From a financial standpoint, our industry is smarter than it was before 2008. It arrived at this point through duress, however. I call it “business management borne out of necessity.”
Here is how that played out: When the recession hit, sales dipped. That meant fixed costs and expenses like labor became a bigger part of the budget, so much so it threatened to shutdown the garden center. So retailers began cutting costs to stay afloat.
For some, it was a matter of lowering cost of goods sold (the largest target), while others lowered their wage and wage benefits (the second largest target), or both, to compensate and attempt to hold the line on profit erosion.
It was a somewhat convoluted way to arrive at a positive result, but it made some small-business owners more fiscally responsible. These businesses did what they had to do to make it work within the framework of good business practices.
Why So Many Garden Centers Have Been Closing
The sad part is, despite improving their financial habits, many did not remain solvent, and even more will cease business in the coming years. There are at least three reasons for the fallout:
● Having too much leftover inventory.
● Not taking a second look at fixed costs and making adjustments.
● Not trimming labor.
1. Pay Attention To End Of Season Inventory Levels
More prosperous times covered a variety of flawed management practices, especially having too much inventory.
Many put product out and customers bought at least some of it. Never mind that leftover inventory was decreasing in real value while accumulating a carrying cost in the process. As a result of higher ending inventory, cost of goods sold appeared to be decreasing while, in fact, it was eating a hole in cash flow.
2. Adjust Your “Fixed” Costs
Operating expense is a gray area sometimes considered to be unmanageable. After all, how do you negotiate fixed expenses like bank fees, fuel oil and gas, rent, taxes and utilities?
This question overlooks the fact that many operating expenses are variable, meaning they might go up with increased revenues and should go down with decreased revenues. Some examples of variable costs are advertising, dues and subscriptions, entertainment and meals, operating supplies and expenses, postage and stationary and other office expenses.
Failing to manage fixed costs means increased expenses and lower profits.
3. Remove Bloat From Your Labor
During more prosperous times, garden centers had the luxury of hiring and retaining a large, full-time staff of managers and employees to handle the ever-increasing revenues. Family members were hired and sometimes paid far more than their responsibilities deserved. Some tossed out efficiency in the quest to appear fully staffed to customers. Payroll budgeting wasn’t a management tool of the times. In other words, too many people did way too little productive work.
This business model relied heavily on next year’s spring being bigger and better. Strong seasons can cover up a lot of management flaws.
We’ve developed a labor benchmark within The garden center Group. The Group P&L Study assists in determining what is possible and what exceeds reality.
For example, our Group goal for wage and wage benefits is 28 percent, including owners compensation at a fair and reasonable rate, for a retail garden center. A retailer/grower is closer to 30 to 32 percent, depending upon how much product the operation grows itself.
The place for you to start, however, is internal benchmarking so you are aware of when your percentages rise and fall, which indicates more or less efficiency.
4. Improve Your Management Style
The money crunch that’s resulted from lower revenue and larger expenses is leading to a crisis for the industry if it’s not confronted.
Many garden centers infused money from what I would consider non-traditional sources into their businesses. For some, the money came from high-interest loans from less-than-credible sources. For others, it came from family loans. But the most common sources, I’ve found have been from the owners’ own savings and retirement funds.
The problem? Too many haven’t changed their management practices. So the inflow of needed cash only extended the length of time it takes to drain the coffers. Doing the same old thing only yields the same old result.
The basics of good management are well known, but can seem overwhelming: Increase revenues if possible. Control your inventory levels while decreasing cost of goods sold. Eliminate as many of the fixed operating expenses as possible while negotiating or shopping the variable operating expenses. Budget payroll and have only the full and part-time staff needed to effectively manage your operation.
There is only one way I know of to achieve those levels of performance — planning. The planning process I am talking about requires mastering three areas:
Your P&L (or income statement)
Cash flow Balance sheet
Planning all of the steps for accurate reports forces you to know your business better. And knowing your business better means you are more in tune with what it will take to manage growth or decline.
5. Turn To Staff, Peers And Experts For Help
When you keep accurate reports, you will inevitably look for chinks in your armor so you can shore up your weaknesses. Are you on top of your financials, marketing, merchandising, store design and layout, staff and staff training and planning? No one can be an expert in everything. And I’ve not yet met anyone who wants to do all of these things themselves.
Finances are not an end in themselves. Rather, they point out all of the pluses and/or minuses in any business, but not how to improve. That comes from your team’s skill and creativity. Your team includes you, your staff, your peers and any advisors you hire. There are resources out there to assist if you just ask. This type of investment is a small percentage of revenues when you consider the return it should yield.
6. The Secret To Success: Planning
Of all the clients I work with, the business owners who will survive and thrive are the planners. Their management tools will include pro-forma P&Ls, cash flow and balance sheets for at least one year in detail, with five years in general terms. Long-term versions will be revisited each and every year.
As a bean counter, I am less of a prognosticator than a recorder of history. But if history is a good guide (and in financial and business matters I think it is), people willing to risk their entire life’s savings or potential savings had better be the best all-around businessperson they can possibly be or, at the very least, surround themselves with those who are.
A business that is willing to change the plan as needed will be a survivor. Because no matter the revenue level attained, it generated profit, achieved adequate cash flow, and most importantly, built equity (wealth) to be used however management deems desirable.
It’s truly survival of the fittest.