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7 strategies to make retail work better for you

This company operates in the leisure sector in Stirling. We have been accountants to the company since it started in 2006. This fledgling business had been buffeted by many things in its first few years. Operating as it does in the leisure sector as a coffee shop, it is up against tough competition with Starbucks, Costa and other sizeable operators nearby. If anything, that made Robert even more determined: “We sell bloody good coffee – and have a better relationship with our customers – than they do.” The coffee shop needed more customers or better sales or both but it was a small operation and had an extra sales line, making it a little quirky but intensely interesting as a business. Disaster struck about nine months ago. Another property in the block had a flooding problem and the cafe was flooded and shut for nearly four months. It looked like the end of the road but the insurers coughed up and today it is a refreshed business, bright and shiny and doing extremely well.

What were the issues?

The effect of the bounce in trade was magnified by the arrival of a competitor in the next block, but it was one of the shiny competitors, and although they are getting business, our customer is getting business from them when people compare the two environments. The business was already doing better as a result of its unplanned refit but not massively so. Sales increasing in a retail business is a problem. The cafe was below the VAT threshold and had been for many years and so retail prices were based without VAT. The nature of the products purchased for resale were such that there was little VAT as part of the purchase price. This “cheaper” priced product had helped a little in the earlier years to minimise the losses, but things were changing. The higher sales pushed the business over the then VAT threshold of £68000. So now Robert had a dilemma: either keep the selling prices the same as they had been for a couple of years and swallow the VAT add-on and see his margin plummet by a further 15% or increase them.

How did we help?

Fundamentally the first thing was to examine the menu and decide which items were affected by VAT – nearly all of them, so there wasn’t a possibility of cross-subsidising one against the other. Then, with Robert, we looked at the market. He realised that what he sold was different from Starbucks – his coffee creations were unique. He realised, too, that prices hadn’t been increased for a couple of years. All he needed was courage and after some debate and discussion, prices increased to cover the VAT increase and in some cases a little more. Next came the challenge of the till. There are never enough buttons on most tills to cover everything you sell so we had to work out with Robert a way of capturing the right VAT information at the point of sale.

So what lessons do we all need to learn from this?

Make sure that your price point matches your product offering. Many small businesses set up with the intention of competing by being cheaper rather than being better, and it’s often easier to be better as a small business. Very few people buy on price alone and will usually pay more for something different and better. Know your margins. In Robert’s case, because we had already been discussing it, he did know the margins. In retail there are often many different products’ margins to consider and that coupled with the mix of products sold can make things really interesting. Make sure your till tells you what you need to know and write it down every day. Most retailer business owners know all about Z-Totals but few actually record the number of sales of each product group (or product) so that you can see averages, daily and monthly trends. Sure, you can leave it to gut instinct but why take a risk with your investment? If you’re below the VAT threshold, know when you cross it and what you must do. A lot of people believe that the VAT threshold works on an annual accounts basis. It doesn’t: it works on the last 12 months of turnover. And once you cross the threshold you’ve got just 30 days to register so get advice. Make sure your prices are competitive: not necessarily cheaper than your competitors but consistent with them because you’ll be as good as them. But this also means putting your prices up a little to keep pace with your rising costs. It’s interesting that your suppliers don’t hesitate to put your buy-in prices up but you hesitate to pass that on. When did you become a philanthropist? Keep on innovating. Retail thrives on new stuff alongside the old, and trusted favourites. Don’t stop doing what works, simply try out new things and measure how successful they are. If it works, carry on: if it doesn’t change it and measure it’s success again. Set cash targets for every day. This way you’ll know when you can breathe a sigh of relief during the day, knowing that your operating costs, profit and tax are covered.

Disclaimer

This case study is derived from a real business that we worked with. Names have been changed and some of the context has been changed to help anonymise things. It is not important that you try to identify who or when; it is important that you recognise the generic business problems and see how NGM Accountants, a professional accounting practice, is able to help. The case study is an abbreviated history only. A full blow by blow account would not only be boring but it would tend to repeat itself and contribute little new useful information. No responsibility is accepted by NGM Accountants for any losses or profits foregone by acting on or refraining from acting on any information contained within this case study or factsheets to which this case study refers. Before making any decisions concerning the accounts of your business or enterprise, you should consult a professionally qualified accountant.

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