By John Matthews, founder and president of Gray Cat Enterprises Inc.
When it comes to managing a profitable operation, knowing the key financial drivers of the store is paramount. Developing a “Four-Wall Analysis” is a helpful tool to better understanding both revenue projections as well as variable and fixed expenses.
Few operators take the time to create a simple Proforma analysis so that they can clearly see what contributes or detracts from store profitability. Rather, they leave the Profit & Loss (P & L) to their accountants on a monthly basis instead of managing to profitability on a daily basis. A “Four-Wall Analysis” provides a simple, yet effective, way of managing the moving financial parts. Each retail store will have its own set of key revenue and expense line items. Managing to your store P & L will create greater overall profits, then simply reading the results at month end.
Pictured above is a sample “Four-Wall Analysis” that combines revenue with expenses. In this scenario, I have used a franchised, foodservice operation with four different Proforma revenue models, combined with corresponding monthly Cost of Goods Sold (COGS) and expense line items. In addition, since this example is a franchise model, I have added in the Royalty and Local Marketing Co-Op expenses. All of the expenses are monthly, and this type of format allows the operator to look at four different revenue scenarios and in a one-page snapshot, know the details that drive profitability.
The benefits of creating the “Four-Wall Analysis” are tremendous for the following reasons:
Sets Goal Setting Target Scenarios: This analysis provides an assortment of the “what if” scenarios that an operator should be cognizant of in order to manage profitability. Most operators will have a ballpark idea on their P & L but will have no sense how a sales increase of 30% or a significant sales decrease impacts their bottom line. By looking at a variety of revenue scenarios and their corresponding expense-loads, an operator is better armed to manage their store.
Know The Key Drivers: Much like the federal government budget that largely consists of three key expense line items – namely, Social Security, Medicare and Medicaid – most operational P & L’s have core drivers to their budgets that if left mismanaged, will crater their profits. In the foodservice industry, those three drivers are food, paper and labor. Failure to manage those three and the remaining expenses are immaterial. Identify the key drivers in your operation and manage these with a fine-toothed comb.
Understanding Variable Vs. Fixed: Under different revenue scenarios, expenses will either be fixed in nature (i.e., rent) or variable based on the volume of the store (i.e., utilities increasing with added hours/equipment). Lowering your fixed expenses to their lowest level through negotiation combined with managing the growth of the variable expenses, is critical to improving profitability. The goal is to improve the delta between additional revenues and manageable expenses.
Overcoming Barriers To Growth: Everyone wants to grow revenues – well, almost everyone. Sometimes, employees will resist growth because they are neither motivated by incentives nor have the desire to work harder servicing more customers. The Proforma scenarios should identify ways to reduce barriers to growth, not layer on more barriers. “War-gaming” different scenarios will provide the operator with ways to motivate their staff to embrace growth, not resist it.
Manage Line-By-Line: Sharp and prudent operators understand that the key to profits is in the details. Each line item should be “scrubbed” to provide the most efficient cost structure. One of my favorites is trash removal. This expense item is determined by: a) size of the container; and b) the frequency of the pickup. If you want to reduce your expense in this line item, train your employees to break down every box, can, etc. and reduce either the size of the container or the frequency of pickup. Managing by line item squeezes dollars from your overall expense load.
Teambuilding Buy-In: Lastly, make your P & L management a team effort. Share and educate your employees on the items that drive the profitability of the operation. If employees are unaware of how their contribution impacts the P & L, then they are not only oblivious to managing profits, but have no incentive, as well. Getting your team on the same page, is a critical step in running a tight, profitable operation.
In summary, knowledge is powerful. The “Four-Wall Analysis” is a critical tool for any operator to embrace because it identifies in advance the key drivers of the operation and allows for the operator to manage to stronger profits. Being proactive and taking ownership of each line item with a process and strategy to maximize profit should be the ongoing incentive for every operator.
John Matthews is the founder and president of Gray Cat Enterprises Inc., a strategic planning and marketing services firm that specializes in helping businesses grow in the restaurant, convenience and general retail industries.