Most independent jewelry store owners are wearing many hats. Most are functioning as Head of HR, Vendor Relationships, Client Development, Advertising and Marketing in addition to some may be operating as Head of Sales or Design. Chief Financial Officer is a role that can sometimes taka a back seat, or seem overwhelming with so many accounts and financial statements to look at. Managing these many roles is a matter of prioritizing your efforts, and streamlining whatever tasks are possible. When looking at your financial statements, there are four key areas to focus on:
Inventory is a working asset, that generates almost all the store revenues. Inventory management is critical to the success of the store. Questions to ask when evaluating inventory include:
- What is the right amount of inventory to carry? Since most of the store’s capital is used to support this asset, having too much can be a drain of badly needed cash, but not having enough inventory can cause the store to lose sales.
- What is the right composition of inventory? Having a proper balance between quick sellers and more expensive longer sales cycle merchandise will yield optimum results.
- Is my inventory marketable? Whether an accessory item to a person’s wardrobe or a long-term keepsake, an inventory needs to be relevant and appealing to customers.
- A combination of liabilities and equity is how assets are supported. Too many debts, or liabilities require repayment, and can incur interest charges. These repayments and interest expenses can eat into cash flow.
- The ratio of liabilities to equity should be correlated to a Company’s recurring and predictable cash flow.
- As balance sheet leverage increases (total liabilities outweighing equity) cash flow to support that leverage needs to increase.
- More moderate balance sheet leverage, with total liabilities less than equity demands less cash flow to support. In the jewelry industry, the longer sales cycle of higher priced items can slow down cash flow, along with economic cycles and seasonal ebbs and flows.
Most business owners focus on total revenues and net profits. Questions a business owner should ask:
- What is the “Breakeven” level of sales?
- What are the trends in my revenues, and how do they compare to the industry?
- What are my net profit trends as a percentage of my revenues? Is my net profit margin growing or shrinking?
- What return on equity are net profits yielding? Don’t forget to consider owners’ wages as well as net profits when considering return on equity.
This is the biggest challenge for most business owners. An expanding business may require more cash than a company can generate to support growing working capital needs. Cash flow can be a better measurement of a company’s financial health than net profits.
- Most measurements of cash flow include adding net profits to non-cash expense items such as depreciation.
- Activities other than operating profits that add to cash flow include selling assets, such as inventory or collecting receivables, new liabilities such as lines of credit, or injections of capital from owners or investors.
- Activities that decrease cash flow include increasing assets, such as higher inventory levels, or capital expenditures on equipment. Other activities that decrease cash flow include paying down liabilities such as accounts payable, credit cards, lines of credit or term loans. Deductions from equity, such as dividends or S-Corp distributions decrease cash and can be a drain on a company’s cash. Distributions more than profits can result in increased reliance on debt to support assets.
By managing these four key financial areas, an owner will be able to quickly assess the health and direction of their company, then have time to get back to managing HR, Vendor Relations, Advertising and Marketing and all the other responsibilities of a busy jewelry store owner.
If you would like more assistance to help ensure your finances are in the healthiest shape for 2017, please contact us and we will get you started on the right foot for the year. 714-925-2456 or Becka@EdgeRetailAcademy.com