Finance 101: Thinking of Revenues

30th Nov 2008
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The big question facing any businessperson or entrepreneur is how does he or she increase Profits? Theoretically speaking, the answer is simple – you find ways to increase revenues and ways to lower costs. Let us assume you want to think of ways of growing revenues. There are a number of ideas that may come up top of your mind. How about thinking about this in a logical manner? This article attempts to show how you can think through basic finance issues in a structured manner that also takes into account the industry specific metrics. Let us assume that you are the owner of a retail chain and you are faced with the challenges of growing revenues.

We can think of total revenue as follows:

Revenue = Revenue per store* Number of stores

Also, we know that, Revenue per store = Revenue per sq foot/sq foot per store

So, that gives you some food for thought. Maybe increasing number of stores is an option? How about generating more revenue from existing stores? Maybe the retailer needs to change the assortment of products. Or maybe the way forward is to use larger proportion of the precious retail space for faster moving products (though we should be careful about noting that higher volumes products need not be higher margin products!). With rentals being high in most places and retail space being limited, optimum space utilization could be a key success factor for the success of the business.

You may also conduct revenue per store analysis of all individual stores in your chain and identify the stores which lag behind in this metric. Maybe those stores are not in prime locations or not in areas which attract your target customers. Is there a way to increase popularity of these underperforming stores? Maybe changing the product mix, making it relevant to customers of that particular area could be helpful.

You can also think of Revenue as:

Revenue = Revenue per customer * Number of customers per store* number of stores

So, here is some more food for thought. Has your customer base been increasing or decreasing? Is your challenge increasing number of customers or is your challenge getting customers to spend more while they are in your shop? Or maybe the challenge is to increase footfalls as well as to get those customers to spend more. If your number of customers per store is declining, could it be because of increased competition or more attractive discounts by your competitors? It could also be the case that you may have opened new stores which are not doing well. As a retailer you could look at some attractive schemes that lure customers into your shop and get them to spend money. Is your store layout convenient and attractive? Can customers find things they need easily? Does the store ambience make customers linger around or does it drive them out of your stores quickly? As a retailer, you may want to look at improving the store layout and designing a layout which is more customers friendly. Are there ways to target newer segments of customers? These maybe things to ponder over and address.

This is just a simple example to show how structured thinking and a logical approach can help answer a basic question. On most occasions, seemingly complex problems can be easily analyzed by simple, logical thinking. We have just played around with two simple formulaes, but those formulas gave us a quite a few issues to think about. Finance is simple, isn’t it?

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