Retailvisory home  >  Basics

A crash course in retail finance

Breaking down potentially daunting parts of business

Understanding the financial side of your business can be absolutely mind-boggling, especially if math wasn't your favorite subject in school. So, until you become your very own financial advisor and an absolute wizard on Excel, let’s break down some of the basic building blocks of finance.

The ABCs of your 123s

Before we dive into the nuances and intricacies of retail finance, it’s helpful to know some high-level terms.

Revenue: Also known as sales revenue, this is the amount of money a business earns from selling goods online and in-store. Revenue is calculated by multiplying the number of units sold by the average sales price.

Cost: This refers to the monetary value that has been spent by a company to produce something. Cost includes all expenses incurred in the production process, such as raw materials, labor, utilities, and overhead costs. Accurately calculating costs is necessary to determine pricing and profitability.

Profit: This is the money a business pulls in after accounting for all their expenses. The primary goal of any business is to maximize profit. It is calculated by subtracting business expenses and costs from total revenue.

Margin: This refers to the difference between the price a business pays for a product and the price it sells it for. So, if an item sells for $100 and the business paid $50 for it, the margin is $50.

Capital: This is a broad term referring to any and all assets that add value to a business. Capital can be borrowed loans, real estate equity, intellectual property such as patents, money, or company equipment.

Fixed costs: These are expenses that stay the same no matter how your business is doing. Fixed costs include rent, salaries, utility bills, insurance, and loan repayments.

Variable costs: These are any expenses that change based on how much a company produces and sells. Variable costs include labor, utility expenses, commissions, and raw materials. For example, as your volume increases you may spend less on raw materials if you buy in bulk; however, you may spend more on labor to process the raw materials.

To learn more financial and retail terminology, check out our Retailvisory Glossary.

Getting to know gross margin

Now that you know the differences between some of the most frequently used finance lingo, let’s look at a few easy ways to wrap your head around your business numbers. One of the most important things you can do is determine your gross margin per unit. This might sound daunting, but it’s actually quite simple. As mentioned earlier, margin refers to the difference between how much you pay for a product and how much you sell it for. So gross margin per unit just means how much money is left over after a specific product or service is out the door.

When you determine gross margin per unit, you’re basically figuring out how much you make each time you sell a specific product or service. Once you figure out this number for each product or service you sell, you can start making decisions to increase this number and maximize your profit. And to put that in fancy business terms, you’re trying to make revenue higher and cost lower.

More important numbers

The next numbers you’ll want to figure out are your units and fixed cost per unit. Understanding these alongside your gross margin per unit will give a 360 view of how cash is flowing through your business. This is where spreadsheets really come in handy.

To understand units, which are just your inventory or the services you provide, look at how many you have produced and break them down into categories that make sense for your business. If you own a clothing store, you may categorize them by size, clothing type, gender, etc.

Next, you should add up all your fixed costs and divide this number by your total units to determine your fixed cost per unit. When compared next to your gross margin per unit, these numbers help you determine your pricing and break-even point, which is how much product you need to sell to cover your fixed and variable costs.

Now that you understand the basics of finance, it’s time to apply what you’ve learned to your very own data and numbers. And we hope this quick overview made your numbers seem a lot less scary! Finance can be confusing, but the more you learn and apply, the more confidence you will build for you and your business.