Retail Observer

RETAILOBSERVER.COM FEBRUARY 2015 64 I t's that time of year again. Year end reports are due. Taxes are due. Your accountant tells you that your business financials look dreadful. Your bank declines your loan application. You look at your financial reports and wonder what everyone is talking about. Sound familiar? Well you are not alone. In fact, you're a member of a large group of business people who struggle to understand how the moving parts of a company work together to make it successful and how financial metrics like profit margin and cash flow reflect how well each of those moving parts is doing its job. So what is "business acumen"? Business acumen is the keen, fundamental, street smart insight into how your own business operates and how it makes money and sustains profitability, now and in the future. The problem with most entrepreneurs and managers is that while they understand their jobs they fail to see the big financial picture because it seems too complex. Developing business acumen helps us cut through this complexity and get a better understanding of how the financials of the business work which will enable us to 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? Knowing the answers to questions like these and understanding how these numbers interact with each other in the big picture will help you understand and run your business more profitably. While there is not enough space in this issue of The Retail Observer to go into detail, I will attempt to give you the key indicators of how your business is doing based on four drivers: Cash, Profit, Assets and Growth. We will use these core financial statements; the statement of cash flows (cash), the income statement (profit) and the balance sheet (assets). The most important lesson to learn is that there is interdependence between each of these statements and you cannot affect 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 volume of cash flowing through the business. Cash received (–) cash paid out. Hopefully 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 cost to produce and sell them (expenses). Within the profit bubble there are two common measures: gross profit and net profit. You will find these numbers on your profit and loss statement. • Assets: Asset strength reflects your ability to meet your financial obligations now and in the future. If your assets are greater than your liabilities then 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 account gives you your year-end financial statements take a close look at them and look for some of the key drivers of your business. I have listed a number of formulas below. These formulas will help you find some of the most important key numbers you should be concerned with. Use them to help guide your operations and learn the interdependence of your financial statements. If you are interested in reading more about this subject there is a wonderful book on the market titled Seeing the Big Picture by Kevin Cope from which this article is based. It is a short read but powerful and will help you acquire a stronger business acumen. CASH FLOW 1. Cash in – cash out PROFIT AND LOSS 1. Growth rate = ytd revenue–previous year revenue / previous year revenue 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 HOW'S YOUR BUSINESS ACUM EN? S E R V I C E D E P A R T M E N T RO Ralph E. Wolff , MCAP, CSM—Industry Relations, PSA Service News features alternating writers discussing topics of the service industry.

• Cover