How to Grow a Retail Business

An Introduction on How to Grow a Retail Business

Growth and sustainability are two different things. Unrestrained growth from a business perspective might sound appealing, but if your pipeline and supply chain are not primed to match that growth, it will end in burnout.

One way to see healthy growth in your retail business is to observe profit margins. Another is to check on overall revenue numbers. If there is an uptick in revenue, chances are you are seeing a growth in demand. Thirdly, noticing an increase in customers and sales transactions.

It’s important to distinguish the cause of growth to decide if it presents an opportunity to scale. If there is something obvious happening that is causing a fluctuation in customer demand for a short period of time, like a holiday weekend or a local event, it may not be a reason to start scaling your business. However, if there is a sustained period of growth you are observing month over month, it's time to consider what tools you have to meet demand.

Measuring growth requires looking at the rate at which your revenue increases annually. For example, many business owners use a sales growth formula similar to this one. You can find the metrics for each figure easily on an income statement. If you are measuring from one fiscal year to the year before it, that is a good place to start.

**(Current Period Sales - Prior Period Sales) / Prior Period sales * 100**

After subtracting current sales from the prior period, you can use that figure to divide against the prior period’s sales and multiply that number by 100 to arrive at your percentage of sales growth rate.

The overall sales number, however, is just the tip of the iceberg when it comes to growth. The real backstory of what is going on can be parsed into cash flow, operating debt, profit margins, and net profit. Potential buyers and investors in companies often look at these numbers as an indication of a company’s growth and overall health.

Important Steps to a Retail Business Plan

A retail business plan is important to define for every business owner. Whether you have one now or not, it’s easy to see the value and benefit of creating one. It will provide a strategic edge to your daily operations.

One aspect of building a strong retail business plan is to look at your operational capacity. What does your supply chain look like and are there ways to optimize it? Inventory is a massive priority for retailers and keeping enough of the right product stocked. How is the product ordered and is the frequency of replenishment working for your business? Are there ways to automate manual workflows slowing you down?

Having a financial plan for the fiscal year is another huge recommendation. Retail is subject to seasonality which may cause inventory costs to surge around this period of increased demand. Last-minute ordering leads to an increase in cost per item, so it's important to be prepared for these surges by ordering ahead of time.

If you have a financial advisor or business manager in place, a cash flow analysis is an important exercise to see the overall financial outlook of your business. How much cash you have in the bank, and how prepared you are to finance business expenses or the purchase of new equipment is a good indication of your readiness to grow.

Tips on How to Grow a Retail Business

How to value a retail business can be done in an unlimited number of ways. There are a few tried and tested methods to use to create a more profitable business.

Create a new product line in the same vertical that has shown success
Turn on the marketing machine to boost visibility/sales
Decrease retail floor space to increase sales per square foot ratios
Take a closer look at your core customer and what they need
Refresh your brand image, website, and messaging

For most retailers, rent is a major operating expense which means the most profitable retailers use their space to get maximum revenue. This includes anything from having more strategic product placement to reducing the square footage of your space by renting something smaller that benefits your sales per square footage ratios. This is how the amount you sell stacks against the amount it costs to rent space for your products. Use your floor space wisely and you may see an increase in profit.

Social media is another tool in a business’s marketing plan that can drive sales without having to consider physical floor space. Getting in front of your customers at the right time on the right platform can pay off massively in profit. Creating a budget for advertising might be the right next move once you’ve completed adequate research and psychographics of where your customer is hanging out online. Ad campaigns can dial-up growth and profitability, but this strategy is best used in a targeted fashion and not as an experiment as it can quickly eat up your budget.

Automation is yet another hugely overlooked way of adding value to your retail business plan. Consider it part of the ease of purchase and reordering which is directly linked to repeat business with your customers. If getting through the checkout process is cumbersome and requires too many steps, or if the customer’s questions are not adequately answered by product descriptions on the website, this adds to the friction of purchase and can lead to abandoned shopping carts. Removing these barriers is yet another part of improving profitability.

How to Value a Retail Business

Business valuations for retail can vary depending on the size and type of markets you are selling to your customers. However, these are a few practical due diligence items you can follow now to prepare your company for a valuation.

Organize your financial statements

Gather profit and loss information, budget reports, and inventory statements to start gathering a financial picture of your business. Once you have a figure for your gross profits, you will subtract that from other costs like labor and insurance to arrive at your net annual earnings. Get your business manager or accountant involved to have eyes on the numbers of your yearly performance. This will lay the groundwork to complete a detailed business valuation.

Do some market research

Knowing the market you are competing in is of huge benefit to creating a business plan. Projected value based on market demand is a significant way investors and potential buyers consider a business’s future profitability. Assess competitors in similar markets selling goods and services like yours. How is your retail business differentiated to meet or exceed competitors? How does your retail business look when stacked up against their offerings? This is an important exercise for valuation and continual improvement.

Work on your brand

Branding is important, especially for conveying authenticity to customers. Authenticity and trust are closely associated and if the brand looks outdated, negative assumptions will also be made about your product or service. Investing in a polished, continuous brand image, from graphics to products to websites is hard to overemphasize. Ecommerce transactions exploded in the retail space after 2019, illustrating the importance of having an active online presence as yet another channel of selling to customers. If you don’t have an online presence, now is the time to consider if this would boost the value of your business.