GENERAL REVENUE AND EXPENSE CATEGORY GUIDELINES

Discount stores offer the customer merchandise of exceptional value at a very low fixed price. This low price point creates an impulse shopping experience. We hear comments daily from prospective clients, like yourself, about their experience in shopping discount stores and how they go into a new store to investigate and leave having spent forty to seventy dollars.
The combination of exceptional value at incredibly low prices has made Discount Stores the fastest growing retail segment in recent years.
Profitability, of course, depends on many variables. The location, the cost and variety of merchandise, and the management skill of the owner are just a few of the many factors that will ultimately determine the level of profit.
Many expenses in this business are fixed; they stay constant regardless of the sales generated. The following table lists typical FIXED cost categories and it provides a model to use in determining what your costs will be.
Therefore, a few key VARIABLE cost categories will determine how well the store performs. They include:
MERCHANDISE - Storeowners will control their average cost of merchandise based on the suppliers they purchase from and the product mix they decide to put in the store. The merchandise orders we create to open most stores typically will show an average cost of goods in the range of 35%-50%. The merchandise mix the owner will select will determine their overall average cost. (Opening store orders take into account the geographical location of each store and freight and delivery time considerations, and are placed with the suppliers best situated to provide economical, timely stock replenishment. This helps each store to identify the group of suppliers best suited to serve them as they go forward.)
WAGES - range of cost should be 10 to 13 percent of sales generated. This includes all wages, including that of the manager and owner.
FREIGHT - This is usually discussed in terms of freight cost as a percentage of merchandise purchased. The range of freight cost to merchandise purchased should be between 5 and 7 percent. Stores that are located in states where the population density is lower, such as Montana, Wyoming, Idaho, and North Dakota may realize slightly higher costs due to the infrequency of truck routes.
SALES - Sales level is the other key factor that will help determine your profit level. Sales per square foot will vary from location to location and from storeowner to storeowner based on a myriad of factors. The size of the community, general customer traffic of the shopping center, store location, proximity to the anchor, previous business ownership, management and merchandising experience of the owner, and personal daily involvement of the storeowner are just a few examples of the variables that will determine your level of sales. The business skill and experience of each owner, along with the level of involvement in and commitment to their store will have an impact on their success.
SAMPLE OF FIXED COST CATEGORIES
DESCRIPTION - RECOMMENDATIONS ON HOW TO DETERMINE COST
HEALTH INSURANCE - typically, this is the insurance policy for the store manager. You can offer no coverage, major medical coverage, or different levels of more complete coverage. It is recommended that this cost be kept at around $100 per month.
INSURANCE - this category relates to general business coverage and includes public liability, fixed articles, theft, and other coverage’s. Contact a local insurance agent for quotes.
ELECTRIC - the local power company can give you estimates of electric cost for retail establishments’ by square foot.
TELEPHONE - determine usage -- again, your local phone company will give you insight into this nominal cost.
PERSONNEL - this typically includes items such as pizzas once a month and a year end party. Determine what you would like to do for your employees.
RENT - this figure includes the monthly stated rent and charge for common area costs. The lease agreement will state these charges. For preliminary planning purposes, contact with local realtors will give you a good idea of the cost range.
SUPPLIES - this category pertains to office and store supplies. Pens, tape, paper, printer cartridges, and like items.
ADVERTISING - routine advertising is always recommended to keep your store in front of the public. The local newspaper will provide various rates and programs.
DEPRECIATION - pertains to the periodic write-off of capital cost items. Your local accountant can provide further information.
OTHER EXPENSES - this is a catch-all for other costs that pertain to your business operation.
THIS EXAMPLE OF KEY FIXED COST CATEGORIES IS NOT INTENDED TO BE COMPLETE AND SHOULD BE USED FOR GENERAL INFORMATION PURPOSES. IT IS ALWAYS PRUDENT TO DO YOUR HOMEWORK AND DEVELOP A RANGE OF COST LEVELS THAT CAN BE USED FOR FINANCIAL PLANNING PURPOSES. AT THE END OF THIS SECTION, YOU WILL FIND A BLANK WORKSHEET TO USE TO CREATE YOUR OWN ESTIMATES.
THE FOLLOWING ILLUSTRATION SHOWS THE FORMULA FOR HOW YOU CAN DETERMINE THE SALES NEEDED TO BREAKEVEN AND TO GENERATE VARIOUS LEVELS OF PROFIT FOR YOUR STORE:
** ILLUSTRATION **
SUMMARY OF VARIABLE COST RANGES AS A PERCENTAGE OF SALES
 

