QUILT TRENDS - - - - -




                          Money
                             Matters                           ...
“The real value of the balance sheet and income statements comes after
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QUILT TRENDS - - - - -     Money
                              Matters
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QUILT TRENDS - - - - -       Money
                                Matters
                         you plan for and ensur...
QUILT TRENDS - - - - -     Money
                              Matters

                         STEP 3: USING
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Money Matters

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Money Matters

  1. 1. QUILT TRENDS - - - - - Money Matters By Laurie Harsh Benchmarks for Quilt Shops: Key Financial Ratios Laurie Harsh is the founder and president of The Fabric Shop Network, Inc. Since 1997, this growing trade organization has worked to support independent quilt and fabric retailers nationwide to achieve business success. Harsh has more than 30 years of fabric-industry-specific retail management experience. She has consulted with hundreds of shops in the past six years to help them monitor and manage their business performance to reach their goals. Using financial statements and key business ratios is an essential component of her success in guiding shops in their own growth. For more information on joining the organi- zation, go to www.fabshopnet.com; call Laurie Harsh at 360/892-6500; or visit FSN at Fall Quilt Market in Booth #167. Craftrends Magazine is the leading trade magazine for quilt, sewing, and fabric retailers, providing important articles like this one every month. Retailers receive a FREE subscription. For more information, visit www.craftrends.com or call 303/273-1327. Reprinted with permission. ©2003 Craftrends Magazine. 32 OCTOBER 2003 craftrends www.craftrends.com
  2. 2. “The real value of the balance sheet and income statements comes after their creation. They provide the information you need to create key business ratios that reveal the true picture of your shop’s financial position.” H ave you ever wondered how your quilt shop com- pares financially with oth- ers in the industry? Have you ever wondered what you can do to improve 3. Compare your ratios to industry benchmarks. These steps involve some mathe- matical calculations that are easy to do – especially with the help of your cal- STEP 1: CREATING YOUR FINANCIAL your shop’s financial performance and culator. It is a simple matter of learning STATEMENTS outlook for the future? Using key how to organize your information so it Determining where you stand finan- financial and operational ratios with provides a clear picture of where your cially begins with creating your finan- QUILT TRENDS - - - - - industry benchmarks to compare shop stands financially from year to cial statements (see samples above). financial results can help you answer year and in comparison to quilt shop These include your Balance Sheet and these key questions. benchmarks (industry averages). Using an Income Statement (or Profit and A three-step process makes it simple. benchmarks will help you obtain an Loss Statement). Creating these finan- 1. Create your shop’s financial objective picture of your current and cial statements is largely a mechanical statements. historical performance so you can take exercise. The numbers in the state- 2. Analyze your shop’s financial charge of directing the financial destiny ments should be easily accessed in statements using key financial ratios. of your shop. And, it can be fun! your accounting records at the end of (more on next page) www.craftrends.com craftrends OCTOBER 2003 33
  3. 3. QUILT TRENDS - - - - - Money Matters For Example I n this shop example, note that the shop’s sales were the same over the past three years, while operating expenses showed an increase in each succes- sive year. “By examining the business ratios In other words, sales are flat and operating expenses are steadily climb- of peers or successful industry lead- ing. When you compare these figures in these two areas to the industry ers, or a volume segment as a benchmark for quilt shops, you can see that the operating expenses may be too high. whole, you can project and plan to make adjustments so that your fig- Your Company 2000 2001 2002 Industry Benchmark Sales $245K $245K $245K ures will come close to matching Operating Expense% 40% 42% 45% 35.5% industry averages.” To improve this scenario in the coming year, you would want to reduce operating expenses and increase sales and gross profits. an accounting period. Then you, your financial position. These ratios will money and some creditors use them to accountant, or your accounting soft- help you see how your shop is doing determine