ADVICE ON ANALYSING GROSS PROFIT BY FLOOR SPACE ALLOCATION

Spend 20 minutes to get a fresh view of your business.

With retail space usually costing between 11% and 15% of (non agency) revenue, it is usually the next highest cost outside of the cost of stock itself.

This is not advice you will get from your accountant or from reviewing your P&L or computer reports. It is designed to be practically helpful in managing your business.

1. Take a blank sheet of paper, ideally A3, and roughly sketch out the layout of your shop, marking in display units, wall shelving, the counter – everywhere you have product.
2. The floor plan layout should also include your back room if you have stock there.
3. Colour-shade the layout by department. 
4. List the departments on the side of the floor plan.
5. Calculate the percentage of total space used for each department. This does not need to be accurate to two decimal places. List this next to each department you have listed.
6. Use your computer system to report on gross profit dollars earned by each department over the last year, or calculate it from sales figures knowing the average GP% per department.
7. Calculate the percentage of total gross profit contribution earned by each department and list this next to the floor space allocated to each department - on the floor plan map you have done.
8. Circle in green those performing the best and in red those performing the worst. A best performing department will typically be responsible for a significantly higher percentage of gross profit than percentage of space allocated whereas a worst performing department will be contributing a percentage of overall gross profit considerably lower than the percentage of floor space allocated.

Once you have the marked-up floor plan with the space percentage and percentage of total gross profit, think about your floor space allocation.   

Here are actions the work you do could lead to:

1. Changing the location of a department within the business.
2. Increasing floor space for a department.
3. Decreasing floor space for a department.
4. Working on improving the GP achieved for a department through better buying.
5. Working in increasing sales for a department to lift the overall GPO dollar contribution achieved..

You can take the analysis a step further by looking only at one department and analysing performance by category, using the method outlined above.

The type of analysis we are suggesting here is intended to give you a fresh view of your business as you engage in the process of constant change.