In my local High Street there are two shops sharing a building (a little like being in a semi-detached house) one is a dress exchange and the other is a running-shoe shop.

 Last week both shops put new signs on their doors. The dress exchange announced that they would ‘now be open on Sundays’ whereas the running-shoe shop announced that it would ‘no longer be open on Mondays’.

 Intriguing. Why did one shop decide to extend its opening hours while the other decided to reduce them?

Is it profitable to open?

Clearly you should (with a few tiny exceptions which I have jotted down at the bottom) only open your shop if you expect to make a profit doing so. But how do you calculate the profit? Many retailers get this calculation wrong, with dire consequences.

So I thought today we could look at the easy way to do it.

1.Collect some information

Start by collecting some information: your ‘daily opening costs’, ‘daily revenue’ and your ‘average mark-up per sale’:

Daily opening costs

Daily opening costs are the costs that you only incur if you actually open the shop. The biggest cost is usually wages for the sales person. There are usually a few other smaller costs such as lighting but if they are tiny feel free to ignore them.

You don’t need to worry about the cost of rent etc because you are paying that whether you open or not.

Daily revenue

This is very simply your daily takings, before you take anything out of the till!

Average mark-up per sale

If you use a standard mark-up, for example you always set the selling price at twice the cost of the goods, then the standard mark-up is also the average. (If you are puzzled by mark-ups then take a look at the post below this one)

If you use different mark-ups (or if you have discounted some of your prices) then you need to do a little calculation to get to the average average mark-up.

The point to remember here is that your calculations don’t need to be perfect – so don’t be put off - they just need to be near enough. 

The way to do it is this:

Take a look at your past daily sales to get an idea of the mix, so for example you might see that roughly 80% of your sales are at a mark-up of 50% and the rest are at 30%.

Then do a calculation to work out the average, so in this case your average mark-up will be:

(80%* 50%) + (20% *30%) = 46%

This is just saying that 80% of the goods sold are marked up at 50% and 20% of the goods sold are marked up at 30% so the average mark up is 46%

2. Do a calculation: converting mark-up into margin

The next step is to calculate the gross margin percentage. The margin is the percentage of revenue that is profit.

I talk about mark-ups in the paragraph above because that is the way that most retailers calculate their prices; they take the cost of the goods and they mark-them-up by a standard percentage.

But the mark-up is based on the cost of the goods sold. What we want is a formula based on revenue, because, after all, that is the number that is we have close at hand as soon as the shop is closed.

To convert your mark-up into a margin percentage you do a calculation like this:

Let’s say your mark up is 40%, so if your cost of goods was $30 your selling price would be 1.4* 30= $42

So your profit (your margin) would be $42-$30= $12

So your margin percentage would be profit/revenue=12/42 = 28.6%

It doesn’t matter what you pick as your starting cost of goods, if you follow this little process you will always get to the margin percentage.

So why do we need a margin percentage?

Because once you have worked it out, you don’t have to work it out ever again (phew)! So at the end of every day, when you want to calculate the gross profit, you just do this:

Margin% * daily revenue=gross profit.

So if your daily revenue (takings) were $1000 you would know that you had made 28.6% * 1000= $286 gross profit.

3. So should you open your shop on a Monday?

Imagine your daily operating costs are the salary of one employee, and she is paid $30 per hour for 8 hours. The cost is $240.

In the example above, your gross profit is $286. If you then deduct the daily operating costs of $240 you will see that you make a profit of $46 when you open. That’s ok.

But what if your daily revenue for a Monday was just $500? Your gross profit would be (28.6% * 500) $143, but your costs would be $240. You would make a loss of $97. Not worth opening?

So why did the running-shoe shop feel the need to close on Mondays when the dress exchange found it profitable to open every day?

It is possible that the running shoe shop simply sold much less than the dress exchange. But I think it has more to do with the mark-up that both shops use. The dress exchange always charges a 100% mark-up. Even when they discount their product they retain the same margin (they just pay less to the person for whom they are selling it), whereas the running-shoe shop charges a 65% mark-up at best, and sells a number of styles at a mark-up of just 35%. Their average mark up is something like 45%

So both shops need to cover the $240 cost of sales staff. But to do that the dress exchange needs to take daily revenue of at least $360 whereas the poor old running-shoe shop has to take daily revenue of at least $405 (12.5% more than his neighbour). It makes a difference.

Times to ignore the advice above!

A final word…

When you are a new shop building your trade it probably pays you to be open as many days as possible, even if it’s costing you.  Consider the loss you are making as a marketing cost.

If you are very strapped for cash and need to pay a supplier your best bet may be to open the shop simply to get cash flow into the business (provided the daily takings are more than you are paying your shop assistant). Do remember though that you are opting for cash now at the expense of profit later.