Virtue of standards

The Virtue of Standards Manifesto
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The Virtue of Standards manifesto
A general guide to sustainable success in retail business and food related industry
By
KYLE RHODES
____________________________________________
© 2016 ALL RIGHTS RESERVED

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TABLE of CONTENTS
I: Prelude
II: Figuring Out What We’re All About
A. Mission
B. Locale
III: Standards and Expectations
A. Sustainability
B. Systems
C. No Excuses
IV: The Fundamentals of Customer Satisfaction
A. Clean
1. Tips and Focus Areas
a. Cleaning and Maintenance Schedule
b. Customer Tools and Conveniences
c. Declutter
d. Restrooms and Common Areas
e. Plants and Décor
f. Outdoors and Glass
g. Backstock
h. Employee and Office Areas
i. Facility
2. Safety and Sanitation
B. Service
1. Basic Customer Service Expectations
2. Courtesy and Convenience
3. Disputes and Policies
a. Customer Disputes
b. Policies
C. Quality
1. Quality Control
D. Product Availability and Presentation
1. Out-of-Stocks
2. Inventory Maintenance
E. Customer Communication and Signing
1. Storefront and Direction
2. Pricing
3. Products and Education

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V: The Human Factor
A. Hiring
1. The Screening Process
B. Leading and Managing
1. Orientation and Training
2. Scheduling
3. Delegate, Empower, Reward
4. Accountability
5. The Disciplinary Process
VI: Basic Economics and Financials
A. Math
1. Translating and Understanding Percentages and Decimal Numbers
2 Common Calculations
B. Sales and Revenue
1. Sales Log
C. Cost of Goods Sold (COGS)
1. Calculating COGS
D. Margins and Pricing
1. Gross Profit and Gross Margin
2. Target Margin
3. Estimating Gross Profit with a Target Margin
4. Establishing a Target Margin
5. Blended Margin
6. Generating Profit: Margin VS Sales Volume
7. Margin VS Markup
8. Cost Factor
9. Creating a Retail Price
E. Measuring Business Growth
1. Comps
a. Calculating Comps
b. Comp Trends and Variables
2. Customer Counts
3. Average Transactions
4. Peak Hours
5. Daily Sales
F. Forecasting
1. Forecasting Sales

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G. Inventory
1. Conducting and Calculating Inventory and COGS
2. Total COGS
3. Calculating Value of Inventory Using Cost Factor
4. Spoilage
H. Purchasing and Budgets
1. Purchasing
2. Order Boards and Pars
3. Vendors, Wholesalers and Distributors
4. Purchase Journals
5. Receiving Goods
I. Expenses
J. Net Income and Net Margin
K. Financial Operations Tool

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I. Prelude
Virtue: A quality considered morally good or desirable.
The purpose of The Virtue of Standards Manifesto™ is to provide business owners
and managers with the direction and insight necessary to improve their operation.
Inspired by business rescue programs, I was overwhelmed by the number of
businesses that were struggling because they failed to manage a handful of
fundamental practices. I am not writing to be judgmental, but with the hope that by
outlining a few simple guidelines I may be able to positively contribute to what could
be a successful enterprise. I believe that by focusing on the essentials, and narrowing
the scope of responsibilities, that we can be both more effective and prosperous.
The failure to maintain the basics can be fatal to any business. Granted, businesses
fail for a number of reasons. But with a strong foundation, our businesses have a
greater opportunity to succeed, and the fate of our endeavor is placed more soundly
in our own hands.
The Virtue of Standards Manifesto™ will lay out a few specific areas of operation
that merit attention, as well as some personal philosophy that I have found beneficial
in my own experience. This overview is not intended to be read as a text book, but
rather as a tool of reference to offer support, and as a means to avoid the more
common pitfalls of a struggling business.

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II. Figuring Out What We’re All About
A. Mission
Mission Statement: A summary describing aims, values, and overall plan of an
organization or individual.
In any new business it is important to clearly define in writing:
1. Who We Are
2. What We Do
3. Why We Do It
This not only helps to focus and ground ourselves, but also helps us to connect with
our customers and community.
Here are a couple of examples:
Starbucks: “To inspire and nurture the human spirit one person, one cup, and one
neighborhood at a time.”
Nike: “To bring inspiration and innovation to every athlete in the world.”
Our mission should describe what we as a business are accomplishing each day, and
not so much a goal that we hope to achieve some time in the future. All that we do
should in some way be serving our mission. It is what separates us from our
competition.
Our mission should reflect our personality and be in line with the needs and
sentiments of the community. If our neighbors appreciate what we stand for and
strive to achieve as a business, the more likely we are to generate new customers and
to keep existing ones.

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B. Locale
A poor location can mean the end of a business before ever having the opportunity to
get started. There are more variables in choosing the right location for a business
than can be counted, and these variables change depending on the type of business.
There are, however, a number of resources available for free. It is easy to find
demographic information by zip code that includes basic data such as population,
median age, median income, and education etc. It is also necessary for us to research
potential locations, evaluate traffic, and comparative shop. It is best, if not essential,
to have a sound understanding of the needs and habits of potential customers in the
area in which we intend to establish our business.
Research. Research. Research.
It is necessary to collect and analyze as much data as possible in order to be confident
that we are making an informed decision about our location. Do not become fixated
on a single idea or possibility, or try to force a business into a location where it is not
best suited. Be objective and try to evaluate a location from a customer’s
perspective. We want to choose a location that gives our business the greatest
opportunity to succeed. This may be the most important decision that we make.

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III. Standards and Expectations
Standard: An idea or thing used as a measure, norm or model in comparable
evaluations
In order for our business to maintain success and growth it is necessary to ensure
“high standards” in all areas of service and operations. While this principle may be
applied to any number of areas, we focus primarily on the essentials. If we are able
to consistently achieve excellence in these few key categories, we will separate
ourselves from our competitors, and greatly improve our chances for long-term
success.
How do we know if we have “high standards”? How do we measure them? How do
we achieve them?
Put most simply, there are only two (2) degrees of standards:
1. High Standards
2. Low Standards (or NOT High Standards)
In order to establish our standards, we must first define what is acceptable and NOT
acceptable. The more attention that we pay to detail; the more refined our
expectations, the higher our standards. The more variables that we accept as
passable; or the more relaxed our expectations, the lower our standards. If we use
expressions like, “that will do”, “that’s good enough”, or “that should be fine”, we
are probably not maintaining high standards. In order to consistently maintain high
standards, our expectations must be clear and concise. The more room that we leave
for interpretation, the more likely our standards are to falter.
To use an analogy, let’s describe the cleanliness of a dining area. Is it clean? Or
NOT clean?
If our tables and chairs are clean, but our floors and baseboards are filthy, our dining
area is NOT clean”. If it can be described as anything other than “clean”, it is NOT

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clean. Therefore, we are not meeting our expectations of cleanliness, and NOT
maintaining “high standards”.
We can use this same mentality in every facet of our operation to easily evaluate our
standards, and also to more clearly define our expectations.
- Are the needs of our customer being met? Or are we NOT providing the best
service?
- Is our food the best that we can provide? Or does the quality NOT meet our
expectations?
- Is the machine in good repair? Or does it NOT function as safely as it
should?
A. Sustainability
Sustainable: able to be maintained at a certain level
Once we are able to evaluate and determine if we are able to achieve high standards,
we must determine if we are able to maintain them. In order to truly achieve a high
standard of performance and operation, we must be consistent, and meet or exceed
our expectations for an indeterminate period of time. We must be committed to
achieving the same high level of execution every single business day.
We can translate standards that we maintain in our everyday lives to those related to
our business.
Let’s imagine that we are one of those people whose car is a complete mess: There is
trash in the console, fast food containers on the floorboard, dirty laundry in the
backseat, and graffiti carved in the dirt on the windows. What happens if we have a
date, or if we are expecting to drive someone that we would like to impress?
Generally, we would wash the car, clean out the trash and junk, vacuum, make sure it
smells nice, and put on some music that will make our passenger feel good. Right?
By making our car comfortable for our passenger, we have exhibited our potential
and created a standard that we are capable of achieving. But unless we are able to
maintain the car in this condition, we are not maintaining high standards. We MUST
be consistent.
In business, we need to impress our customers every hour of every day. Unlike our
personal life, in business we do not have the luxury of choosing when our standards
are important. We must always be prepared. If we are not, our customers will go

