IN BUSINESS, STORE owners often get trapped because they don’t heed the messages their business sends and they don’t pay attention to basic principles. The following checklist represents a clear set of danger signals — situations and issues — that have a clear and negative effect on cash flow. Take a few minutes under the harsh, cold light of reality to ask yourself how many of the following danger signals exist in your business and then evaluate carefully their implications:
- No physical inventory taken on a regular basis.
- Lots of unsold or unrented inventory sitting around.
- No monthly cash budget projection.
- Bank credit line not paid down to zero within the last year.
- Term loan payments were paid late one or more times within the year.
- Buying at trade shows without a purchasing plan.
- Short-term credit like credit lines used for long term assets such as rental equipment.
- Bank statements not reconciled every month.
- Supplier discounts rarely taken for early payment.
- Projected annual sales increase of over 25%.
- Balance sheet prepared only at the end of the year, and only used for tax purposes.
- No review of financial statements on a regular basis.
- High interest rates on bank loans.
- Increasing amount of credit supplied by credit cards.
- Bad debt expense increases every year.
- No “Accounts Receivable” report on weekly basis.
- Fast-moving items are often out.
- Payroll checks have been written late one or more times this year.
- No systems in place to prevent internal fraud.
- Only communication with CPA is in April to discuss tax avoidance strategies.
- No handle on company cost structure or break even level.
- Showing profits but no cash.
- Business cycle contains sharp seasonal slumps or booms.
Perhaps the greatest dangers of all: Not having adequate records and/or financial skills to be able to answer all of these questions – or not having any questions to ask! Planning is the vital element, especially when we’re talking about cash flow. Danger signals are just that – signals. The longer you wait, the fewer options you will have. Now is the time to gain control and keep it. Get ahead of the game, sleep better at night, and get in a much better position to weather whatever rough seas lie ahead.
Lucky Numbers
What it is? Introducing GMROI — more lengthily known as “gross margin return on inventory”. GMROI shows how much gross margin earned for every dollar of inventory. A high (good) number results when inventory investment is low (due to fast turnover) and gross profits are high (due to both high volume in sales and high gross profit margin as a percentage of sales). Our high-profit group in the 2004 Jewelers Financial Benchmarking Study took home $1.32 in gross margin from each dollar in inventory compared to only $1.13 for the rest of the companies surveyed.
Strategy: GMROI is such an important number because it measures both the profitability and productivity of your inventory. To find your GMROI, take your gross profit and divide it by your ending inventory. You can measure GMROI by total sales, individual department, vendor, or even SKU. Once you get the hang of it, you might even find yourself using GMROI to help choose vendors and product lines. Best of all, an improvement in GMROI will positively impact all four critical financial areas in your business: profitability, productivity, cash flow, and financial position. Not a bad return.
Money Math
- Gross Margin Per Square Foot of Selling Space
Formula: Net sales minus cost of goods sold, divided by the total square feet of selling space.
How To Use It: If XYZ Jewelers has annual sales of $500,000 and its cost of goods sold is $300,000, with 1,000 square feet of selling space, then gross margin per square foot of selling space is $200 ($500,000 – $300,000 = $200,000; $200,000 / 1,000 = 200)
This story is from the April 2006 edition of INSTORE.