Not too long ago, I was making a presentation to a prospective client, when he asked me which single metric he should stay most focused on.
I thought at that moment that he probably expected me to recommend sales, or perhaps inventory turnover, since that was what we'd been primarily discussing up to that point. But I didn't need to think twice. The metric that I recommended he focus on, day in and day out, like a laser beam, was gross margin.
Don't get me wrong. There isn't a small retailer alive who doesn't track sales and keep a tight rein on expenses, and woe to any small retailer who takes his eye off the inventory ball. But the most critical metric, and the most overlooked on an ongoing day basis, is gross margin.
Gross margin isn't something that most small retailers think of tracking on a weekly and monthly basis. They rely on their markup formulas, and assume that gross margin will naturally flow from there. But gross margin is too important to be left unattended. It's right in the middle of everything. It flows directly from sales, it's a leading indicator of profitability and cash flow, it's the dollars that cover the expenses, and it's a critical element in measuring how productive your inventory investment is.
Here are several thoughts to keep in mind about managing gross margin:
Nobody likes surprises, especially small retailers. There's nothing pleasant about learning at the end of a quarter or year that profitability and cash flow aren't what they should be because gross margins came in below budget. The small retailers who actively manage their gross margins not only won't be surprised by their quarterly or annual results, they will quickly discover that profitability and cash flow will consistently beat their budget projections. And that's the name of the game.