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somewhere else, and it could literally cost us our livelihood and the livelihood of
others. We must ensure that we are maintaining high standards every business day.
In order to be consistent and successfully maintain high standards, it is necessary to
implement sustainable systems. If we commit ourselves to cleaning our car each day
to ensure that we are always prepared for any passenger, we have created a
sustainable system. If we are capable of creating routines that improve our personal
standards in daily life, it will greatly improve our ability to identify issues, to create
solutions, and to improve our standards in the workplace.
B. Systems
Sustainable systems are simple procedures that we implement in order to ensure that
we are being consistent in our practices, and also maintaining high standards on a
daily basis. Viable systems help us to be more efficient by making a great number of
tasks more manageable and a simple part of our daily routine. These procedures are
performed periodically (hourly, by shift, daily, weekly, monthly, etc.) depending on
the purpose of the task.
- We may walk common or dining areas every 15 minutes.
- We may check restrooms every 30 minutes.
- We may count drawers every shift.
- We may mop floors daily.
- We may place orders twice weekly.
- We may perform inventory every week.
Regardless, systems are essential in order to maintain consistency, and are also
beneficial in helping to establish job expectations. Logs, checklists, and calendars
are all common systems used to ensure that expectations are being met.
- Logs are effective in recording tasks that need to be continuously maintained
throughout the day. They are also beneficial, and often required, for safety
and liability purposes (i.e.: Sweep Log, Temperature Log).
- Checklists are more procedural, and can be effective in ensuring that a
number of necessary tasks are being completed throughout the work day or at
the end of a shift.
- Calendars are always ideal for planning ahead. If we have a special event
soon, we can mark our calendar a week or two ahead to make sure that will
be prepared. We mark our calendar a few days ahead of time to review our
strategy and to troubleshoot.

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When developing systems, it is preferable to maintain written documentation for a
couple of reasons:
- To ensure that tasks are being completed as required.
- To assess accountability and more easily identify opportunities for
improvement.
We all have our own personalities and our own unique styles. What works best for
us may not be the best solution for others. As business owners and managers, it may
be important to consider the most practical system for those performing the task. The
important thing to remember when creating sustainable systems is that they are
effectively serving their purpose:
- Our expectations are clear and concise.
- We are maintaining our standards.
C. No Excuses
Excuses are a fast-track to failure.
Once we have established our standards and the expectations with which we maintain
them, it is important that we not allow excuses to drag us down. As leaders, others
look to us for the answers.
Rather than making excuses:
1- Identify the REASON that we are not meeting our expectations.
2- Find a SOLUTION that will solve the problem and resolve the issue.
Excuses are contagious, and can create a domino effect that spreads from one area of
operation to another if we let them.

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IV. The Fundamentals of Customer Satisfaction
People talk. That's why it is so very important to satisfy each customer that walks
through our doors. Before we consider spending on advertising, a diligent focus on
satisfaction is the surest way to grow our customer base and business. Not only does
this encourage our existing customers to return again and again, but greatly improves
the likelihood of them encouraging their family and friends to visit us as well.
We must go beyond remarkable service, and provide our customers with a clean,
comfortable atmosphere in which they enjoy passing their time. Creating a relaxed,
enjoyable experience for our customers will keep them coming back, and will be the
difference between them choosing us over a competitor that may be located nearer to
their home or office.
The number of ways that we can accommodate and impress our customers is
limitless. However, this section focuses on a handful of simple fundamentals that our
customers will expect and appreciate.
A. Clean
Having a business that is always clean and in good repair is essential. Sweeping
floors and wiping tabletops is only the smallest part of keeping our business clean. A
clean, inviting atmosphere invites customers to spend more time in our establishment.
A comfortable environment can even make us a destination for customers over
nearby competitors. Adversely, an unclean business is among the top reasons that
customers choose to shop elsewhere. Not only could we lose existing customers, but
a bad reputation could also deprive us of new customers. In addition, we must also
maintain our work spaces, backstock and employee areas. Cleanliness and
organization in the back are relative to how we operate and perform on the sales
floor.

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1. Tips and Focus Areas
a. Cleaning and Maintenance Schedule: A comprehensive schedule
puts all of our tasks into a regular rotation to ensure that all cleaning
and maintenance is performed as necessary. Cleaning as we go can
help to prevent unmanageable messes.
b. Customer Tools and Conveniences: Carts and hand baskets should
be clean and in good repair (especially those used by children).
Trash bins should be wiped and emptied regularly. Scales and other
conveniences should be sanitary and cleaned of adhesives.
c. Declutter: All areas, especially those visible to customers, should be
tidy and well-organized. A cluttered sales floor can cause
undesirable stress and prevent our customers from moving about
freely. Well thought-out merchandising can help to prevent
bottlenecks and foot-traffic congestion.
d. Restrooms and Common Areas: Make certain that customer
facilities and eating areas are inspected and serviced routinely.
Restrooms should be fully operational, stocked and cleaned
thoroughly. Dining areas should be maintained. Condiments and
conveniences should be readily available.
e. Plants and Décor: Plants and decor that are or not maintained can
become eyesores or even unsanitary. Plants should be watered as
needed and thriving. Services are available at an expense to
maintain rental plants or provide artificial foliage. Art and
ornaments should be dusted and detailed.
f. Outdoors and Glass: We have an opportunity to make a positive
impression before our customers even walk through our doors.
Make sure parking lots are free from trash and debris. All foliage
should be well-maintained. Grass should be cut; trees and bushes
should be trimmed and well-kept. All glass along our doors and
storefront should be clean, attractive free from messy adhesives like
tape.
g. Backstock: Backstock areas should be clean, organized and well-
maintained. This will help to tighten our ordering practices, and also
alleviate headaches at inventory time. Out-of-stocks on the sales
floor are not acceptable. Losing sales because we are not aware that
we have an item in backstock is inexcusable.
h. Employee Office and Lounge Areas: Providing suitable and
productive work areas for our personnel is a good way to exhibit
respect and appreciation for the work that they do. Having an

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accommodating and comfortable place for employees to relax during
break times can help boost morale and productivity.
i. Facility: Each new day we should dedicate ourselves to ensuring
that our facility appears and functions the same as it did on our very
first day of business. Our facility should be in good repair and décor
should be kept appealing and relevant. Paint should have an
attractive appearance and free from unattractive dirt and dings. The
more refined our attention to detail, the better.
2. Safety and Sanitation
Some tasks help to prevent injury and may be required by law.
- Sweep Logs help to ensure that our floors are free from debris and spills that
may be hazardous and cause an accident.
- All food storage and handling areas must be diligently maintained, and
managed according to local and federal food safety regulations. There are
companies and services available that specialize in this area that can assist us
with our efforts and help us to be compliant.
B. Service
Our business should employ a courteous staff that is familiar with products and menu
items, store layout and policies. It is the responsibility of our service representatives
to make our customers feel welcome and comfortable. They provide the answers and
support necessary to meet our customers’ needs. If we are able to provide our
customers with personable service, and the knowledge to help them make informed
decisions, we already have an advantage over our competitors. While many
businesses boast about their great customer service, the reality is that it is a complete
waste of time to ask someone for help. We will be the definition of exemplary
service, and exceed the expectations of our customers.
While personal service is our priority, it is also our responsibility to provide every
convenience to ensure that our customers enjoy a convenient and carefree experience.
In addition, we must make every effort to quickly and efficiently resolve any issues,
and make every reasonable concession to ensure complete customer satisfaction.
1. Basic Customer Service Expectations
- Service staff is prepared and familiar with products, store layout and policies.
- Staff is dressed in approved business-appropriate attire (and not smelly).
- All customers are greeted upon entering, acknowledged with eye-contact,
and offered assistance.

