Shop Talk by Bob Schumacher – February 2009
IS YOUR PROFIT UP A TREE?
No, they’re right out front. It just takes a trained eye to find them.
IN BUSINESS, one can’t be successful over the long haul without at least a cursory understanding of how to end a month with more money than you had when you started that month. First, you have to know where profit is made. In my opinion, there are three areas in and around your pro shop where that occurs. One is important, the second very important, and the third absolutely vital if you are to maximize your profit potential, and produce a saving wage — which is what you can make working for someone else, plus some extra for living expenses for your family, and a bit extra for your IRA.THE CUSTOMER SERVICE COUNTER
This is the #3 most important area, where business is conducted, sales are brokered, advice and undivided attention is given, and cash changes hands. This is an area of one-on-one, and the reason you prepare yourself hygienically, wear a clean apron with a company logo and a name tag, and have a pen at the ready. This also is an area where you exhibit your skills at your chosen craft, and your willingness to unequivocally help — where you record in detail everything you need to know during each of your customer’s visits in order to be prepared for their return. This is an area where you avoid or resolve all disputes in order to insure customer satisfaction and repeat business. It also is an area used to mark territory in a given local market. It is clearly an area of profit and the origin of cash flow. It’s important, but there are two even more critical locations.THE BUYER’S CHAIR
This is the second most important profit area, where margins are set and retail mix is established. It is the place where you’ll make the decisions that determine which products will comprise your shop’s inventory and how much those items will cost your customers. The concept is simple on the surface, but there is much more to it than searching catalogues and price lists looking for gold.
In the buyer’s chair, you’ll decide what percentage of your capital will go toward stock on hand, and how much you’ll allocate for goods purchased from your distributors. Buy too much, and money will be wasted as products sit on backroom shelves. Buy too little, and holes in your inventory can send customers to your competitors. Alas, many operators find that if you inadvertently send your customers down the street often enough, some of them never come back. So, what can you do to help profits in this area?
The first step in maximizing your profit from the buyer’s chair is to do monthly projections and budgets. These may seem painful and a waste of time, but think again. Note what month it is so as to account for seasonal aspects of the bowling business, look up last year’s records, and mix in current industry trends in your area to arrive at a realistic projection of how much business you expect to do in the next month. Then budget static expenses, average controllable expenses and normal purchases to determine what might be left over for working capital, special buys, or maybe a dividend for good old you. After 31 years in the business, I still prepare projections and budgets so I can put my finger on the pulse of our business and, if necessary, reach into its chest and feel its heart beat. For normal purchases, a model inventory helps, but only for products with a history. What about new products, manufacturer or distributor closeouts, or offthe-sheet deals?
Long-time operators understand the perks associated with remaining current financially with manufacturers and distributors. In my opinion, you are foolish and short-sighted if you allow your company to fall behind with your product sources. When manufacturers or distributors have volume purchase deals, close-out specials, or introductory prices for new items, they’re not going to contact shops that are behind financially; they’re going to look toward their best customers. If your company has never enjoyed the benefit of some of these opportunities, start by contacting your most frequently used distributor and ask about getting on their list for all of the above. Their response will tell you what you need to work on. A solid, symbiotic business relationship with your distributor can positively impact your bottom line.THE LEASE/RENTAL AGREEMENT
This is the most important profit area. Had I not heard all the tragic, sad stories myself, I never would have realized how extensive is the loss of profit for those who shackle their businesses by carelessly rushing into lease or rental deals that virtually preclude any type of success.
I can’t tell you exactly what should or should not be included in your lease agreement, but a professional in your locale can. So, my first advice is to spend a few hundred dollars and ask a commercial real estate broker or lawyer to interpret a proffered lease and advise you as to the good and the bad.SOME THOUGHTS ON LEASE CLAUSES
• With the possible exception of death, everything in life is negotiable. People who proffer leases all have their own ideas about what’s important. If you’re proffered a lease from a person or corporation that will not negotiate, my recommendation is to simply walk away. If they won’t work with you in the beginning, they certainly won’t work with you when disaster strikes (fire, flood, earthquake), a time when people really need to work together.
• If you are prepared to commit to your profession, the best thing going for you during lease negotiations is your knowledge, experience and what you can bring to a bowling center. Emphasize your positives, because a good proprietor wants you as much as you want him. By the end of the first meeting, you’ll know whether you’re right for each other.
• Negotiate lease length of at least five years, hopefully ten, giving you sufficient time to garner a return on your investment. Get options, as many as possible, but insure they are your options, not mutual options.
• Insure your lease has a buyout clause, so that you’ll be compensated if the proprietor sells his business/property prior to the completion of your lease. Most states have laws along these lines, so check with the professional you’re hiring.
• Do your best to negotiate a flat-rate rent; avoid escalator or percentage rents. I’ve never been a fan of the concept of the harder I work, the more I pay you. If percentage rates are de rigueur in your area, negotiate a maximum monthly rate, especially if your proprietor wants a minimum. If the proprietor wants, say, $1,500/month minimum or 10% of the gross, whichever is higher, try to negotiate a ceiling of perhaps $2,500 or $3,000/month. What looks large now may not be so large a few years down the road, with the cost of living going up or your skill as an operator increasing your gross sales.
• The whole idea, of course, is to make your rental expense a smaller percentage of your gross sales. My experience is that a rent of higher than six percent of gross sales per month is high, but a flat rate becomes a static expense and shrinks comparatively as sales increase and you build your business. When $20,000 months become $90,000 months, a flat rate or ceilingcapped rent expense virtually disappears.
It has been done, and if you can do it, too, you’ll experience the greatest profit increase you could expect with the stroke of a pen. If you decide you want to maximize your profit, provide the best customer service in your area, find ways to buy as low as possible and sell as high as possible, and, if necessary, rework your rental agreement to reflect the effort you put into your business.
Bob Schumacher has been in the business for over 30 years, and in 1985, co-authored “The Profitable Pro Shop” with his brother, Jim, and Larry Lichstein.
*Posted with permission from Luby Publishing Inc.