will it work? 

Before you start a retail business, check essential things like market research, local demand, customer needs, competition, potential profit, and resources you need to succeed. Make intelligent choices so your investment of money and time pays off with a profitable retail business.

What can be improved?

Think about improving your product. Identify changes that will attract more customers, increase profits, and help you reach a larger audience. 

In retail, it’s crucial to meet your customers’ needs. Know your target customers, understand what they want, and adjust your business to serve them better and make more profit.

What makes it stand out?

Stand out from competitors by giving customers a solid reason to choose your store. Create and implement a unique retail concept that makes your store genuinely distinctive.

Summary

New retailers may struggle to profit and satisfy customers without a solid plan. It’s crucial to assess finances and understand the store’s profitability to navigate the challenges of the business world effectively. 

A well-thought-out business plan serves as a roadmap, enhancing the retailer’s ability to run their store successfully and succeed in the competitive retail landscape. In the next chapter, we’ll explore finding the ideal location for your business.

References

Ramsey, D., & Ramsey, J. (2010). The Everything Guide to starting and running a retail store: All you need to get started and succeed in your own retail adventure. Adams Media.