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- Customers should be walked to product that they are interested in OR
followed-up on if they are only browsing.
- Customers should be made aware of like or complimentary items or
store/employee favorites.
- All customers should be presented with the item(s) that they are looking for
and/or answers should be found for all inquiries.
- Upon exit, all customers should be sincerely thanked and invited back again.
2. Courtesy and Convenience
We never want to create work for our customers. Even for our regular more self-
directed guests, there are conveniences and courtesies that we may provide to ensure
a pleasant visit and seamless shop.
- Be sure that carts and handbaskets are available, in good repair and clean.
- Be sure that antibacterial wipes are available where needed and well-stocked.
- Be sure that waste baskets are available where needed and emptied.
- Provide samples to introduce new or popular products.
- Make sure that bags and twist ties are available where needed.
- Make sure that customer tools like scales or price scanners are functioning
properly. If vending machines are used, they should meet our standards and
also work.
- Make sure napkins, condiments and other conveniences are available and
always well-stocked.
- Be aware of and accommodate special needs or requests, especially from
regular customers.
3. Disputes and Policies
a. Customer Disputes
Regardless of how diligent we are in our practices to satisfy our customers, we must
sometimes literally go the extra mile. But contrary to popular cliché, the customer is
not always right. Customers are people, and as we know, some people are just not
happy. However, this fact should never derail us from our ultimate goal of satisfying
each and every customer. We are here to serve and satisfy. Everyone. Blame should
never be a point of contention. Much like the law, right or wrong has nothing to do
with it. The sooner that we are able to remove liability from the situation, the sooner
we can get to the task of resolving the issue and maintaining our good relationship
with the customer. Remember, satisfaction is the objective.
- Listen to the customer’s request, concern, or complaint.

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- Find an answer, create a solution, and suggest alternatives. Whatever it takes
to solicit good will.
b. Policies
Policies are created to better serve our customers, for safety reasons, or some may be
required by law. But many policies are created internally to protect our business
from financial loss. If we are a policymaker, or have the flexibility to interpret our
policies depending on the situation, it is generally preferable to act in a way that is
most agreeable for our customer.
Most people are honest and genuine. As policymakers, we must determine if those
policies designed to protect us from loss are of greater value than the actual loss of
our honest paying customers. Generally, it is most productive to give the customer
the benefit of the doubt. If there happens to be an individual that constantly has an
issue that no other customer seems to have, we will know. And we can manage that
situation as necessary. But it simply does not make sound financial sense to punish
our entire customer base over the eccentric delusions of one individual. Conversely,
if we are approached several customers that seem to have similar issues, it may be
time for us to examine our policies or amend them to be more accommodating.
We should not get stuck in policies that may make sense in one place, but not in
another. While people may have common needs and interests, the diversity of
cultures and social interests vary in each community. We should not lock ourselves
into a blanket policy that may be suitable in one location, but will distance us from
our customers in a second location in a different neighborhood.
C. Quality
We always want our customers to be satisfied with the quality of products and
services that we provide. Each time they visit, we want to provide our customers
with the same enjoyable experience that motivated them to come back and see us.
This is among the reasons that consistency is so important, especially when we talk
about quality. We may visit a restaurant and be served the greatest pastrami and
cheese sandwich that we have ever eaten. But when we return to the same restaurant
and order the exact same thing: the meat is lousy with fat, the bread is day old and
hard, and the cheese is missing! What happened? There is a good chance that we
will not return again. This same principle may be applied to retail or services.
There are any number of reasons why we decide to sell a specific product. And many
of them revolve around value image or perception. However, people in general
prefer and appreciate quality. To paraphrase Dennis Miller, “Two of crap is crap…”

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While an attractive price point may attract some, we will not retain many customers
if the products that we sell or serve are substandard or inferior. The delicate balance
between our cost of goods, our profit margin, and the quality of products that we
provide to our customers merits careful consideration.
1. Quality Control
- Establish quality standards in every segment of our business.
- Communicate our expectations of quality to those responsible for selling and
serving.
- Evaluate quality daily to ensure consistency.
- Do not offer customers products that do not meet our quality standards.
D. Product Availability and Presentation
Before we are able to sell goods and services to our customers, we must have the
products to sell on-hand. Our product stock levels should be full and abundant.
Quantities for popular, trending or best –selling items should be sufficient enough to
accommodate all of our customers. Empty tables or shelves look tacky and
substandard. Pretending to have ample stock by merchandising less popular items in
gaps and empty spaces is a waste of time, and loss of revenue. This practice can also
create additional confusion and frustration for our customers as signage becomes
displaced and pricing is mismatched.
1. Out-of-Stocks
Customers will buy what they want, even if they have to go somewhere else to do it.
Walking an automatic sale as a result of an out-of-stock item is literally like throwing
cash in the trash can. Persistently being out-of-stock of key products can avalanche
into the loss of our core customers and the established income that they provide.
2. Inventory Maintenance
- We must monitor our on-hand quantities daily to ensure that our top sellers
are in stock, and that we are not missing any sales. We should establish our
merchandising standards to ensure: sufficient quantities, and attractive
presentation, and convenient and/or prominent product placement.
- We should establish par inventory quantities, and use order boards when
replenishing our stock. Using par quantities when placing orders is a best
practice. A par is the average or preferred number or amount of a particular
item that we should always have on-hand. (i.e.: If we have 2 in stock, and
our par is 5, then we order 3.) If we are selling out of an item, we should

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increase our par to have more on-hand. Adversely, pars also tell us what we
should not be carrying. If we have a product on the floor that has not sold in
months, get rid of it! It is taking up space for other merchandise that could
make us money. We should chalk it up as a lesson learned, mark it down,
and get it out the door. The longer a product just sits there, the more it costs
us.
- We should always pay attention to customer requests. Our customers are
sometimes a step ahead of us and can dictate the products that we carry.
Often times a magazine article or mention on TV can create an onslaught of
requests for an unknown product. We should research and react
immediately. These are great opportunities to boost sales, but are often
fleeting. So we need to respond quickly.
- Communication with our customers is key. Sometimes there is a legitimate
reason that a product is unavailable. We need to communicate all
manufacturer outages, regional shortages, recalls, etc. to our customers to
solicit their understanding. “We forgot to order it” is not an acceptable
reason.
E. Customer Communication and Signing
Some folks prefer to walk alone. While signage is decidedly secondary to friendly,
personal service, it is our responsibility to provide every convenience to those
customers who prefer to do for themselves. Signs act as a guide that direct customers
throughout our store, and provide useful information that assists them with their
purchases. The more information that we are able to provide, the easier it is for our
customers to navigate our store and make informed decisions. Signs should never
overwhelm or distract from our featured products: The product should do most of the
talking. Signs should not be confusing, but easy to read, translate and understand. A
few ground rules:
- Signs should have a professional, business-appropriate appearance. If we are
unable to create them ourselves, there are inexpensive services like Vistaprint
that provide good quality and easy-to-use design tools.
- As a guideline, signs should not be hand-written unless part of design or
décor. (Like chalkboards or old world market-style.) And should still be
professional and easy to read, and never on regular flimsy paper.
- No tape or hard-to-remove adhesives should be used. Find an alternative that
will not leave behind an unattractive and permanent mess.

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1. Storefront and Direction
Our storefront signs should let customers where we are and what we do. People must
know where to find us. Make sure storefront signs are visible to passers-by. These
signs should be well-lit and in good repair. A broken letter or busted bulb looks bush
league, and may give customers the perception that we maintain low standards
indoors as well. Products or services that are highlighted on our signs should be
clear, and accompanied by our recognizable logo. Upon approach, the simple things,
“Open” or “Close and store hours should be accurately reflected. Indoors, signage
that provides direction should be easily visible and self-explanatory. Departments
should be easy to locate.
2. Pricing
Regardless of the system that we are using, pricing must be accurate and diligently
maintained. Inaccurate pricing is among the quickest ways to lose customers. Price
audits should be performed routinely.
3. Products and Education
Detailed product and service signs can make decisions easier for our customers or,
better yet, make their decisions for them. Popular, unique or artisanal products give
us an opportunity to tell a story and make a personal connection with our customers.
We should take advantage of every opportunity that will provide our customers with
extra motivation to buy. Some common ideas for effective product signs include: top
sellers, store recommends, or local products.

