Steve Bailey
Financial Analysis Consultant

Are You Ready For A Point of Sale System

"Should I install POS (Point of Sale) in my garden center?" I'm asked this question probably more than any other. The obvious answer would be a numeric one, but instead of taking a path straight to the black and white numbers, let's use a decisive management approach in which we examine how a POS system assists us in managing our businesses.

But before we begin, let me explain how I examine a garden center Income Statement or Profit & Loss Statement. A quick breakdown of the numbers into five basic segments - Sales, Cost of Goods Sold, Operating Expenses, Wages & Wage Benefits, and Profitability - reveals everything you need to know about your center in one snapshot (see diagram).

GreenSideUp GC P&L
		Dollars		Percentage
Sales		$1,000,000		100%
Less
COGS		$460,000		46%
Oper Ex		$200,000		20%
Wages & WB		$240,000		24%
Equals
Profitability		$100,000		10%

Trending out the dollars and percentages in this simple income statement over the course of three or more years will reveal areas of both increase and decline. Sales and Profitability dollar increases are good. Rising Cost of Goods Sold, Operating Expenses, and Wages & Wage Benefits as a percentage are usually not good. I invite you to put your numbers to this test and discover in what direction your business is headed and where you need to improve.

We are always pushing for more sales. In that vein, you have to realize that if your center is hitting on all cylinders and achieving 10% Profitability, increasing Sales by $1 will only yield increased Profitability of 10¢. Decreasing expenses in Cost of Goods Sold, Operating Expenses, and/or Wages & Wage Benefits by $1 increases Profitability by $1! We get to keep the whole dollar!

Before you take me wrong and think I'm not in favor of rising Sales, nothing could be further from the truth. POS can manage loyalty programs, direct targeted marketing, handle gift cards, and generate sales through 'bounce-back' coupons from receipts. All could raise sales. And, yes, I'm in favor of raising Sales, as long as we manage our business correctly and realize more Profitability in the process. But there is no denying the fact that more Profitability improvement can be achieved by controlling Expenses than raising Sales.

That said, let's take that questioning stroll through a POS system and ask the burning questions about how a Point of Sale could improve our center's performance in the essential areas above.

We'll begin with "How will a POS system lower my Cost of Goods Sold?" Cost of Goods Sold, or COGS, is by far the biggest culprit in decreasing Profitability. Conversely, it is also the largest area of opportunity for increasing Profitability. Maintaining Sales while lowering COGS yields increased Margin Dollars. And Margin Dollars are what pays the bills - Operating Expenses, Wages & Wage Benefits, and Profitability.

There's a whole arsenal of weapons called data that accumulate in a POS system. The real trick is to use that data in the form of reports to control inventory. A few of the basic reports and their importance in lowering COGS follow -

An Items Sold report tells which items sold at what Margin Percentage to contribute this amount in Margin Dollars. This is a very important report since it reveals the movers and shakers that are shouldering the load in your center. This report is produced on any period you may wish, but should be a mainstay in all meetings with department managers.

The Category Report summarizes the Items Sold report into a one or two page report. Same information, same importance, just more concise.

Top 50 List shows the top item performers in your center in terms of Margin Dollars and Sales. Remember, Margin Dollars are the most important so this report should be sorted from most to least by Margin Dollars. Managing this list could lower COGS considerably.

The Bottom 50 List shows the inverse of the above items. Make them better or get rid of them. Acting on this list will improve COGS quickly.

Dead Inventory List summarizes the items that are just not moving at all. This is a scary list, so sit down the first time you read it. There's more there than you will ever think possible. A no-brainer when it comes to lowering COGS.

One of the most important reports deals with Inventory Turns. Slow turns are an indicator of how long your inventory is sitting in your center and how much cash you are tying up in slow inventory. A very important measurement, one that centers should use more often. The faster the turns, the fresher the inventory, the fresher the inventory, the higher the margin percentage, the higher the margin percentage, the lower the COGS . . . what I prefer to call the Domino Effect of Inventory Management.

If you're using Open To Buy in your POS, you're using one of the most powerful inventory control methods available. Buyers armed with a known amount to buy or to dispose of should evolve into very precise buyers of timely inventory with the resultant effect of lowering COGS.

The reports above are just the tip of the iceberg available in POS. All of these and more contribute to Margin Improvement by item, which lowers COGS.

Coming from a different angle, the ability of POS to improve accuracy in your center's accountability can lower Cost of Goods Sold. Barcodes and self-generated price labels assist in managing discounted sales, multiple pricing, multiple pricing levels, and bundling. Add to the above the Time Clock feature available in most POS systems that clearly measure department payroll costing. In addition, the self-imposed discipline of a POS Purchasing and Receiving System tightens the belt on waste and inventory loss. All money savers.

In short, all of the reports and resultant actions will lower markdowns, increase inventory control, and improve cash flow. All winners.

