Driving ROA and Profits in Convenience Stores
At a recent seminar that stressed the importance of return on assets (ROA) as a key financial business barometer, the discussion centered on improving ROA and hence profitability.
A commonly used calculation for ROA is: ROA = Profit before Taxes/Total Assets
ROA tells the business owner how much profit the company generated for each dollar of asset. Assets include cash on hand, the value of buildings, real estate, inventory, and equipment, and accounts receivables.
You only have to look out your door to know that the downstream retail petroleum market is asset intensive. To operate our retail business we need canopies, tanks, piping, fuel dispensers, pumps, price signs, walk-in coolers, food service equipment, inventory, shelving, on-hand cash to pay for fuel and inventory, and POS and back office software infrastructure. ROA averages hovering around 6% for c-stores are the current norm.
So how can we improve our ROA?
Beginning with the most important, the following list prioritizes where we should focus our attention on increasing Return on Assets and hence driving profitability:
1. improve gross profit margin (GPM)
2. decreased fixed expenses
3. improve sales
4. reduce inventory or accounts receivable
As retailers, the objective is to maximize store gross profit per square foot. Identifying UPC profit contribution will allow management to replace under performing items that do not meet pre-determined profit objectives with items that will deliver.
Additionally, automating the process allows management to control the quantity of items in inventory to help drive down the cash tied up in inventory without being caught with any stock outs. The net result is an increase in profit.
Your back office software should provide the business intelligence tools to identify:
• product received at the correct cost
• catch vendors delivering product at the incorrect cost
• ensure the correct quantity of product is received
• ensure that product is being scanned at the correct price
• price, cost, rebate, and promotion changes made into the future
• reconcile rebate checks and credits within seconds based upon purchases or sales
• reconciling lottery books and ATM machines
• reduce inventory carrying cost by only purchasing what is needed to meet demand
• identify shrink issues quickly and take corrective action
• identify and remove those items that are your worst GPM contributors
Just pick any three of these items to focus your efforts in returning a greater ROI. You wil see positive results then, start checking off the remaining items one by one.