Accounting for customer value

If you own a retail business, there are a few financial measurements you need to keep a close eye on. They are the average basket, frequency of customer visits, and gross margin. Ok, granted there are actually several other accounting measures you should also watch, but these are the important ones because it translates into a quantifiable value of your customers. This value can then be established as a benchmark to be improved upon.

When I consult with retail clients about cash flow issues, I like to use a simple but powerful analysis tool to help illustrate how improving one or all of these three measures in varying degrees, will have a profound impact on gross profit.

For instance, a business with $500,000 in sales that improves the average basket price by $2.50, can add $8,333 to gross profit, based on a few other assumptions. Likewise, increasing the average customer visits by 1.5 visits could improve gross margin by $43,000, again based on a few other assumptions.

Making appropriate changes to a retail operation, whether it’s a newly started business or an established one, to improve gross profit, should be a focused effort. This is not a measure easily found or created within QuickBooks, Peachtree, or any other accounting system. If you’d like me to email a copy of the spreadsheet for FREE, please send me your contact information on the right side of our home page.