Retailers who keep their store's financials tucked away until they need to shop for credit miss an opportunity to succeed. The balance sheet and income statement act as report card. Financial ratios pulled from them measure operating performance and return on investment -- critical success factors. According to the Retail Owners Institute, poor financial health is the leading cause of retail failure. A retailer can avoid disaster by monitoring seven key ratios.
Gross Profit Ratio
Also known as gross margin percent, gross profit ratio represents the average amount of money made per sales dollar. It reflects pricing strategy: how much you mark up prices and how deeply you markdown. Retail consulting firm Martec International says planning sales with margins that are too high risks overpricing; too low of margins brings the risk of cash flow problems. A retailer can change his gross
profit ratio by lowering costs, increasing prices and controlling theft and damages. The Retail Management Advisors targets a 50 percent gross profit ratio for apparel clients. Calculate this ratio by dividing gross profit by net sales, figures found on the income statement.
Operating Expense Ratio
To learn how much of every sales dollar goes toward operating expenses, a retailer looks at the operating expense ratio or expense-to-sales ratio, which is computed by dividing total non-merchandise expenses by net sales. According to Martec International, operating expense ratio should run between 20 percent and 45 percent of sales, depending on the business model. For example, a warehouse functions with a lower operating expense ratio than a bridal store. Because they lack the economies of scale that chain stores enjoy, small retailers incur higher operating costs, particularly for payroll.
Current and Quick Ratios