whether or not to extend ware simply has to look up the num- in a number of areas. You don’t have you credit. bers and plug them into the appropri- to know the exact makeup of each Every business should produce an ate slot in the statements. item on the balance sheet and income array of financial ratios that can be The Balance Sheet is a snapshot statement, but you must have a sense used for daily, weekly, or monthly of the financial condition of your busi- of what the numbers mean in order to monitoring to make sure all key activ- ness at a particular point in time. This interpret and analyze these financial ities are on track. When you compare snapshot shows your: records. changes in your business’s ratios from • Company’s Assets – everything period to period, you can pinpoint the shop owns improvements in performance or • Company’s Liabilities – every- thing the shop owes STEP 2: developing problem areas. By compar- ing your ratios to those in other quilt • Net Worth or Equity – consists of ANALYZING KEY shops with similar volume sales, you all investments made by owners into the business plus retained earnings. FINANCIAL can see possibilities for improvement in key areas. The Income Statement shows the RATIOS Running your quilt shop “by the results of the revenue and expense A financial ratio is a mathematical numbers” isn’t at all like painting by activities of your shop over a period of comparison between two or more the numbers. Unlike a finished paint- time. items from your balance sheet or by-numbers picture, financial ratios It’s essential to remember that sim- income statement. offer you several pictures, including ply going through the exercise of cre- You can use financial ratios to: how your shop is performing today, ating and updating these two state- • Monitor the performance and and how to meet business goals in the ments isn’t enough. They are only the measure the financial progress of your future. And, every picture tells a story starting point for successful financial business about how successful a business is or management. The real value of the • Uncover trends could become. balance sheet and income statements • Point to potential problem areas There are hundreds of business comes after their creation. They • Help you with your strategic ratios that can be created from your provide the information you need to planning process financial statements. Here are some create key business ratios that reveal Bankers often analyze these num- common ones that you should be the true picture of your shop’s bers to decide if they want to lend you examining on a regular basis to help (more on page 36) 34 OCTOBER 2003 craftrends www.craftrends.com
  4. 4. QUILT TRENDS - - - - - Money Matters you plan for and ensure your shop’s disappear, could my business meet its and income statement. success. current obligations with the readily Inventory Turnover Ratio: This convertible funds on hand?” ratio reveals how well inventory is Analyzing Balance Sheet Ratios A Quick Ratio of 1:1 is considered being managed. It is important There are two critical balance sheet satisfactory unless the majority of your because the more times inventory can ratios that measure liquidity and sol- “quick assets” are in accounts receiv- be turned in a given operating cycle, vency (your business’s ability to pay its able, and your pattern of accounts the greater the profit. bills as they come due) and leverage receivable collection lags behind the (the extent to which the business is schedule for paying current liabilities. To calculate your Inventory Turnover Ratio: dependent on creditors’ funding). Cost of Goods Sold Current Ratio: This ratio is one of Analyzing Income Statement Ratios Average Inventory at Cost the best measures of your shop’s finan- Income Statement Ratios measure cial strength. profitability. Here are two examples. Return on Assets (ROA) Ratio: Gross Profit (or Gross Margin) This measures how efficiently profits To calculate the Current Ratio: Ratio: This ratio is the percentage of are being generated from the assets in Total Current Assets sales dollars left after subtracting the your business when compared with Total Current Liabilities cost of goods sold (COGS) from net the ratios of similar businesses. A low sales. It measures the percentage of ratio in comparison with industry The Current Ratio provides the sales dollars remaining available to averages indicates an inefficient use of answer to the question, “Does your pay the operating (overhead) expenses business assets. business have enough current assets to of your shop. meet the payment schedule of its cur- To calculate your Return on Assets rent debts with a margin of safety for To calculate the Gross Profit Ratio: Ratio: possible losses in current assets, such Gross Profit Net Profit Before Taxes as inventory shrinkage?” Net