Gross Margin, Retail Business and Business Acumen

“The best CEOs have a knack for bringing the most complex business down to the fundamentals — the same fundamentals of the family shoe shop. They have business acumen — the ability to focus on the basics and make money for the company.”

-Ram Charan

Ram Charan is one of the world’s most sought after management expert. He once remarked that when it comes to business CEOs and street hawkers both essentially adopt same finance strategy. He calls this skill as Business Acumen.

Ram Charan talks about six parameters that every person in organisation needs to know to track to improve his business acumen.

cashflow

These six parameters are-

  • Cash generation – The difference between all the cash that flows into or out of the business in a given time period.
  • Margin – Margin is the percentage profit made on the products the company sells or services the company provides.

'The problem seems to be pointing in your direction, Ferguson.'

  • Velocity – Sometimes referred to as “inventory turns”, describes the concept of how frequently the company’s stock is moved off the shelves into the hands of it’s customers, and replenished by suppliers.
  • Return on Assets (ROA) – The amount of money you are able to make with a given amount of fixed assets.
  • Growth – A company’s growth is the increase in a company’s size in terms of revenue, profitability and manpower.
  • Customers – A company must listen to its customers in order to succeed.

ROI

“Expand on your business acumen by practicing it in more complex situations. Don’t be afraid to make mistakes and learn from them. Make judgements that reflect business acumen and share your knowledge.”

-Ram Charan

Similarly in retail business a similar model has been designed so that every employee is aware of four important things that matter in retail business- gross margin, inventory level, retail space and labour. This is also called as Strategic Resource Management Model. To track the four key parameters there are 3 ratios- GMROI, GMROF and GMROL.

Strategic model

GMROF or Gross margin return on feet is ratio of gross margin divided by square feet of selling space. It tells you how efficiently you are using your space.  This is an important ratio considering high rentals.

GMROL stands for Gross margin return on Labour – is relation between gross margin and number of full time employees. It is a measure of productivity of your employees. To improve the ratio either gross margin has to improve or you need to control your manpower costs.

inventory

GMROI (also known as GMROII) stands for Gross margin return on investment (inventory) is relationship between your gross margin and amount you invest in inventory. It is a measure of inventory productivity that expresses the relationship between your total sales, the gross profit margin you earn on those sales, and the number of rupees you invest in inventory.

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