Every business should provide management with timely reports of key drivers of the business. Management must then read and, as necessary, respond to the results in order to successfully operate the business. For a business that operates multiple locations, such as retail locations, a 4-wall analysis is an essential report that must be created and maintained.
What is a 4-wall analysis?
A 4-wall analysis is a profit and loss schedule for each location and is a combination of what happens within the four walls of the store as well as transactions incurred outside the four walls of the store but that need to be allocated to the store. Direct items include sales, sales returns and allowances, discounts, and cost of goods sold which should all be easily identified with each location based on each store’s POS system. Examples of direct expenses include occupancy, compensation and benefits, utilities and other operating expenses.
Some expenses incurred beyond the four walls need to be included in the 4-wall analysis. These indirect expenses are captured outside the four walls but are attributed to a store, such as freight, insurance, regional marketing and advertising programs, regional field support and interest expense (funded CapEx or operating losses applicable to individual locations).
Why is a 4-wall analysis important?
A 4-wall analysis allows management to stratify store performance using various filters, such as store contribution or EBITDA, by state or region, or by line item such as sales, sales per square foot, sales per head count or other expense line item. Often the 4-wall analysis is sorted from worst to most profitable from an EBITDA perspective as EBITDA is a proxy for cash. By sorting in this way, management can monitor underperforming locations. Store attributes, such as headcount, staff hours, and square footage enhance management’s ability to dive deeper into the metric by looking at line items on a comparative basis, such as sales per square foot. Comparative analytics allow management to quickly identify outliers and begin to take corrective measures.
Are any expenses excluded from the 4-wall analysis?
Generally, costs which are not impacted at the store-level are excluded. Examples of these costs include back office support like corporate sales/marketing, human resources, legal, IT, finance/accounting and corporate management.
Are there limitations to a 4-wall analysis?
The 4-wall analysis is intended to capture the performance of each location. As eCommerce has grown in significance, the importance of traditional brick and mortar locations may not always be reflected in the 4-wall analysis. The value of a brick and mortar location in support of eCommerce activity (e.g., comparison shopping, exposure to new products, sizing/fitting, color validations, customer pickup and returns) is not easily allocated to stores.
How often should the 4-wall analysis be updated?
Since a 4-wall analysis is an essential component of management’s toolkit, it must be updated on a daily basis. In order for the information to be produced in a timely manner (often it is included with the CEO/CFO morning financial dashboard), the 4-wall analysis is generated directly from the company’s financial reporting system.
A 4-wall analysis is a vital reporting tool that provides management with timely and critical operating and financial information and comparable metrics enabling management to quickly identify problems and take action.
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