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V. The Human Factor
Every business, in some way, is a product of the people it employs; for better or for
worse. At some point it is necessary to hire capable people to help with, if not
manage, our day-to-day operations. We depend on our employees to serve our
customers and to represent our business and principles. So finding the right fit is
important.
Skills and areas of expertise will obviously vary depending upon the position for
which we are hiring. However, good attributes can include but are not limited to:
- A positive disposition.
- Being well-spoken with a courteous demeanor.
- Having respectable people skills.
- Being well-groomed and dressed in business-appropriate attire.
- Being self-motivated and able to follow directions.
- Being available when is necessary, dependable and responsible.
A. Hiring
While first impressions can tell us a lot, they do not always give us a clear
understanding of how an individual may perform over a long period of time. And
one bad hire can have a detrimental effect on our entire operation. Employees that
are incapable of reporting for their scheduled shifts or pulling their own weight create
more work for others and have a negative impact on productivity and morale. This is
the reason that it is so important that we are hiring the right people. Offering a
competitive wage, advancement opportunities and benefits may encourage the right
person to work with us rather than our competitors.
There are simple measures that we can take to improve our pool of candidates.
Rushing the hiring process out of necessity can cause an endless cycle of the same
headaches. Properly training personnel costs time and money. Having inexperienced
employees on the business floor can cause our service and standards to suffer, and
also cause the loss of our customers and sales. By implementing a screening process,
we can automatically eliminate from consideration those who have trouble being
punctual, following directions, or have issues with availability.

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1. The Screening Process
A screening process is the measure that we take beyond thumbing through
applications to ensure that we are only considering the best candidates. Sometimes
the applicants that look good on paper are not necessarily the best fit, while
applicants with limited or unrelated work experience can prove to be an asset that we
cannot live without.
- Set up a designated day and time to conduct multiple interviews, and do not
interview applicants that are late.
o Eliminates those that cannot be on time.
o Eliminates those with limited availability, or who may not be
available during business hours when we need them. (If a potential
hire with limited availability is a good candidate, they will at least
find a way to be considered for a position. If they do not, then we
have already identified and resolved a probable issue.)
- Do not make a decision right away. Carefully evaluate each candidate to
determine which is best for the position.
o Have a pool of candidates from which to choose.
o Take the time to check references.
o Call candidates back for second or even third interviews until we are
confident in our decision. (It may even be appropriate to include
trusted veteran team members in on the process.)
- Have an evaluation period.
o Gives both parties the opportunity to amicably part ways if it is
determined that the job is just not the right fit.
o Gives us the opportunity to part ways with new hires that are not able
to meet fundamental job expectations.
It is good to keep a record of viable prospects. Since we may not be able to hire
everyone, we can circle back to those favored candidates should another suitable
position become available.

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B. Leading and Managing
As discussed in the ‘systems’ section, we all have our unique styles. Similarly,
different personalities are motivated and respond to direction in different ways. As
leaders, it is our responsibility to develop an approach that will encourage the best
performance from an individual. Although our scales may tilt differently, it is also
beneficial to find a balance between our work life and personal life. Having this
simple consideration for ourselves and others can reward us with a more enjoyable
and productive workplace.
1. Orientation and Training
Routine tasks and interacting with customers can be difficult, demoralizing and even
embarrassing for even the best new hires if they are not properly prepared. To
maintain consistency, we must have an adequate training program in place to ensure
that employees are comfortably representing our business and standards. We should
create a comprehensive plan that covers all areas of service and operation. While we
should try not to rush the process out of necessity (i.e.: being short-handed), training
should be completed within our evaluation period.
Orientation
It is nice to acquaint our new hires with our business, history and mission. This helps
to give the individual a better understanding of the culture to which they will be
contributing.
Training
Our training programs should include but are not limited to:
- Our service and operational standards.
- Clear and concise job-specific responsibilities.
- Comprehensive educational training of products, menu items, and
procurement.
- The tools and resources necessary for our employees to perform their jobs
most effectively.
To build confidence, it is beneficial for a new hire to be partnered with or shadow a
veteran that is already familiar with the standards and expectations of the position.

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2. Scheduling
Scheduling expectations should be made clear before hiring and treated as all other
job-specific responsibilities. While we must adhere to availability and requests that
were agreed to at the time of hire, scheduling should be done according to the needs
of the business. In order to avoid distracting situations and conflicts, we should
provide the same consideration and courtesies to all persons equally.
3. Delegate, Empower and Reward
We hire for a reason. We cannot do it all ourselves. If we are making good hiring
decisions and have a sound training program in place, we should maintain confidence
in our employees’ ability to do their jobs. It is our task to mentor and motivate.
- Have a list of tasks that need to be completed.
- Delegate tasks and offer direction.
- Provide support, and answer any questions or concerns relative to the task at
hand.
- Listen to productive feedback or ideas that can improve our systems or
methods.
o Getting others involved in the decision-making process can create a
feeling of ownership and instill a sense of pride that can be
invaluable in consistently maintaining our standards.
- Empower individuals to create solutions that are consistent with our policies
and standards.
- Follow-up to ensure that all tasks are completed properly and within a
justifiable period of time.
- Address and resolve any and all issues or challenges that may have arisen.
- Recognize and reward excellent performance.
o Everyone likes to feel appreciated. Rewards and recognition are
great motivational tools, and can also encourage longevity.
4. Accountability
Regardless of the measures that we take, some relationships simply do not work.
This is the reason that we must be diligent about our training. When job
responsibilities are clear and concise, and employees have a clear understanding of
their expectations, it makes difficult conversations more productive for everyone.
We should hold all positions equally accountable, and disciplinary measures should
be consistent.

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5. The Disciplinary Process
1. Create a written record of the issue or policy infraction. Include the date, and
a detailed description on the incident.
2. Have a conversation with the employee. Discuss the issue and the reason for
the infraction. If we are effectively performing our job as manager, the
employee should expect a conversation.
3. Agree on a plan that will correct or resolve the issue.
4. Have the employee acknowledge the conversation in writing.
5. Give the individual the opportunity to correct their performance.
6. Follow-up whether the situation has improved or is recurring.
If after several opportunities an individual is unable to perform to our standards or to
meet their job-specific expectations, it may be time to part ways. At the end of the
day it is our responsibility to maintain our standards. We need motivated doers on
our team. So, if an individual is preventing us from achieving our goals and we fail
to correct the situation, the fault is our own.

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VI. Basic Economics and Financials
In our business the ultimate goal is to make a profit. In order to make a profit, we
must sell our goods at a higher price than we pay for them. In addition, and most
importantly, we must have money left over once we have paid our operating
expenses. Easy, right? Sounds simple. However, the most common mistake that we
make as business operators is to simply not pay attention to what is happening. Or
worse yet, not caring; in which case we should probably fire ourselves, and find
something that we actually enjoy doing.
Financial analysis, in some way, plays a part in almost every aspect of our business.
And making sound financial decisions is among our greatest responsibilities. We
must pay attention. We have to know. And we have to care. Otherwise, fancy décor
and a prime location will amount to nothing.
Keeping track of our finances is not that hard. With some simple math and a
calculator we have all of the tools we need to be fiscally responsible. Granted, it may
take some time and experience to get great at it, but the effort will prove to be well
worthwhile. Money is the objective. By observing a few good financial practices, it
is easier to keep track of where our money is going, to identify areas of improvement,
to reduce expenses, and to maximize profits. If we do not happen to enjoy this aspect
of our business, we should consider hiring someone that does. Regardless, we must
still be aware of and understand our financial performance.
A. Math
Many people do not like doing math. But being financially responsible and most
profitable in business is going to require us to refine our skills. This is absolutely
nothing to fear or get stressed about. If we visit a foreign country it is not necessary
for us to be fluent in the language. Usually if we are able to order a beer or find a
bathroom we are just fine. Same principle. We are not engineering a rocket ship to
Mars. We are simply balancing our checkbook.
1. Translating and Understanding Percentages (25%) and Decimal Numbers (.25)
While managing our financials we often use percentages and decimals
interchangeably in a great many processes: to forecast our sales, to estimate our
purchasing and labor budgets, and to predict our operating expenses. Percentage

