Retail Observer

RETAILOBSERVER.COM OCTOBER 2019 64 B efore you know it, year-end reports and taxes will be due. Your accountant may tell you your business financials look dreadful. Your bank may decline your loan application. You may look at your financial reports and wonder what everyone is talking about. Sound familiar? You're not alone. A large group of people struggle to understand how the moving parts of their business work together to make it successful, and how financial metrics such as profit margin and cash flow reflect how well each of the moving parts is doing its job. Developing business acumen is fundamental— a street-smart insight into how your business operates, makes money, and sustains profitability. A problem most entrepreneurs and managers face is that they understand their jobs but they can't see the big financial picture because it seems too complex. Business acumen will help you cut through the complexity and better understand how the financials of your business work. And that's a major boon, because it can help you fix present problems, prevent new ones and take advantage of new opportunities. Do you know how much cash was on hand at the end of the year? Do you know how much cash was generated from operations? Do you know your net income? Do you know your net profit margin? By what percentage did your total revenue grow or decline over the previous year? Being able to answer these questions and understand how the numbers interact with each other within the overall picture will help you understand your business and run it more profitably. Without going into too much detail, I'll attempt to give you the key indicators of how your business is doing. They are based on four drivers: Cash, Profit, Assets and Growth. We'll use these core financial statements: the statement of cash flows (cash), the income statement (profit) and the balance sheet (assets). It is very important to learn the interdependence between these statements, and you cannot alter one without influencing the performance of another. Your ability to clearly understand these relationships will affect your long-term profitability and growth. • Cash: You need cash to pay your bills and other obligations. Without cash, your business will fail. Cash flow is simply the difference between the volumes of cash flowing through the business. (Cash received minus cash paid out.) Let's hope the number is positive. These numbers can be found on your statement of cash flows. • Profit: Profit is the difference between how much you make by selling goods and services (revenues) and how much it costs to produce and sell them (expenses). Within the profit bubble there are two common measures: gross profit and net profit. You'll find these numbers on your profit and loss statement. • Assets: Asset strength reflects your ability to meet your financial obligations now and tomorrow. If your assets are greater than your liabilities, your future financial obligations are secure. The most important indicator of asset strength is liquidity. Assets, Liability and Equity can be found on your balance sheet. When your accountant gives you your year-end financial statements, take a close look at them. Look particularly for some key drivers of your business. I've listed a number of formulas below. These formulas will help you find some of the most important numbers you should be concerned with. Use them to help guide your operations and understand the interdependence of your financial statements. If you're interested in reading more on this subject, there's a wonderful book called Seeing the Big Picture by Kevin Cope. Much of this article is based on that book – it's a short but powerful read that will help you develop stronger Business Acumen. CASH FLOW 1. Cash in – cash out PROFIT AND LOSS 1. Growth rate = ytd revenue – previous yr revenue / previous yr rev x 100 2. Gross profit = total revenue – cogs 3. Gross profit margin = gross profit / total revenue x 100 4. Operating income = ordinary income / revenue 5. Net margin = net income / revenue BALANCE SHEET 1. Equity ratio = shareholders equity / total assets x 100 2. Return on assets = net income / total assets x 100 3. Debt to equity ratio = total liabilities / total equity 4. Current ratio = current assets / current liabilities GET READY FOR THE END OF THE YEAR – HOW'S YOUR BUSINESS ACUMEN? S E R V I C E D E P A R T M E N T RO Ralph Wolff, Industry Relations, PSA Certified Service Center www.certifiedservicecenter.org

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