Sales Total Assets A generally acceptable current ratio is 2:1. The minimum acceptable cur- Net Profit Margin Ratio: This Return on Investment (ROI) rent ratio is obviously 1:1, but that ratio is the percentage of sales dollars Ratio: The ROI is perhaps the most relationship is usually playing it too left after subtracting the cost of goods important ratio of all. It is the percent- close for comfort. sold (COGS) and all expenses, except age of return on funds invested in the Quick Ratio: This ratio is some- income taxes. It provides a good business by its owners. times called the “acid-test” ratio and is opportunity to compare your shop’s one of the best measures of liquidity. “return on sales” with the performance To calculate your ROI: The Quick Ratio is a much more of other quilt shops in your industry. It Net Profit before Tax exacting measure than the Current is calculated before income tax because Net Worth Ratio. By excluding inventories, it tax rates and tax liabilities vary from (more on page 38) concentrates on the really liquid assets company to company for a wide vari- – the ones you can access quickly. It ety of reasons, making comparisons also measures the company’s depend- after taxes much more difficult. ency on turning inventory to pay short-term liabilities. To calculate your Net Profit Margin Ratio: To calculate the Quick Ratio: Net Profit Before Tax Cash + Marketable Securities + Net Sales Accounts Receivable Total Current Liabilities Analyzing Management Ratios Other important ratios, often The Quick Ratio helps answer the referred to as Management Ratios, can question, “If all sales revenues should be derived from your balance sheet 36 OCTOBER 2003 craftrends www.craftrends.com
  5. 5. QUILT TRENDS - - - - - Money Matters STEP 3: USING business ratios of peers or successful The store example on page 33 industry leaders, or a volume segment shows just one reason why it is impor- INDUSTRY as a whole (for example, shops doing less than $250,000 a year in sales), tant to create your financial state- ments, use them to construct key BENCHMARKS you can project and plan to make business ratios, and do the necessary Operating and financial ratios are adjustments so that your figures will benchmark comparisons to continual- important in themselves, and doubly match or come close to matching ly monitor and adjust your financial important when used to compare this industry averages. planning. year’s performance with last. However, In addition to comparing these Not paying attention to these num- making a three-year comparison to ratios with those of industry peers, it bers is one of the key reasons small determine trends and then comparing is important to see how your company businesses fail. Using benchmarks your ratios to industry benchmarks stacks up with competitors. If a com- takes discipline, but employing this offers you the most opportunity to use petitor is more profitable, these ratios process and making it a routine part of the “numbers” in planning your finan- may indicate why, and suggest areas your business management practice is cial strategies or adjusting your you can address in your shop to one of the surest ways for you to course. improve your own profitability. determine what’s really happening Benchmarking is the process of Significant variances between your financially in your shop, to adjust continually comparing and measuring performance and industry averages your course when necessary, and to your business processes against others could indicate an opportunity for make sound strategic plans for the in the same industry. By examining the improvement. future. ◆ More Help in New Book Here areworkbook,Shopthe manyforInc. discussed inFinancial Ratios, cation just a few of from The Fabric Benchmarks ratios Network, Quilt Shops: Key the new edu- • Advertising as a Percent to Net Sales • Average Sales Transaction • Cost of Goods Sold • Gross Sales per Square Foot • Net Sales per Employee • Operating Expenses • Payroll as a Percent to Net Sales • Rent as Percent to Net Sales You also will find: • Essential information and worksheets you need to learn how to construct key operational and financial ratios. These are the ratios you need to make year-to-year comparisons with your own numbers and industry averages. • Industry benchmarks for key operational and financial ratios by volume segment. You need this information so you can compare your numbers to the segment most like your shop. • Instruction on how to interpret your ratios so you can determine when it’s necessary to adjust your business strategies to achieve your business goals. The Fabric Shop Network workbook, Benchmarks for Quilt Shops: Key Financial Ratios, will be available at www.fabshopnet.com. ❒ 38 OCTOBER 2003 craftrends www.craftrends.com

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