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(%) simply means “of 100”. So, 35 people out of 100 people would be 35%. A
percentage may be expressed as a decimal number (.35) simply by moving the
decimal over to the left two places (i.e.: 35% becomes .35). To create a percentage
from a decimal, we move the decimal over to the right two places and add the ‘%’
symbol at the end (i.e.: 0.35 becomes 35%). This is something that we need to know
by heart to ensure quick and accurate calculations. It is super easy.
67% = .67 .53 = 53% .1767 = 17.67%
39% = .39 -.97 = -97% .3953 = 39.53%
6% = .06 .03 = 3% 20.01% = .2001
10% = .10 .15 = 15% 98.10% = .9810
If a percentage is greater than 100%, then we use the whole number in front of the
decimal.
120% = 1.20 210% = 2.10 755% = 7.55
141% = 1.41 407% = 4.07 1278% = 12.78
To be as accurate as possible for accounting purposes, we generally round our
percentages to the hundredth. When managing substantial sums of money, one-tenth
of a percentage can represent a sizeable amount. So if our calculator gives us a result
that is the length of its display, there is no need to panic. The same rule applies. We
simply move our decimal over to the right two places to get our percentage.
.1532 = 15.32% .47532 = 47.53% .5688421 = 56.88%
-.0850 = -8.50% .00863 = 0.86% .0005126 = 0.05%
2. Common Calculations
Not that we can confidently convert our percentages and decimals, it is time to put
our knowledge to practical use. In calculating our spending budgets for example, we
often times must derive our budget by using the percentage of a whole number.
(Unlike percentages, our dollar amounts ($) may be expressed as whole numbers.
We can leave off the cents.) This is accomplished with some rudimentary
multiplication.
1: 20% of $100 20% = .20 . 20 X $100 = $20 20% of $100 = $20
2: 25% of $1000 25% = .25 . 25 X $1000 = $250 25% of $1000 = $250
3: 67.25% of $5000 67.25% = .6725 .6725 X $5000 = $3362 67.25% of $5000 = $3362
4: -49.39% of $11670 -49.39% = -.4939 -.4939 X $11670 = -$5763 -49.39% of $11670 = -$5763
5: 0.07% of $89201 0.07% = .0007 .0007 X $89201 = $62 0.07% of $89201 = $62
6: 151.09% of $6233 151.09%=1.5109 1.5109 X $6233 = $9417 151.09% of $6233 = $9417

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We have just made relatively easy work of what, to others, might look like some
pretty complex financials. We have just learned how easy it is to calculate our
purchasing budgets and to forecast our expenses. With practical experience, making
calculations like these becomes routine.
There is one last equation that we must review before moving on to the fun stuff. At
times it is necessary for us to derive a percentage from the difference in two dollar
amounts. We can accomplish this easily by using simple subtraction and division.
Sales COGS (Sales-COGS) Gross Profit (Gross Profit / Sales) Gross Margin%
$10,000 $7000 $10,000-$7000 = $3000 $3000 / $10,000 = 0.3000 or 30.00%
$51,500 $29,500 $51,500-$29,500 = $22,000 $22,000 / $51,500 = .4271 or 42.71%
$79,425 $48,918 $79,425-$48,918 = $30,507 $30,507 / $79425 = .3840 or 38.40%
$42,218 $33015 $42,218-$33,015 = $9203 $9203 / $42,218 = .2179 or 21.79%
$20,143 $22,833 $20,143-$22,833 = $-2609 $-2609 / $20,143 = -.1335 -13.35%
With these simple equations, we just managed to calculate our gross profit and gross
margin. Once we have a sound understanding of the fundamental mathematics in
this section, we should be able to confidently manage our financials.
B. Sales and Revenue
Put simply, both ’sales’ and ‘revenue’ refer to income. Sales generally represent the
total amount of income that we generate from the sale of our goods and services.
Revenue may refer to total income including sales in addition to other sources of
income such as interest or royalties, etc. Since the sale of goods specifically will be
representing our total income for the purposes of our financial topic, we will use the
term ‘sales’; if only to simplify the matter and avoid unnecessary confusion. We use
our total sales to determine our profit, margin, in calculating our spending budgets, in
forecasting our expenses, and in measuring our business growth.
1. Sales Log
In order to measure the performance and growth of our business, it is necessary to
utilize a sales log. A sales log is simply a record of our daily sales that should be
diligently maintained and kept indefinitely. Sales are generally recorded each
business day, and then divided into weeks and months or a specific financial period.
Not only is it essential that we understand how our business is doing, but we will also
use these records to estimate or forecast our future sales and budgets.

Kyle Rhodes
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C. Cost of Goods Sold (COGS) (COGS = Beginning Inventory + Purchases –
Ending Inventory)
Cost of Goods Sold (COGS) represents the total cost of goods sold by our business.
If we are manufacturing our own goods, then COGS will also include the cost of
materials and labor necessary to produce them. For the sake of our economic
overview, COGS refers specifically to the amount of money that we pay to our
vendors to provide us with the goods that we sell.
As an analogy, as physical fitness must begin with a healthy diet, our COGS help to
improve and sustain our financial health. If we are not conscientious about what we
spend, we will never achieve our desired results, despite the effort and hard work that
we put into it. Our profit is determined with our COGS. We must operate within our
purchasing budgets if we desire to consistently maintain a healthy bottom line. As
may be true in our personal lives, if we buy whatever we want without keeping track
of our spending we will end up in debt.
1. Calculating COGS
COGS = Beginning Inventory + Purchases – Ending Inventory
Most businesses conduct monthly or periodic inventories to ensure that their COGS
and profit are in line with their expectations. If our inventory at the beginning of the
period is $50,000, our purchases during the same period are $80,000, and our
inventory at the end of the period is $40,000, then our COGS are $90,000.
$50,000 + $80,000 - $40,000 = $90,000
D. Margins and Pricing
1. Gross Profit and Gross Margin
Gross Profit = Sales – COGS
Our gross profit is determined by subtracting our COGS from our Sales.
Gross Margin = Gross Profit / Sales
Our gross profit margin or gross margin is the way that we measure our profitability,
and is expressed as a percentage. Our gross margin or margin represents the
percentage of our sales that we may use to pay our expenses.

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SALES COGS GROSS PROFIT GROSS MARGIN
(SALES-COGS) (GROSS PROFIT / SALES)
$100,000 $70,000 $30,000 30.00%
$50,000 $37,375 $12,625 25.25%
$75,525 $63,900 $11,625 15.39%
$250,834 $146,628 $104,206 41.54%
2. Target Margin
Our target margin represents our desired profitability expressed as a percentage. It
can also help us to determine our retail selling prices. It is essentially the average
gross margin from all of our sales compared to the gross profit generated from the
sale of all of our products combined (May be calculated for our overall business or
for specific departments independently). Profitability in business depends on the
industry. Characteristically, bottled water and designer clothing for example have
high profit margins, while groceries or new cars have lower profit margins. So, it is
not possible to create a single target margin that would be applicable for all
industries. Similarly, retailers generally offer a great variety of different goods. So,
since we make more profit with some products than we do with others, our target
margins for different segments of our business will also vary; and could vary greatly.
For this reason, it is usually necessary to divide our inventory into departments or
categories, and create an appropriate target for each. This will help to ensure that we
are pricing our products accurately, and maximizing our profit in each segment of
our business.
To create our target margin, we must do some research to determine the industry
average or industry standard. There is an abundance of information and resources
available on the internet that should help us to determine our target margin. We may
also compare our COGS on specific products to their selling or retail prices to help
us refine our targets.
It may take time, practical experience, and some experimenting in order to establish a
target margin that is accurate and representative of our actual financial performance.
3. Estimating Gross Profit with a Target Margin
If we have an idea of what our sales will be, we can use our target margin to
determine our anticipated gross profit. We refer to this process as projecting or
forecasting.

