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What Does Your Debt-to-Equity Ratio Mean to Your Business?

Achieving the correct balance will keep your business healthy and ready for growth.

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ACHIEVING THE CORRECT balance will keep your business healthy and ready for growth.

No business can survive well without adequate funding to sustain growth and maintain working capital during times of the year when cashflow is tight. Even the most profitable jewelry store is very dependent on December trading for most of the annual profit and needs additional financial support during the remaining eleven months to keep the business running smoothly.

When it comes to securing financing, most businesses are faced with two choices: debt provided from an outside source, or equity — funds contributed by the owner (or additional owners if it is decided to bring someone else on board).

The ratio of debt to equity is one of the most important measures of a business’s financial health. Too much debt can create pressure on the business to service the cost of carrying it. Equally, too little debt for a successful business may mean it’s missing the opportunity to maximize returns where the interest rate is lower than the return on investment that the funds can generate.

This balancing act needs to be revisited from time to time as the ratio between the two does not stay steady by itself. Retaining profits in the business can grow equity, which provides funds for growth. However, this may have its tax disadvantages if you then use debt to fund personal expenses. Likewise, a drop in equity due to excessive personal cash withdrawals or the company sustaining losses can see the debt ratio become too high relative to the owner’s contribution to the business.

The last twelve months have presented challenging times for many business owners, and with closures and lockdowns, many are in a situation where they have had to rely on outside funding to keep their business going. Now that the future is looking a little more optimistic and a return to normal trading is on the way, it’s the ideal time to revisit your balance sheet and see where you stand for the trading ahead.

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You may have run your inventory down because of Covid, and in order to meet sales targets, you may need to revisit your current range and depth of product in-store. With interest rates at historic lows, now may be a very good time to secure some additional funding in order to prepare yourself for what’s needed. Likewise, if you have been holding onto cash and building up the equity in your business, it might be time to determine how these funds can be better deployed for maximum results.

Either way, a review of your balance sheet will show how you can best prepare for the opportunities ahead.

David Brown is the President of The Edge Retail Academy (sister company of The Edge), who provide expert consulting services to help with all facets of your business including inventory management, staffing, sales techniques, financial growth and retirement planning...All custom-tailored to your store’s needs. By utilizing the power of The Edge, we analyze major Key Performance Indicators that point to your store’s current challenges and future opportunities. Edge Pulse is the ideal add-on to the Edge, to better understand critical sales and inventory data to improve business profitability. It benchmarks your store against 1100+ other Edge Users and ensures you stay on top of market trends. 877-569-8657, Ext. 001 or [email protected] or www.EdgeRetailAcademy.com

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Wilkerson Testimonials | Sollberger’s

Going Out of Business Is an Emotional Journey. Wilkerson Is There to Make It Easier.

Jaki Cowan, the owner of Sollberger’s in Ridgeland, MS, decided the time was right to close up shop. The experience, she says, was like going into the great unknown. There were so many questions about the way to handle the store’s going-out-of-business sale. Luckily for Cowan, Wilkerson made the transition easier and managed everything, from marketing to markdowns.

“They think of everything that you don’t have the time to think of,” she says of the Wilkerson team that was assigned to manage the sale. And it was a total success, with financial goals met by Christmas with another sale month left to go.

Wilkerson even had a plan to manage things while Covid-19 restrictions were still in place. This included limiting the number of shoppers, masking and taking temperatures upon entrance. “We did everything we could to make the staff and public feel as safe as possible.”

Does she recommend Wilkerson to other retailers thinking of retiring, liquidating or selling excess merchandise? Absolutely. “If you are considering going out of business, it’s obviously an emotional journey. But truly rest assured that you’re in good hands with Wilkerson.”

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