SUMMARY OF ANNUAL FIXED COSTS

NEXT, WE PUT THE ESTIMATED ANNUAL FIGURES INTO THE FOLLOWING EQUATION TO DETERMINE THE BREAKEVEN IN SALES.
SALES = VARIABLE COSTS + FIXED COSTS + PROFIT
SALES = 52.7% + $52,550 + 0 (NOTE: PROFIT = 0 AT BREAKEVEN)
100% SALES = 52.7% + $52,550
47.3% SALES = $52,550 (NOTE: 100.0 – 52.7 = 47.3%)
SALES = $111,099 (NOTE: 52,550 / 0.473 = 111,099)
TO PROVE THE FORMULA, WE PLUG THE NUMBERS INTO THE FORMULA.
SALES = VARIABLE COSTS + FIXED COSTS + PROFIT
$111,099 = $58,549 + $52,550 + 0 (111,099 * 0.527 = 58,549)
SO, WE SEE THE FORMULA WORKS - IF YOU GENERATE $111,099 IN SALES, VARIABLE COSTS WILL BE $58,549 AND THE FIXED COSTS WERE DETERMINED TO BE $52,550, AND PROFIT WILL BE ZERO.
THUS, IF THE COST STRUCTURE IS THE SAME USED IN THE ILLUSTRATION, ONE WOULD NEED TO GENERATE $111,099 IN SALES TO EXACTLY BREAKEVEN ON A BUSINESS.
BREAKEVEN MEANS THAT ONE NEITHER MAKES NOR LOSES MONEY.
HOW MUCH IN SALES REVENUE WOULD ONE NEED TO GENERATE EACH DAY TO BREAKEVEN IN A BUSINESS?
ASSUMING 360 WORK DAYS, $111,099 / 360 = $308.61 PER DAY
SO, IF ONE AVERAGED $308.61 IN SALES PER DAY, THEY WOULD EXACTLY BREAKEVEN ON A BUSINESS
HOW MUCH IN SALES REVENUE WOULD ONE NEED TO GENERATE EACH HOUR TO BREAKEVEN IN A BUSINESS?
GOING ONE STEP FURTHER, ASSUME THAT STORE IS OPEN 10 HOURS PER DAY. A STORE WOULD NEED TO GENERATE $30.86 (308.61 / 10 = 30.86) IN SALES PER HOUR TO RESULT IN ACHIEVING BREAKEVEN.
HOW MANY CUSTOMERS PER HOUR DO I NEED TO BREAKEVEN?
IF THE AVERAGE CUSTOMER SPENDS $12.00 PER PURCHASE, YOU WOULD NEED TO 2.57 CUSTOMERS PER HOUR (30.86 / 12 = 2.57) TO ACHIEVE BREAKEVEN ON THE BUSINESS.
THANK YOU FOR STAYING WITH THIS LONG ILLUSTRATION, HOWEVER, WE CAN NOW USE OUR FORMULA TO DETERMINE DIFFERENT LEVEL OF POTENTIAL PROFIT.
WHAT IF I WANT TO MAKE A 10% PROFIT - HOW MUCH SALES REVENUE WOULD I NEED?
COMPLETE THE STANDARD FORMULA
SALES = VARIABLE COST + FIXED COST = PROFIT
100% SALES = 52.7% + $52,550 + 10% (PROFIT)
SOLVING
100% SALES = 62.79% + $52,550 (52.7% +10% = 62.7%)
37.3% SALES = $52,550 (100.0 – 62.7 = 37.3%)
SALES = $140,885 NOTE (52,550 / 0.373 = 140,885)
SALES PER DAY = $391.35
SALES PER HOUR = $39.1
CUSTOMERS PER HOUR = 3.0 (AVERAGE PURCHASE OF $12.00)
WE COMPUTED THE SALES NECESSARY TO MAKE VARIOUS LEVELS OF PROFIT FOR A 1,000 SQUARE FOOT STORE - CLICK HERE TO REVIEW TABLE.
ASSUMPTIONS:
- OPEN 360 DAYS A YEAR, 10 HOURS PER DAY
- VARIABLE AND FIXED COST DATA FROM EXAMPLE ABOVE
- YOUR RESULTS FOR AN ACTUAL LOCATION WILL VARY
THE VARIABLE COST AND FIXED COST RANGE INFORMATION, ALONG WITH THE DEPARTMENTAL COSTS USED IN THE ILLUSTRATION ARE NOT TO BE USED BY YOU TO DETERMINE YOUR COST LEVELS. ALSO, THE PROFIT, ANNUAL SALES, SALES PER DAY, SALES PER HOUR, AND PROFIT ARE SIMPLY A BY-PRODUCT OF THE VARIABLE AND FIXED COST DATA SUPPLIED FOR ILLUSTRATION PURPOSES AND SHOULD NOT BE USED BY YOU TO DETERMINE YOUR FINANCIAL PERFORMANCE, INCLUDING PROFIT LEVELS. THIS ILLUSTRATION SIMPLY ALLOWS YOU TO FOLLOW THE MATHEMATICAL CALCULATIONS IN DETERMINING THE FIGURES.
THERE IS A TREMENDOUS AMOUNT OF INFORMATION LOCATED ON THE INTERNET THAT COULD BE USEFUL IN DETERMINING THE COST STRUCTURE OF YOUR STORE.
IF YOU NEED ASSISTANCE IN COMPLETING ANY OF THE FORMULAS STATED ABOVE, OUR SALES REPRESENTATIVES WILL BE GLAD TO HELP.
***AS RENT VARIES FROM REGION TO REGION, PLEASE TALK TO YOUR SALES REPRESENTATIVE FOR ADDITIONAL INFORMATION.
****THE AMOUNT YOU SPEND ON ADVERTISING IS COMPLETELY WITHIN YOUR DISCRETION.
CLICK HERE FOR A FINANCIAL WORKSHEET (Microsoft Excel required)
NOTE: The financial performance of each and every store is dependent upon many variables including location, population, average income of customers, merchandising habits, management experience, etc.