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Sales Target Margin Gross Profit Forecast
(Sales X Target Margin)
$10,000 30.00% $3000
$25,000 25.00% $6250
$100,000 15.75% $15,750
$250,000 26.74% $66,850
4. Establishing a Target Margin
- Compare average retail prices with our competitors and other retailers to
ensure that we are pricing our products competitively.
- Use the industry standard to help create a baseline for our business.
- Compare our COGS from a broad sample of key products and use our retail
prices to help determine an average.
5. Blended Margin
The combined gross profit margin for all products and services is referred to as our
blended margin. Since we will more than likely be selling a great many different
products, margins will vary depending on the specific product. To determine gross
margin for single products, we use the same formula as we would in determining
gross margin for our business. Rather than using sales, we use the product’s selling
or retail price. (A retail price is simply the price that we charge our customers for a
product.) The cost charged by our vendor for a single product will represent our
COGS.
Retail Price COGS Gross Profit Gross
Margin
Product 1: $6.99 $5.25 $1.74 24.89%
Product 2: $25.99 $19.60 $6.39 24.58%
Product 3: $3.99 $2.88 $1.11 27.81%
Product 4: $43.99 $36.74 $7.25 16.48%
Product 5: $9.99 $7.12 $2.87 28.72%
Product 6: $15.99 $12.52 $3.47 21.70%
Total Retail $ Total COGS Gross Profit Blended Margin
All Products $106.94$84.11 $22.83 21.34%

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There is much that we can learn from the example above. Most importantly, we may
NOT take the average of our gross margin percentages combined to determine our
blended margin. (When dealing with varying amounts, an average of percentages
will not be accurate.) We must use our formula (Margin = Gross Profit / Total
Sales). As we can see, both gross profit and gross margin are relative to price and
cost. We may generate most of our profit dollars from our lower margin items
because of their higher retail price. On the contrary, we may generate fewer profit
dollars from our higher margin items because of their lower retail price.
6. Generating Profit: Margin VS Sales Volume
Sales solve everything. But first we must have a clear understanding of the
difference between our profit and margin. While a percentage (margin) may be
derived from anything, we must first generate sales in order to show a profit. At the
end of each day, profit speaks the loudest. However, the strategy that we use to
achieve the most profit depends on the opportunities provided to us by our type of
business. For example:
- Convenient stores will have higher margins. They can justify higher retail
prices by offering a more convenient location for their customers to purchase
goods.
- Mass merchants like Walmart will have lower margins. They create more
profit by offering the absolute best retail prices to a very high number or
volume of customers. They are also able to reduce their COGS and
maximize profit by purchasing goods in great quantity.
Sales Gross Margin Gross Profit
High MARGIN Retailer: $25,000 40.00% $10,000
High VOLUME Retailer: $100,000 25.00% $25,000
As demonstrated, higher margin does not necessarily mean more profit. Another
important thing for us to notice and understand is the relationship that volume of sales
has with both margin and profit. As effective operators, we must determine a retail
price that will generate the highest volume of sales dollars while still providing
perceived value to our customers. High margin items produce a higher margin than
our target. Low margin items produce a lower margin than our target.
If we are at all confused at this point, the following example should provide us with
that “a-ha” moment that we are searching for. This example presumes that we have a
target margin of 25.00%.

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Sales Product Margin % Gross Profit $ Target Margin % (+ or -) Target $ $ (+ or -)
$1000 26.00% $260 25.00% +1.00% $250 +$10
$1200 24.00% $288 25.00% -1.00% $250 +$38
This example presumes that by pricing a product at 26% margin we will generate
$1000 in sales.
By pricing the same product at more reasonably at 24% margin we generate $1200 is
sales.
Even though we are not meeting our target margin of 25% in the second instance, we
are generating more profit dollars than pricing our product at +1.00% above our
target margin.
While we always strive to meet or exceed our target margin, we will sometimes fall
short. That’s OK. Don’t panic. Contrary to what some believe, boosting or driving
sales in favor of meeting our target margin is not a forbidden thing. If we are
competent, careful and aware of what we are doing, we have the flexibility to
improve our sales and profit if the opportunity presents itself. The important thing is
that our business is growing, and that our profit is greater than we expected or
forecasted. It is very unlikely that an investor will have a problem if our financial
performance is better than anticipated.
7. Margin VS Markup
Confusing margin % with a markup % is a relatively common mistake but can have
some demoralizing results if we are not careful. Our margin compares our gross
profit with our SALES. Markup compares our gross profit with our COST
(COGS).
If we sell an item for $10.00 and the cost (COGS) of that item is $8.00, then our
gross profit is $2.00.
Therefore our margin is 20.00%. ($10 - $8 = $2. $2 / $10 = .20 OR 20%)
If we sell an item for $10.00 and the cost (COGS) of that item is $8.00, then our
gross profit is $2.00.
Therefore our markup % is 25.00%. ($10 - $8 = $2. $2 / $8 = .25 OR 25%)
When calculating markup % we divide our gross profit with our COST (COGS).
The markup % is greater than our margin %.
Although this is a conservative example, we can see how misinterpreting the two can
have a negative impact on our perceived financial performance. We use our margin
% to determine the amount of money that we will have to pay our operating
expenses. If this number is confused or inaccurate, not only will our profit be less

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than we anticipated, but we will not have money enough to pay our bills or
employees. Yikes.
Here is our example using a more exaggerated volume of sales:
- $100,000 in sales with a target margin of 20.00% = $20,000
- $100,000 in sales using a markup of 25.00% = $25,000
-$5000
If we do use a markup % rather than our target margin to assist us in calculating
our retail prices, we MUST understand and appreciate that the two are NOT
interchangeable.
8. Cost Factor
Cost Factor = 100% - Target Margin % OR 1.00 – Target Margin
Our cost factor is the inversion of our target margin (or 1.00 – Target Margin).
For example if our target margin is 25%, our cost factor would be 75%. (100.00%
- 25.00% = 75.00% OR 1.00 - .2500 = .7500) We use our cost factor to help
determine our retail pricing, and to calculate our purchasing budgets.
Target Margin Formula (1.00 – Target Margin) Cost Factor
30.00% 1.00 - .3000 = .7000
12.50% 1.00 - .1250 = .8750
42.35% 1.00 - .4235 = .5765
26.72% 1.00 - .2672 = .7328

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9. Creating a Retail Price (Target Retail Price = COGS / Cost Factor)
A retail price is the amount that we charge customers for our products. In creating
retailing pricing, we use our cost factor to ensure that the profit we are making on
each product we sell is at least meeting our target margin. However, there are
several variables that we may consider before establishing our retail prices. We want
to maximize profit, while still maintaining competitive prices that offer value to our
customers. We must understand that raising our retail prices or reducing the amount
we spend on COGS will increase our gross margin. While lowering our retail prices
or spending more on our COGS will decrease our gross margin. We must do
research and shop at our competitors (comparison or comp shop) to ensure that our
prices are reasonable and fair. In addition, our standards of quality or service, or
convenience of location may be taken into consideration. We must use our best
judgement and business sense to come up with the best retail price. As we have
determined, simply because an item is priced above our target margin does not
necessarily dictate that this is where we are making the most gross profit on a
volume of sales.
When estimating retail prices we can round pennies to the nearest cent.
(Target Retail Price = COGS / Cost Factor)
Target Margin 1.00 – Target Margin Cost Factor COGS/Cost Factor Target Retail $
25.00% 1.00 - .2500 = .7500 $2.00 / .7500 =$2.67
50.00% 1.00 - .5000 = .5000 $4.25 / .5000 =$8.50
15.25% 1.00 - .1525 = .8475 $10.60 / .8475 =$12.51
47.18% 1.00 - .4718 = .5282 $25.37 / .5282 =$48.03
8.73% 1.00 - .0873 = .9127 $109.83/ .9127 =$120.34
The following shows how the prices of our competitors may affect how we may set
our prices.
Our Target Retail Price Our Competitor’s Price Variance (+ / -)
$2.67 $2.99 +$0.32
$8.50 $7.99 <-$0.51>
$12.51 $14.99 +$2.48
$48.03 $45.99 <-$2.04>
$120.34 $127.99 +$7.65
As we can see, there are some concessions that we may have to make to ensure
competitive pricing. But there are also opportunities to add income that we may not
have recognized if we were not familiar with the prices of our competitors.

