Controlling Costs

Q: Our health insurance premiums keep going up, and I don't know how long we'll be able to continue to offer this benefit. Nationalized health insurance seems like a distant dream at this point. Is there any assistance available for a small business trying to make ends meet?

A: With the average annual premium for single health care coverage coming in at over $4,200 in 2006 (according to the National Coalition on Health Care), it's no wonder you're having trouble paying the cost for this important benefit. Health insurance has been going up almost 8 percent a year, and at an even higher rate for small employers such as retailers. As a result, too many shopkeepers don't carry coverage on their employees, or even on themselves.

There are a few options that you might want to explore to reduce your costs. The first is joining a group, such as a trade association or your local chamber of commerce, that offers insurance at a lower rate than you would be able to negotiate on your own. If your chamber of commerce does not offer group insurance, perhaps you could offer to chair a committee to look into the possibility.

Another idea is to provide only catastrophic health insurance, which has a very high deductible but lower monthly payments. While this coverage (sometimes called a major medical plan) does not encourage regular checkups and other preventative care, it could prevent an employee's life savings being wiped out by an accident or severe illness. However, these plans usually have a lifetime cap, which means that expenses beyond a certain amount will not be covered — and most do not cover prenatal care.

More recent options in the consumer-driven health movement are the Archer medical savings account (MSA) and the health savings account (HSA). These programs permit employers to set up accounts with a financial institution in which money is deposited for medical expenses. The government allows these accounts to be funded by the employer and the employee with pretax dollars when used in conjunction with a catastrophic insurance policy. Disbursements are-tax free when used to cover medical costs, and unused funds earn interest tax-free. Information on these programs is available from the IRS at www.irs.gov.

Q: Our store carries a wide variety of merchandise, from Beanie Babies to framed wall art. But we're finding that the amount of money tied up in inventory is increasing faster than sales. Is there some way to make sure we're using our cash resources efficiently?

A: I'm sure you've heard of the 80/20 rule, which originally referred to the fact that 80 percent of the income in Italy went to 20 percent of the population. It's been widely applied widely to explain that the results of most actions come from a small percentage of the causes. In retailing, we use it to help understand that as much as 80 percent of sales may come from 20 percent of the merchandise. While these figures may not be exactly accurate, it helps demonstrate that not all lines sell equally well.

The trick to using inventory dollars efficiently is to determine which merchandise is producing the highest rate of sales, at the highest percentage of markup. In order to do this, you need to track sales and purchases by category. Start by dividing merchandise into logical categories such as children's gifts, home decor, and bath and body products. Take a physical inventory to see how much money you have committed to each area.

The next step is to track sales by category, using either a POS system or a cash register with category keys. You may need to code the price tags on your merchandise so that sales staff will know what category an item belongs to. (We use the alphabet for our inventory codes.)

The third step is tracking inventory purchases by category. You'll need to work within your bookkeeping system to see how to do this, and may need to code purchase orders by category so merchandise dollars can be allotted correctly. By adding new inventory purchases to beginning inventory, and subtracting the wholesale value of merchandise you've sold, you can track the changing value of each category throughout the year.

Compare the dollars tied up in inventory in each category with sales being generated by that category. If wall art is responsible for 8 percent of your sales, but represents 20 percent of your inventory, it may not be a worthwhile category for you.

If the balance is closer, but still not completely in sync, it might mean you need to reduce your inventory in that category, and use an “open to buy” budget to control spending in that area. Keep in mind that some categories are seasonal — you're not likely to sell many garden items in the winter, and Easter is not as strong as Christmas for holiday merchandise.

You may also want to look at the square footage of your store, and allocate more space to the categories that provide the most income. Take into account not only the percentage of sales being generated, but also whether one category earns a higher or rate of return than another. For example, it's easier to take higher markup on items that do not come pre-priced, or are not particularly price sensitive.

In order to make your store interesting and attractive, you'll need to devote some space and inventory dollars to items that don't sell as quickly as your top 20 percent. But in order to keep your store profitable, focus money on the merchandise that brings in the most income.