When you have a lack of supply within the workforce, that drives up the cost of labor.
|Susanne Mariga:||Welcome to the Profit Talk Show. In this show, we’re going to explore strategies to help you maximize profits in your business while scaling and creating the lifestyle that you want as an entrepreneur. I am your host, Susanne Mariga. I am a Certified Public Accountant, a Certified Profit First Professional, and a Certified Tax Coach. Today, we’re going to talk about strategies to help you maximize profits in your business. |
|Hello, Profit First Entrepreneurs. Today, we’re going to talk about the importance of watching the market and the impact of the market on your profits. I recently had the opportunity to speak to one of my clients, and when I was speaking with them, I was surprised by how excited they were. And, they were excited because they were just so grateful for our monthly coaching calls. They are a small local mom-and-pop grocery store. They kind of, every neighborhood appreciates the one that’s right down the street, right across the street, or even somebody’s cases for you guys that are in bigger cities, right downstairs. When you’re in a pinch, you are just so grateful that they’re there. And, my clients belong to a small grocery store consortium. So, that’s like a group of grocery store owners that get together every month to talk about different things. |
|This consortium comes together every month and they talk about things like best practices. They talk about economic events, and they talk about things like various other topics that might impact the grocery store industry. This month, they were talking about the financial impact of the pandemic on their businesses. This was an interesting conversation because as a grocery store, you would have thought that every one of them had the best year ever, especially if you guys have been watching the news and you’re seeing those clips of people running out of the store with those carts full of toilet paper and paper towels, and when you walk down those empty aisles, you see those shelves at once held cleaning products, you would think that every grocery store out there in a universe possibly had the best year ever. |
|But, it was interesting though, because a lot of these stores that were part of this consortium were complaining because although they had experienced a drastic increase in revenue during the pandemic, they experienced an overall 15% decrease in profits. Now, let’s take a moment and let that sink. Even though sales had hit record-breaking numbers, they experienced a 15% decrease in profits. How does a grocery store in the midst of the best year ever, with its highest sales ever, manage to experience a 15% decrease in profits compared to prior years? Now, my client was also in shock. They had never expected to hear this from their peers and they were in shock because they had personally just experienced their best year ever in 2020, not only in revenue but in profits. |
|When I asked them, “Why did they experience such a difference compared to that other industry?” They told me, “You know, Susanne, I think it’s due to the fact that we were meeting with you, our Accountant and Profit First Advisor, and each month we were going over our numbers”. And, not only that we go through their numbers, but we were also looking for fluctuations. We were looking for drastic changes each month. We were looking for numbers from a year-to-year comparison that really stood out each and every month. We were looking for trends of what was going on in the market, and every time that we found that there was a ratio that was out of proportion, we would investigate it and really look into it to figure out what was going on, what was causing this ratio to just really go out of proportion. |
|Now, Profit First Entrepreneurs, when I meet with my clients, I am looking at their costs of goods sold as a percentage of revenue. And, I’m also looking at reports such as the inventory role for reports. What I’m evaluating is what is selling versus what is not selling. So, what is literally sitting on the shelves and starting to go stale? I’m also looking at the last purchase price for an inventory item, meaning how much did my client pay for this from their vendor a month ago in comparison to the current or most recent price of that product? What I’m looking for is something specifically called inflation. And, what inflation is, it’s that natural increase in prices that we experienced in our economy. For example, when you went to the grocery store a year ago, the price of eggs was very different than the price of eggs today. |
|I always find it so interesting that a lot of people don’t even notice that they’re paying a lot more at the grocery store. If you paid for that carton of eggs in 2019, you actually paid $2.25 on average for that, but now, if you go to that same grocery store and you buy that same carton of eggs, you’re going to pay $2.34, that is a 4% increase in just the price of eggs. And, this increase, it’s either the fact that now, the grocery store has to pay a higher wage in order to recruit employees now that it’s COVID, and unemployment benefits are pretty easy to get. So, the quality of employees to get a really good employee, it’s a lot harder to find them.|
|Now, you’re competing with the government, you’re competing with unemployment, and it literally is the simple Law of Supply versus Demand. When you have a lack of supply within the workforce, that drives up the cost of labor. Now, the same grocery store that has to pay more for labor also had to implement COVID safeguards. They had to keep their employees safe, that is their responsibility. So, these grocery stores had to install plexiglass in order to protect their cashiers. They had to purchase hand sanitizers. They had to purchase masks in order to keep their customers and their employees safe. And, at some point, some of these items were even hard to find. Naturally, when they bought these, they were buying them at a higher cost.|
|They also had to limit the number of people that they could allow in the store at any given time because of the social distance requirement. All of these things had a cost and had an overall impact on their overall profitability. Now, in order to combat that offset of the rising costs, this grocery store, first of all, needed to have a process in place to notice that this inflation was even occurring, and this process needed to be really sensitive, especially during the COVID era where prices were constantly fluctuating, flux and constantly changing. These stores needed it to be able to identify these changes rapidly in order to raise their prices regularly, to maintain their profitability in light of these rapidly rising costs.|
|Profit First Entrepreneurs, when your price is to acquire inventory increases, if you do not respond rapidly right to this increase in price to purchase your inventory, you’re going to experience a negative impact on your profits. And, this is especially true during a pandemic situation, and that’s exactly what my client experienced. So, in order to experience their best year ever in sales, what my client did was, monitor for the increasing costs associated with the purchase of their inventory. And, they needed to increase their resell prices and proportion to the increase of costs that they were experiencing with purchasing inventory, hiring people, and also implementing safety measures. They had to increase their prices in order to keep in line with that. So, Profit First Entrepreneurs, you must monitor your financial performance regularly. You must monitor your common size financial statements.|
|And, those common size financial statements are financial statements that you’re looking at, not in terms of just dollars and cents, but also as a percentage of revenue. And, you must do this because the economy is not stagnant. Things do not stay the same. Your vendors’ prices are also in flux. Your vendors are being influenced by market demand. I often think about the housing market and what’s going on within the sector. One of the things that the housing market has experienced is that there has been an increase in the price of lumber, in fact, it is said that the lumber prices have increased anywhere between 50 to a 100% since the start of the pandemic. So, these prices have doubled. And, what this means is that the cost to build your home this year is much more expensive than what it costs in prior years. |
|If the home price is what remains stagnant, if the general contractor would not raise his prices, what would happen is, he would have tanked in profitability for his work in building your home. But, in order to keep up and make up for the rising lumber costs, your GC must increase the price of the home that he is building. So, Profit First Entrepreneurs, watch your inventory costs, monitor your financial statements, do not be like those grocery stores that hit it out of the ballpark themselves, but then lose on the back and where it mattered, which is their bottom line. Don’t lose margin simply because you are failing to monitor the market and notice that the overall prices are skyrocketing. Now, check out my new book, Profit First For Minority Business Enterprises, which’s being sold on Amazon. Get your pre-orders in, we’re expecting the book to sell out, it already hit number one in New Releases. A portion of our proceeds is going towards tuition. We are sending girls to school in Zimbabwe. I’m so excited about that. We have partnered with Hope Worldwide, a nonprofit to do this. And until next time, may the profits be with you.|
|I want you to have your most profitable year ever. Yes, no matter what’s going on in the economy, no matter what’s going on in the world, you can have your best year ever. I want to show you how. Join me in our private Facebook group where I will be hosting our Free, Yes, I said, Free Profit First Masterclass on Facebook. Please join the Profit First Master Class with Susanne Mariga. Again, I look forward to seeing you there and watching you have your best year ever.|
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