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E. Measuring Business Growth
1. Comps
Comparable sales or comps are used to measure the growth of our business. Comps
are most commonly used to measure growth over the same period of the previous
year (i.e.: April 2015 VS April 2016, May 2015 VS May 2016, etc.), but can also be
used to ascertain our monthly growth or to identify current growth trends. Comps
are expressed as a percentage, and are used to predict or forecast our future sales
performance, and also to estimate our purchasing and expense budgets.
a. Calculating Comps (This Year’s Sales – Last Year’s Sales) / Last Year’s Sales
This Year’s Sales Last Year’s Sales Variance Last Year’s Sales Comp %
$100,000 - $80,000 = +$20,000 / $80,000 +.2500 or 25.00%
$50,000 - $47,000 = +$3000 / $47,000 +.0638 or 6.38%
$25,000 - $18,000 = +$7000 / $18,000 +.3888 or 38.88%
$250,000 - $260,000= -$10,000 / $260,000 -.0384 or -3.84%
$18,000 - $22,000 = -$4000 / $22,000 -.1818 or -18.18%
b. Comp Trends and Variables
There are variables that can have a positive or negative impact on the growth of our
business. Just having an awesome business, and having people finally realizing that
are among them. If our business has been growing, or we have been “comping” +8%
over last year’s sales, then the current trend is +8%. This would probably be a safe
number (+8.00% or +.0800) with which to forecast our sales. If over the last several
months our comps have been +2%, +4%, and +6% respectively, we could conclude
that we are trending up +2% each month, and forecast our next month at +8%.
Other variables may cause our business growth to increase or decline somewhat
abruptly. It is beneficial to have our finger on the pulse of the community so that we
may navigate more swiftly through changing conditions. If a popular chain store
opens a new location adjacent to our business, our comps may greatly improve
simply as a result of increased customer traffic. Adversely, if our city decides to
make improvements and closes roads that allow easy access to our business, our sales
may plummet.

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2. Customer Counts
Our customer count reflects the number of customers that shop at our store over a
specified period of time. It is easy once we have been open for a couple of months.
But in order to gauge the customer count of a new business, we can use our intuition
partnered with the information that we gather by watching customer traffic at
neighboring businesses and at our competitors. If we can get an idea of our daily
customer count, it will help us to determine our daily, weekly and monthly sales. We
can use an average customer count when planning for business or forecasting sales.
3. Average Transactions
The average transaction is the average amount of money that one customer will spend
at our store per visit. This will obviously vary depending on out type of business:
whether we are a high-end electronics store or a convenient store. If we have 200
customers per day, and our total sales amount to $4000, our average transaction
would be $20 ($4000 total sales / 200 customers = $20 average transaction).
4. Peak Hours
This is the point at which our intuition gets off the bench and into the game. We
could think of a thousand "what-ifs" that may or may not affect our sales
performance, but we are going to adhere to the realistic.
'Peak hours' are the specific times of certain days in which we can expect to be the
busiest. If we were to draw our conclusions related to customer counts and average
transactions based on peak hours, our estimations would be exaggerated. Peak hours
vary according to the type of business. For instance, peak hours at a donut shop may
be 6am-8am, a sandwich shop 11am-1pm weekdays, a bar 4pm-7pm weekdays /
11pm-1am weekends, a grocery store 10am-4pm Saturdays. Therefore, we simply
need to use common sense and have realistic expectations when estimating our
volume of sales and customer traffic.

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5. Daily Sales
All things considered, once we can come up with a ballpark figure of our customer
count and average transaction, we can calculate our average daily sales. From there
we can estimate our total weekly and monthly sales.
If we anticipate 200 customers per day, and an average transaction of $20 per
customer, our estimated average daily sales would be $4000 (200 customers x $20
average transaction = $4000). If we are closed on Sundays and Mondays, that would
bring our estimated average weekly sales to $20,000 ($4000 average daily sales x 5
days per week = $20,000). If we are open 22 of the 30 days in this month, our sales
forecast for the month would be $88,000 ($4000 average daily sales x 22 days of
business this month = $88,000). We can utilize all of this information to help us
forecast sales.
F. Forecasting
To estimate our forthcoming financial performance we use projections or 'forecasts'.
We use our sales forecast to help predict how much we will spend on our purchases,
wages, and other operating expenses. Our forecasts can also help us to estimate our
profit and margin. It is important that our forecasts are as accurate as possible.
If our sales forecast is too high, we may over purchase, or be over staffed. High
forecasts can result in loss of income due to spoiled goods, or spending money on
labor that we could have saved.
If our sales forecast is too low, we may not purchase enough, or be under staffed.
Low forecasts can result in loss of income due to out-of-stocks, or poor customer
service due to conservative scheduling.
Once our business has been open for a while, we can use our sales history or sales
performance trends (comps) as resources to help with our forecasts. If we know
what our sales were last month or last year, we have a baseline from which to create
our projection. If we are a new business, it is a little more complicated. Either way,
to quote Dan Akroyd in Pearl Harbor, ultimately "We guess." But we should not
allow that to be a point of concern or intimidation. We will gather as much
information as possible to make sure that we get close. As a point of encouragement,
even if we are dead wrong, we would still be in elite company in the world of big
business.

Kyle Rhodes
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1. Forecasting Sales
Using our sales forecast we are able to work backwards in order to predict our profit,
margin, labor and operating expenses. Once we have established a sales history, it is
much easier to make our forecasts. Although it is more challenging with a new
business, there are some methods that we may use to make estimating our sales
performance a little easier and more accurate.
- Use average comp % to determine sales forecast. If our growth over the
previous several months is averaging 10%, then we would multiply that
growth by Last Year’s Sales during the same period. When adding a
percentage (%) growth to an existing amount, we use 100% or 1.00 to
represent that original amount.
o FORMULA: Sales Forecast = (1.00 x Average Comp %) x Last
Year’s Sales
o OR: If Last Year’s Sales were $1000, and our average comp is 10%
then our sales forecast would be $1150.
 $1000 x 1.15 (or 115%) = $1150
- With a new business, we must use every means at our disposal to accurately
forecast our sales and financial performance.
o Research and investigate local businesses
o Comparative shop competitors
o Ask friends and associates that are familiar with the industry and
community
o Use estimated customer counts and average transaction to help
calculate our daily, weekly and monthly sales forecasts.
While we want to be ambitious, and to challenge ourselves with our sales forecasts,
we would like for them to remain within the realm of reason. Meeting and exceeding
a conservative but realistic forecast is better than bombing as a result of an ill-
conceived, unrealistic forecast. We always strive to our best to maximize sales. But
consistently failing to meet an unrealistic forecast, or misrepresenting our earning
potential can have consequences; especially if we have investors or shareholders to
answer to. So do not confuse optimism with the reality of a matter, or allow it to
factor into our calculated reasoning.

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G. Inventory
Our inventory is a comprehensive list and value of all products and merchandise that
we have in stock. We must have accurate counts of our inventory in order to
accurately determine our cost of goods (COGS), profit, and margin.
1. Conducting and Calculated Inventory and COGS
It is necessary to conduct inventories (count and value all merchandise) periodically
to ensure that our expected income is in line with our actual income. Inventories are
performed more or less frequently depending on the industry. In retail monthly is
common, while food service or perishable goods may be counted more frequently.
We value our inventory at our cost prices, not retail pricing. This is the value of
inventory that we will use to calculate our total COGS. While technology or
methods may vary greatly, the important thing is to get an accurate valuation of our
inventory at cost. If we keep a tight, organized backstock, the process is much easier.
In addition, we do not like to sit on unsold goods for an extended period of time. The
goal is to turn it over as quickly as possible. We like to keep our shelves and
displays fully stocked, while keeping our backstock inventory as slim as we are able.
Whether they are kept on a sheet of paper or a laptop, we must have a list of all of our
products with accurate, up-to-date costs. Once we have our comprehensive product
list, we simply count everything. When we have completed our count, we add up all
itemized costs to get a total cost value of our inventory. This result is our ending
inventory. Our beginning inventory is the value of goods we had at the beginning of
this specific sales period.
2. Total COGS
Our total COGS are calculated using the formula:
COGS = Beginning Inventory + Purchases – Ending Inventory

Kyle Rhodes
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3. Calculating Value of Inventory Using Cost Factor
It is possible to estimate our inventory by multiplying our sales times our cost factor.
The following example presumes that our target margin is 25%, which gives us a cost
factor of .7500 (or 1.00 - .2500 = .7500).
Ending Inventory = Beginning Inventory + Purchases – (Sales x Cost Factor)
Beginning Inventory Purchases Sales Cost Factor Ending Inventory
$1000 $1000 $1500 .7500 $875
OR $1000 + $1000 = $2000, $1500 x .7500 = $1125, $2000 - $1125 = $875
However, the longer that we go without conducting a physical accurate count, the
larger the variance may be if we are not meeting our target margin. So, if our actual
target margin is less than we expect or if someone is ripping us off, the larger of a
financial hit we will take once we perform an actual inventory.
4. Spoilage
Spoilage is the total cost of goods that we purchase but are not able to resell. Most
commonly it refers to perishable or food items that have an expiration date. But
spoilage can also refer to damaged goods or products that we remove from our
inventory for various reasons. It is important to keep track of spoilage throughout
our financial period. Since we purchased the goods, spoilage will be included in our
COGS. However, since we did not sell the goods, and they will no longer be
accounted for in our inventory, spoilage will have a direct negative impact on our
margin performance. Spoilage drives up our COGS. In order to best anticipate our
financial performance and for forecasting, it is wise to budget or create an allowance
for spoilage; especially if we are managing perishable products.

