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Cost Justifying Your New Retail Automation System

(This section of the website is still in development.Please contact us for more information.)

We have prepared this webpage to assist you in the "number crunching" involved in cost justifying retail automation.

There are some very simple "rules" we have outlined on the next two pages that you should consider. These have been developed over many years in consultation with our clients, so there is nothing magical about them - just plain and simple business philosophies from firms that are already realizing the benefits of automation!

How to use this webpage

Below you will find a simple formula which you can use to calculate what you should expect to spend on automation. The next sections deal with the specifics: how much you will save in four different areas of your business. The last section brings all the numbers together in the form of a summary.

We hope you enjoy it!

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Budget Allocation

Many business owners/managers are uncertain as to whether a computerized retail management system can be cost justified.

How can you justify investing in a computerized retail management system to yourself, your partners or your banker?

John C. Williams, a recognized retailing consultant states that you should, as a rule of thumb, budget an amount equal to 2% of your annual sales for the purchase, installation, and staff training for a computerized retail management system. You should also budget approximately 1% or your annual sales in subsequent years for support, maintenance and ongoing training. This is based on an equipment life expectancy of five years.

Retailers installing point-of-sale(POS) systems typically realize a number of benefits, the most significant of which is, dramatic improvements in their bottom line performance. It is common to see a payback period of less than one year.

Although POS systems contribute to net profit in many ways, there are four areas which are particularly easy to quantify: increase in gross margins, increase in inventory turns, reduction of slow moving, inventory stock and reduced Accounts Receivable costs. (Click on the formula to calculate...)

Formula: Annual Sales x 5 Years x 2% Factor = 5 Year Budget Allowance

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1. Improved Gross Margin on Sales

The Controller Series monitor all sales transactions and gives you detailed information for pricing and overall control of inventory. Statistics from across our entire customer base indicate gross margin increases of at least 4% with the installation of our computerized retail management system. There are several reasons why our customers attain the extra margin:

• Powerful pricing control means you can change prices globally, by department or even sub-department
• Target margin can be compared to actual margins, allowing you to fine-tune your pricing
• Margin control is extremely effective at keeping you up to date with changing prices. With margin control, prices can be changed automatically as soon as new stock is received.

Formula: Annual Sales x 4% = Increased Profit

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2. Control Excess Inventory

Whith the benefits of system-generated information, you are able to identify and eliminate slow moving, non-productive inventory and reallocate a portion of the freed up cash to fast moving, high margin stock.

Statistics show that "slow movers" represent approximately 15% of a typical inventory. Assume that 5% of the cash made available by the inventory reduction is used to pay down the bank operating line. We'll use the other 10% in the next calculation.

Formula: Inventory x 5% Reduction * 10% Carrying Charges = Increase in Net Profit

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3. Faster Turning Stock

Reallocating the other 10% of cash made available (the remainder of point #2) into fast moving inventory has a significant impact on profit.

Formula: Inventory x 10% Slow Movers = Potential Reallocation
Potential Reallocation x Number of Normal Inventory Turns = Additional Sales

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4. Manage Accounts Receivable More Effectively

Managing your Accounts Receivable more effectively has many benefits, all of which affect the bottom line profit of your company. You can:

• reduce the possibility of bad debts by restricting sales to customer over their credit limit
• apply service charges automatically to your customer statements
• print your customer statements quickly and easily segregate outstanding 30, 60 and 90 day account balances to ensure timely collection action.

Surveys across our customer base show an average reduction in outstanding Account Receivable of 10% as well as a reduction in the average number of days outstanding. Less investment in Accounts Receivable results in lower cash requirements from the bank.

Formula: Outstanding AR x 10% Reduction x 10% Carrying Charges = Decreases Carrying Charges

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Cost Justification Calculator

Please enter the following field with the proper values to find out your total profit:

Your Annual Sales: $
Your Inventory: $
Your Number of Normal Inventory Turns: (usually 2.5)
Your Outstanding AR: $

Executive Summary of cost justification issues

1. Improve gross margins on sales

2. Control stocking of excess inventory

3. Reallocate excess inventory to higher turning stock

4. Manage accounts receivable

Total possible benefits - first year

Budget Allocation

5. Five year budget figure

System Payback

Click here to print this page

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The Final Word

We hope this webpage has helped you in defining a budget for retail automation. In today's increasingly competitive market you will find that the more information you have about your business, the easier it is to make decisions on effective management and adaptations to changes in the marketplace.

Call us today for a free, no obligation demonstration of our system. We would be happy to display many additional features that are available with The Retail Controller.

Don't hesitate, call us today at 888-616-9912