Question #2 - "Will a POS system lower my Wage & Wage Benefits expense?" According to a 2003 Microsoft study on POS, most small businesses were able to lower their Wage costs by one to two full time staff positions through attained efficiencies.

Question #3 - "How much will a POS system cost, and will it really pay for itself?" Okay, we've discussed how a POS system could theoretically increase Profitability. Let's get into the actual numbers side of this argument to see the potential benefit.

The Microsoft study mentioned above measured potential Sales Increase, Expense Decrease, Margin Increase, and the bottom line - Net Profit Increase. To further define the study, they divided the study into businesses that exhibited High Performance (used all of the POS tools available to them), Mid Performance (used most of the POS tools), and Low Performance (used very little of the tools available in their POS).

While the argument could be made that Microsoft had an ulterior motive in conducting this study, their results were actually more conservative than other studies conducted by non-POS companies.

Even though increasing Sales are not as important to me as managing the Sales you already have, the study showed POS installation contributed to some pretty hefty Sales increases. Six months after installation of POS, Low Performance businesses raised their sales by 5%, Mid Performance companies saw a 10% rise, while the High Performance group saw a whopping 20% boost.

The overall Profit results were even more staggering. Cutting to the bottom line, the Net Profit Increase for a Low Performance company was 6%, Mid Performance 12%, and High Performance 30%. Admittedly, the High Performance numbers are hard to believe. Given that, add the Low or Mid Performance percentages to your own and see where you might be with a well-managed POS system.

It's time to put those numbers to the test and determine what a POS system costs and the potential payback to your center.

Through my experience installing POS systems, I've been able to measure the overall cost of installing systems in garden centers. Depending upon the type of system purchased, average per terminal cost ranges from $5000 to $7500. This includes networking, hardware and software as well as installation costs.

How many terminals do you need? All installations should include a server and back office workstation. Add to these two the number of sales terminals you currently have or plan to have. The total number of terminals generally ranges from four to ten. As you can see, using the numbers above, a POS system will run from $$18,750-$22,500 for a two office/one sales terminal installation to a $50,000-$75,000 price tag for a four office/six sales terminal operation.

Please Note - Use these figures for a rough estimation of what your POS could cost. Then call several POS software companies for a more precise installation cost estimate.

But the cost is only part of the equation. The potential payback and increase in Profitability are the key measurements. Using the Low Performance data from the Microsoft study (we'll take the lowest-gain scenario), compare the potential performance numbers for several sales levels coupled to their average terminal requirements. For this example, I split the difference per terminal between the upper end and lower end cost to arrive at $6250 per terminal.

GreenSideUp GC P&L
Sales		$300,000		$500,000		$1,000,0000		$2,000,000
Increase In Profitability		$18,000		$30,000		$60,000		$120,000
Less
Cost of System*		$18,750		$25,000		$43,750		$62,500
Equals
Net Results		-$750		$5,000		$16,250		$57,500
		2 Office, 1 Sales		2 Office, 2 Sales		3 Office, 4Sales		4 Office, 6Sales
		3 Terminals		4 Terminals		7 Terminals		10 Terminals

In this example, we assumed an increase in Profitability according to the Low Performance level and a system cost payback during the first full year of operation. As you can see, an increase of Profitability with Sales less than $300,000 would be negated by the cost of the POS system itself. As the Sales level rose, however, the quick return in dollars becomes increasingly higher.

One might argue that a garden center below $300,000 a garden center should not install POS. But a garden center will use the system hardware and software for much longer than one year, meaning the benefit of the system in Profitability could compound for several years.

As to the higher sales levels, it's difficult to imagine anyone running a garden center in today's business climate without the benefits a POS system has to offer. The numbers prove it as well.

So at what point should a garden center consider POS? My answer to that has always been when a center reaches $250,000 in annual revenues, they should be looking. Above $250,000 they better be installing. The potential loss in Profitability that results from running a garden center 'by the seat of the pants' vs. the control possible from a POS system is huge. As sales rise, the greater the potential benefit in Profitability.

Have I convinced you yet of the need for POS in your garden center? If so, start your search the right way. Email your garden center information - name, name of your center, and complete address - and I will send you my
POS Checklist, a basic guide to what you should ask software, hardware, and installation companies regarding POS. You won't find specific recommendations for which software or hardware to use, but rather a set of questions that will help you narrow down the selection field.

Then put this information to the acid test. Ask your fellow garden center owners and managers which system they use, the ease of use, and whether they feel it improved their Profitability. Take the time to go to their center and experience running the system firsthand. That's the only way you are going to know how that system will fit into your garden center.

One closing thought - a POS system is only a tool. You have to use the tool for what it was designed for to reap the benefits. It's like being lost in the woods with a compass in your pocket. If have it and don't use it, you're still lost.

******************************

Steve Bailey is the Financial Analysis Consultant for The Garden Center Group, a business resource alliance of 0ver 100 independently owned
U.S. and Canadian garden centers.
Steve can be reached at stevebailey@gardencenterprofit.com