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H. Purchasing and Budgets
We use purchasing budgets as a guideline to help us keep our spending in line with
our sales. Our purchase budgets help to ensure that we order goods enough to meet
the needs of our customers. They also help us to recognize when we may be
overspending. If we spend too little on goods, we can lose sales as a result of product
out-of-stocks. If we spend too much, particularly on perishable goods, we can lose
money by having to spoil goods that we are not able to sell.
Our purchasing budgets are also relative to the amount of inventory that we have
on-hand. If we are a new business, or operating with a bare-bones inventory, we may
order big to ensure sufficient stock. If our inventory is inflated, we may scale back
our purchasing in order to sell through product already on-hand. Once we have been
operating for a while, we will be able to recognize a comfortable inventory level, and
develop a better understanding of our purchasing needs.
By multiplying our forecast sales times our cost factor, we can estimate our
purchasing budget. This simply tells us the amount of goods that we must purchase
to accommodate a given amount of sales.
Purchasing Budget = Forecast Sales x Cost Factor
Forecast Sales Target Margin Cost Factor Formula Budget
Dept. 1 $10,000 25.00% .7500 $10,000 x .7500 = $7500
Dept. 2 $35,000 18.50% .8150 $35,000 x .8150 = $28,525
Dept. 3 $8000 50.00% .5000 $8000 x .5000 = $4000
Dept. 4 $17,000 64.35% .3565 $17,000 x .3565 $6060
1. Purchasing
Once we have our budget, it is time for us to begin ordering products for us to sell. In
order to ensure that we are ordering competently, we must know the quantity of the
specific items that we expect to sell, and also the quantity that we have on-hand. Trends
and customers’ buying habits change. It is not a good practice to adopt the habit of
placing the exact same order very week for example. We like to make sure that we are
ordering the right merchandise, and ordering only the products that we need and sell.
Using order boards and pars can help us to place orders that make good business sense.
In order to keep track of our spending, we use purchase journals. Our purchase
journals let us know our total spending at the end of a financial period, as well as our
spending along the way. They can also keep us informed of when to expect delivery of
new orders.

Kyle Rhodes
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2. Order Boards and Pars
Order boards are simply a comprehensive list of goods that we generally stock.
Apart from being handy for ordering, they are also ideal for keeping track of our
costs for specific products to ensure that our inventories are accurately valuated.
Order boards are generated according to the specific goods available from specific
vendors. So, we may have several different order boards depending on the number
of vendors that we use.
Our par level (pars) or model stock is the ideal quantity of specific products that we
like to keep on-hand at all times. It is a best practice to include pars on our order
boards. This way, we can spot-check our inventory level and quickly determine the
quantity that we need for each item; making our ordering process quick and accurate.
For example, if our par for an item is ‘10’, and we count ‘3’ in stock, we will
immediately know to order ‘7’ (10-3=7).
Our pars also help us to identify opportunities for increased sales, or products that
we might consider eliminating all together. If we are ordering a product every week,
and our par is ‘10’, but we sell out in 3 days, we would know to increase our par
quantity to accommodate additional sales. Conversely, if we have a par of ‘10’ and
we have not sold a unit in three weeks, we would know to reduce our par, or
discontinue ordering the item entirely. It’s just not selling, man. Utilizing pars
keeps us on our toes. Pars help us to maintain a sensible inventory, and also ensure a
perpetual awareness of our business.
3. Vendors, Wholesalers and Distributors
We generally order our goods for resell at a wholesale price from a product vendor,
wholesaler or distributor. There are some differences, but for us they serve
relatively the same purpose: to provide us with product to sell. We may purchase
small quantities from some vendors that may only have few unique products.
Wholesalers often purchase their goods from Distributors. And distributors often
have closer relationships, or even exclusive agreements with the manufacturer or
supplier. Generally, the closer we can get to the manufacturer, the better deals we are
able to broker. Depending on the nature of our business, it is not uncommon to order
merchandise from a number of resources.
When ordering goods to sell, we are looking for the best prices as well as quality and
service that are consistent with our standards. The better the deal we are able to
negotiate with our vendors, the better our profit will be, and the better value we will
be able to offer to our customers. It is very important that we work with vendors that
best suit our business.

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Some favorable attributes to look for may include but are not limited to:
- Competitive prices.
- Maintains product availability and sufficient quantities that do not result in
product out-of-stocks and missed sales.
- Provides friendly, competent service that quickly addresses and resolves
ordering and product-related issues
- Reliability in getting our merchandise delivered to us quickly, and when it is
expected.
- Provides free or reasonable shipping that do not drive up our COGS
If we can save $1.00 on a single item that may sell 3-4 per day, or say 25 per week,
we will generate roughly and extra $100 in profit per month ($25 per week x 4 weeks
= $100). It may not seem like much, but over the course of one year we will have
earned an extra $1200. So what if we are able to save $1.00 on ten items that also
sell about 25 units per week? We would gain an extra $250 per week ($10 x 25 items
= $250) or $1000 per month ($250 per week x 4 weeks). All of a sudden we are
adding $12,000 per year ($1000 per month x 12 months) to our bottom line just by
finding a better price on a handful of items.
4. Purchase Journals
Our purchase journal is the tool that we use to keep track of our purchasing. This is
most instrumental in calculating our COGS at the end of a financial period.
Each time that we place an order, we document it in our purchase journal. This
way, we know what we are spending on goods. We may also use it as a calendar so
that we remain aware of what is in transit, and when to expect it. When we place an
order, we should receive a confirmation from our vendor that includes an estimated
total ($) for goods as well as a delivery date. Our purchase journal should include
fields for: the date an order was placed, vendor name, order number, estimated total,
invoice number and delivery date. We should record all relevant information in our
purchase journal.
5. Receiving Goods
When we receive an order, we should always check the delivery for accuracy, quality
and shortages. We should notify vendors of any issues or discrepancies immediately,
and receive credit for any and all inaccuracies. Any difference in cost after receiving
a delivery should be accurately reflected in our purchase journal. We do not want
to pay for damaged goods, or goods that we do not receive. In order to ensure that
our COGS are accurate, we should always retain copies of invoices and credits so
that we may reconcile our purchases at the end of the financial period.

Kyle Rhodes
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I. Expenses
After our sales are final, our inventory is complete, our COGS are determined, and
our profit is calculated, it is time for us to pay our bills. Our expenses include all
costs necessary to operate our business. Operating expenses include but are not
limited to:
- Labor, Wages and Compensation
- Rent
- Utilities
- Supplies
- Maintenance and Services
- Office and Administrative
- Marketing and Advertising
- Travel and Hospitality
- Benefits
- Donations and Charity
- Other / Miscellaneous Expenses
- Amortization and Depreciation: Put simply, the process of spreading an
expense out over a period of time relative to its useful life (i.e.: A 5-year
license, or a new display case)
- Taxes
Some of our expenses are contractual or remain the same every month: such as a
plant watering service or Wi-Fi network. Others, like salaries and wages will vary
and may be relative to sales volume. With expenses that are relative to sales, we may
use a percentage to sales in order to forecast expenses (i.e.: We know that our Labor
is usually about 10% of our total sales. And our sales forecast is $100,000. Then:
$100,000 x .10 = $10,000). Either way, it is a good practice to be aware of our
upcoming expenses, and budget accordingly.

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J. Net Income and Net Margin
Our actual profit or Net Income (also net profit or “bottom line”) is our gross profit
minus our operating expenses.
Net Income = Gross Profit – Expenses
Our Net Margin is the percentage of total revenue we have remaining once we have
paid our expenses.
Net Margin = Net Income / Total Sales

Kyle Rhodes
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J. Financial Operations Tool

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