7 Key Retail Metrics Every Retail Business Should Track
Most retailers have a basic understanding of their sales and profits, but they need a better sense of what really matters in order to make better decisions. In the retail world, you’re only as good as your last financial analysis. If you haven’t gotten it checked for a while, you probably don’t know what’s going on. Is something wrong? Are you making more money than you used to? Are you losing money? Where do you need to focus your efforts to turn things around? The good news is that you don’t have to figure this out on your own. There are several key retail metrics that you should track in order to determine if you are succeeding or failing. This blog will help you decide which ones are most important to your business.
Here are ten retail metrics that every retail business should track:
1. Current Ratio | Retail Metrics Every Retail Business Should Track
It’s an essential measure of how liquid a company is. The formula for calculating it is a ratio of the current assets to total liabilities. The numerator is the current assets (equity, cash, accounts receivable, inventories, and other current assets). The denominator is the total liabilities (short-term debt, long-term debt, other borrowings, the value of the equity and the cost of the property, plant, and equipment, including goodwill).
The best time to calculate the current ratio is when the company is doing well, but there is a problem. The main idea behind calculating the current ratio is to see how quickly a business can cover its short-term obligations with its current assets. When the current ratio is high, it means that the business can easily cover its current liabilities. On the other hand, if the current ratio is low, it means that the business has a lot of problems covering its short-term obligations. Therefore, if you are a business owner and want to see how liquid your business is, it is good to calculate the current ratio regularly. Or you can also contact our expert financial analysts for a professional analysis.
2. Gross Profit Margin
Gross profit margin is a simple yet useful metric for retail businesses. It shows how much money the business makes per sale. It also shows a company’s ability to turn a profit from each sale. Profit is what keeps a business running, and gross profit margin shows how profitable a business is. A lower gross profit margin usually means the business is losing money because of higher costs. A higher gross profit margin means that the business is earning more money per sale than it costs to make a sale.
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3. Quick Ratio
One of the most basic retail metrics is the quick ratio. It calculates the ability of a retail business to pay its bills as a proportion of total current assets.
Retail businesses usually pay their bills within 30 days. This means that they are able to pay for their expenses within a month. However, they usually have at least six months’ worth of inventory. The key to making more money is to sell it as fast as possible. The retail business has to be careful not to buy too much inventory. This can lead to a significant loss if the items sell out quickly. If the inventory lasts for more than six months, you can’t get as much money from it. The best thing to do is to always order enough inventory so that you can always sell it on time. You may need to take a loan or raise capital to finance your inventory.
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4. Inventory Turnover
Inventory turnover helps retail firms understand how efficient they are. The higher the turnover rate, the more efficient the firm is at using inventory. In fact, businesses that have high inventory turnovers are typically regarded as more efficient and therefore more profitable. However, if a retail business has a low turnover rate, then it is likely that they are not using the inventory effectively. It is possible that the products are being wasted, or perhaps the items are simply sitting in inventory for too long.
When you take this measure into account, you can see how much inventory a business uses on a daily basis. If you want to understand the effectiveness of a business’s inventory management, you should take a look at its inventory turnover rate.
To calculate your business’s inventory turnover, you will need to know the following:
- Number of days inventory is held.
- Total sales in the month.
- Average inventory level in the month.
- Number of units sold.
- Number of units in stock.
5. Return on Assets
Return on assets (ROA) is a simple way to gauge a retailer’s financial performance. You can calculate it when you divide net sales by gross assets. Gross assets include property, plant, equipment, inventory, and other assets, less any liabilities. Net sales are revenues from the sale of goods and services minus any associated expenses, such as direct materials, indirect materials, and marketing. The numerator is the increase in net sales, or in the case of a decrease in net sales, the decrease in gross assets. The denominator is the decrease in gross assets.
This is one of the retail metrics business owners often confuse with ROI (Return on Investment). Return on Investment Return on investment (ROI) measures the amount of profit a company makes for every dollar it invests. It’s calculated by dividing net income by the amount of money invested.
6. Interest Coverage Ratio
Interest coverage is the amount of interest a company can pay on its debt. This is determined by the interest coverage ratio (ICR), which is the amount of debt divided by total company assets. When looking at the retail metrics of any retail business, it’s a good idea to check out their ICR. You’ll find that businesses with low ICR ratios are generally doing well because these companies can use their cash flow to invest in more profitable areas. Conversely, when a business has a high ICR, then it might mean that there are other opportunities for improvement, such as reducing expenses or increasing revenues.
The ideal ICR is one to two times your debt, so if you’re paying 12% on your debt, then your ICR should be between 24% and 36%. Another relevant metric in the retail analysis is the interest-to-equity ratio. This is basically the amount of interest a company pays out as a percentage of its equity. You can calculate it by dividing the total interest payments by the total equity. Ideally, a business’s interest-to-equity ratio should be between 3.5 and 4.0, which means that half of their total equity should be used to pay down their debts.
7. Average Transaction Value
You could also divide ATV by the average order value (AOV) of your transactions if you need to compare a single average transaction to the average order value of your sales. AOV is just like ATV, except it takes the value of each transaction and divides it by the total number of transactions. The result is a value, in dollars, for that single average transaction.
Average transaction value is an interesting statistic because it gives you a way to compare your average transaction to the average order value. If you’re getting better at selling, this ratio will go down; if you’re getting worse at selling, it will go up.
Average Order Value; this is the other side of the same coin as the average transaction value. The difference is that the average order value takes the value of each transaction and divides by the total number of orders.
A Professional Financial Analyst can Help You Calculate all Retail Metrics Easily
With Oak Business Consultant’s professional financial analysts, financial planners, and CFOs, you can never go wrong. As a financial consultancy agency that has been in the business for more than a decade, we have developed a unique combination of analytical expertise and strategic consulting skills. Our consultants have extensive experience in financial analysis, forecasting, and strategic business planning. Our professional financial analysts and financial planners can help you develop your own comprehensive financial strategy, which will help you make the best decisions for your retail business.
How Can Our Retail Financial Models Help You?
Our retail financial models are a collection of financial tools that we use to calculate key metrics and financial ratios in the retail industry. We have been creating retail financial models since 2011 and have successfully developed more than 80 retail financial models.
When you visit our retail financial model page, you can find out how our retail financial models can help you analyze the financial performance of your retail business.
In conclusion, you must keep track of the most important financial metrics for your business, and these are cash, expenses, profit margins, return on investment, inventory, assets, and more. These retail metrics help to identify which areas need improvement or growth, allowing you to create targeted strategies to address these problems, improve, and grow.