Retail Financials 101 -- HME Business

HME Retail Sales

Retail Financials 101

As HME providers dig deeper into cash sales, they are discovering the nuances of managing retail finances.

By Joseph Duffy
Aug 01, 2015

Retail Financials While HME providers expand their operations to capture more of the growing retail/cash market, they find themselves relying more on their retail finance strategy, which can include accounting, inventory, margin markups, and pricing. What they are finding is as sales increase and market share grows, so does the importance of monitoring, measuring and reacting to retail finance data. Before you know it, a slight tweak to your pricing or inventory can be the difference between posting a profit or a loss.

“Retail finance is generally a challenge for HME retailers due to the lack of a fully functioning POS technology that integrates into the insurance side of the business,” said Rob Baumhover, Director of Retail, VGM Retail. “Cost-of-goods margins are the easiest to track. Costs and sales-per-square-foot dollars are a challenge to isolate and calculate, as many of the associated costs are shared with the traditional HME portion of the business. The biggest challenge is inventory tracking, which is absolutely key to managing the finances of a retail business. Controlling inventory leads to higher tickets, number of items per ticket and thus higher revenue. But inventory control is absolutely key to managing cash flow for the whole company. If you don’t have a system in place to manage the ordering and tracking of inventory it’s impossible to analyze specific inventory calculations like revenue per patient, average cash ticket, and average number of items sold by customer and by category.”

Aaron Ziegler, Retail Program Manager, Advanced Home Care, said many of the challenges associated with finance and accounting for HME retail stem from the complexity and expense of creating the reports and getting your hands on meaningful information.

“Creating a meaningful financial reporting system requires a significant investment of time and money and can consume resources,” he said. “A manager must either hire someone to do this for them, or gather the knowledge and invest time into creating the system. Neither of these are attractive options to the typical manager. Finance is a support role, and is not likely to have an ROI that is easily measured. Dealing with the investment required is probably the biggest issue.”

Jacqueline A. Kerwin, MBA, CPA, CGMA, is Director of Finance for provider Beacon Health Ventures. Her company is a client of Mediware. When it comes to retail finances, she said it can be a challenge but suggests that HME providers use software that:

Provides a POS experience that is quick but captures everything you need
Verifies benefits immediately to know what will and won’t be covered by someone’s insurance
Takes an accurate inventory count with precise reporting when you can’t just shut down operations

“Retail is very challenging,” she said. “Margins are very small and purchasing plays a very important role in insuring you are buying products at the best possible pricing to mitigate constantly shrinking margins. Holding costs are high. You need to have enough inventory to meet demand, but not so much that you are stuck with products that don’t sell.”

She also said that you need to figure out which product lines you should keep and which ones you won’t make any margin on, and have enough variety of product to display and have on hand without being all things to all people, since it is cost and space prohibitive.

The biggest finance challenge is timing, she said, because customers do not want to wait.

“You need to have all of the information in a format that is easy to provide expertise and make sound decisions,” she said. “You don’t have the luxury of ‘getting back to them’ on something. If you don’t have the answers, they will go somewhere else. Additionally, inventory becomes a huge challenge as previously noted. You need experts in the HME industry on a product-specific basis, but you also have to have business savvy to run daily operations that involve cash drawers, credit card reports, batching, reconciliation, etc. Most importantly, the CSRs [customer service representatives] either make or break the business. You have to have the right people as the ‘face’ of your business. They need to be present, accurate, friendly, knowledgeable, etc.”

Retail Finance Best Practices

With more HME providers diving deeper into a cash sales strategy, the industry is learning more about implementing savvy retail finance best practices. Here are best practices used by some HME retail pros:

Aaron Ziegler, Retail Program Manager, Advanced Home Care

Understand your in-store revenue mix. Assuming your goal is to drive your cash sales up, you need to understand the revenue mix in your retail store. Specifically, what portion of your business comes from cash sales and what portion comes from billing the patient’s insurance? If you find cash business more desirable than reimbursed business (and who doesn’t these days), you should begin to work on converting your reimbursed business to cash business.
Manage your promotions. Every time you spend money to promote your business, there should be an immediate and traceable response from your customers. You should be able to trace this response with some tracking mechanism at the point-of–sale. Without a promotion tracking system and reporting of the financial results, you may be overspending and wasting precious marketing dollars. A solid direct response ROI should be five-to-one or even 10-to-one revenue return per dollar spent. Avoid untraceable ‘image advertising’ in the early days of your retail business, like billboards, because the results are very difficult to track.
Know your inventory turns. Retailers need to be really good at one thing: turning inventory over. As a re-seller, you need to be re-selling things rapidly. If you buy items and fail to re-sell them, you won’t last long. This is why tracking inventory turns is critical. Your inventory turnover ratio tells you if you are maintaining a profitable balance between your inventory level and your sales. You can track your inventory turns at the company level, store level and even down to the item.
Calculate your inventory turns using this formula: Annual Cost of Goods Sold / Average Inventory Value

An example of a strong inventory turn ratio would be 10 times per year, and a poor inventory turn ratio would be less than one. If you are holding a lot of inventory on an item, reducing your inventory held could be a solution because this can increase your turns. Other times, you should consider eliminating the item from inventory because you are spending more than you are making on it within a year’s time.

Manage sales performance at multiple levels. This topic is not pure accounting. This is part HR policy, part general management and part finance. However, these data illuminate your path to retail success, so they are relevant here. Consider these valuable questions and the impact that this knowledge may have on your ability to make decisions:
Who was my top salesperson last quarter?
Who was my least productive salesperson?
What is each salesperson’s total revenue this month or this year?
What is their average sale?
How about average profit?
What do these same figures look like for Store A versus Store B?
How about these same figures for my lift chair department versus my bath aid department?
What are my top three product categories by profit margin?

This kind of data slicing and pivoting is known as business intelligence or ‘BI’ for short. BI is essentially the ability to take large sets of historical data about your business, ‘warehouse’ it, and report against it using a variety of views and scenarios. While BI can get very technical, much of this information can be extracted and reported using very common, manual techniques. To study your transaction data manually, you can use simple totaling and averaging functions in Microsoft Excel and get simple reports very quickly. If you are ready to try to automate this process, or you need to retain large amounts of data, you may want to consider upgrading your software. A basic off-theshelf version of many of these BI tools can be obtained with little to no cost.

Maria Claire Markusen, Director of Development and Operations, and Rob Baumhover, Director of Retail, both with VGM Retail

Follow the 80/20 rule: 80 percent of revenue will come from 20 percent of products Also, pay attention to all three layers of inventory