“Being Proactive increases your bottom line”

1. “Being Proactive increases your bottom line”

2. Cash Flowis always King Opportunity knocks but you cannot answer. You are temporarily short of cash! Small business owners may easily avoid this situation with good cash flow management. Cash is a component of a business' net working capital and is its most liquid current asset. To understand its role in and out of a business, we look first at the concept of current assets and current liabilities.

3. Today’s Objectives • Discuss Profit Planning and Benchmarking

4. Today’s Objectives • Discuss Profit Planning • Describe Asset Management and Key Business Ratios for comparisons

5. Today’s Objectives • Discuss Profit Planning • Describe Asset Management and Key Business Ratios • Look At Systematic Retail Budgeting ROY

6. Today’s Objectives • Discuss Profit Planning • Describe Asset Management and Key Business Ratios • Look At Retail Budgeting • Examine Resource Allocation – The Open to Buy Process • Observe Common Budget Mistakes ROY

7. 3 Key Areas • Profits and Debt ManagementInventory Management • 2 - The Balance Sheet1 - Inventory Turnover • 3 - The Income Statement2 - Open-to-Buy: Sales Planning • 4 - The Relationship3 - Open-to-Buy: Inventory Planning • 5 - Ratio Analysis 4 - Plan Review & Analysis/GMROI • 6 - Forecasting the Income Statement • 7 - Forecasting the Balance Sheet • 8 – Future planning • Cash Flow Management • 1 - Cash versus Accrual Accounting • 2 - Preparing a Pro Forma Income Statement • 3 - Preparing a Cash Flow Budget • 4 - Analysis ROY

8. Profit Planning - 1 • Force yourself to Observe Revenues and Expenses over a fixed period of time. • Monthly - Recommended for Small independent retailers • Quarterly • Yearly • Be sure to take into consideration fiscal year time frames not all fiscal years have 52 weeks.

9. Key Areas Profit and Loss Statement for Profit Planning Net Sales – Revenues received after markdowns, returns and discounts.

10. Key Areas Profit and Loss Statement for Profit Planning Net Sales – Revenues received after markdowns, returns and discounts.Cost of Goods Sold – Amount paid to acquire merchandise including freight charges (running as much as 7%!).Make sure that all freight charges are to your account!

11. Key Areas Profit and Loss Statement for Profit Planning Net Sales – Revenues received after markdowns, returns and discounts.Cost of Goods Sold – Amount paid to acquire merchandise including freight charges (running as much as 7%!).Gross Profit (margin) – The difference between net sales and the cost of goods sold: it consists of operating expenses plus net profit.

12. Key Areas Profit and Loss Statement for Profit Planning Net Sales – Revenues received after markdowns, returns and discounts.Cost of Goods Sold – Amount paid to acquire merchandise including freight charges (running as much as 7%!).Gross Profit (margin) – The difference between net sales and the cost of goods sold: it consists of operating expenses plus net profit.Operating Expense – The cost of running your retail business.

13. Key Areas Profit and Loss Statement for Profit Planning Net Sales – Revenues received after markdowns, returns and discounts.Cost of Goods Sold – Amount paid to acquire merchandise including freight charges (running as much as 7%!).Gross Profit (margin) – The difference between net sales and the cost of goods sold: it consists of operating expenses plus net profit.Operating Expense – The cost of running your retail business.Net Profit – The profit earned after all costs have been deducted.

14. Benchmark against Industry Averages

15. Calculate your Breakeven Point! The volume of sales needed for a business to generate zero profit! Example: Breakeven point = fixed costs /gross margin percentage. For example, let's pretend your store is able to buy all its sneakers wholesale for $25 a pair and is then able to resell them for $50. Let's assume that your store's average fixed monthly costs (rent, salaries, telephone, etc.) are $15,000. Your store's monthly breakeven point would be $30,000: (15,000)/ (25/50) = $30,000.

16. Asset Management – 2 Understand Your Financials! Balance Sheet – Itemizes a Retailer’s Assets, liabilities and net worth.Assets can include Cash, Inventory, Fixtures and Equipment. Liabilities – Any obligation a retailer incurs in operating a business – payroll – taxes – accounts payable – short term loans_

17. Asset Management Net Worth & Net Profit Margins Net Worth – Computed as assets minus liabilities. It is also called owner’s equity and represents the value of a business after deducting all financial obligations. Net Profit Margin – Performance measure based on Net Profit and Net Sales Net Profit Margin = Net Profit/Net Sales

18. Net Worth = Assets - Liabilities

19. Net Profit Margin = Net Profit/Net Sales $19000/$220000= 8.6%

20. Asset Management • Ways to Increase Profits • Increase Gross Profit as Percentage of Sales • Reduce Operating Cost As Percentage of Sales • Raise Gross Profits – Opportunistic Buying – Exclusive Lines – Increased Customer Service – Increase Markups- Private Label • Reduce Operating Costs – Employee cost (*Quantify Employee Performance) – cut energy costs – refinance or renegotiate a lease.

21. Asset Management Performance Measurements Examples Asset Turnover - performance based on a retailers net sales and total assets may be used as a broad measure of asset efficiency. It's calculated by dividing Asset Turnover = Net sales/Total assets Increase Asset Turnover – Longer Hours – Mail Order/Web – Smaller Space ROA Return on Investments – relationship between Net Profit and its Asset Turnover ROA = Net profit/Net sales * Net sales/Total assets Financial Leverage – performance based on relationship of assets and net worth Financial Leverage = Total assets/Net worth A ratio of 1 equals no debt – a Higher ratio may means too much cost cutting and short run sales – If your ratio is too low you may be too conservative – our owner equity is too high. Our industry average is 2.3 and banks are looking for a number between 1.25 and 2, at the moment.

22. Benchmarking with Strategic Pricing Models Net Profit Asset Turnover Financial Leverage Return on Net Worth x x = Net Profit/Net Sales Net Sales/Total Assets Total Assets/Net Worth Net Profit/Net Worth This information is used in controlling assets Example: Retailer could learn that a poor return on net worth is due to less than satisfactory asset turnover or financial leverage. ROY

23. Other Key Business Ratios Quick Ratio – Cash + A/R/Total Current Liabilities Shows Retailer Liquidity – ratio greater than 1 to 1 means retailer is liquid.0.5 Current Ratio – Total Current Assets/Total current Liabilities – ratio of 2 to 1 considered good. 2.5 Accounts Payable to Net Sales – A/P/Annual Net Sales. shows reliance on manufacturer dating.7.2 Overall Gross Profit – Net sales –COS/Net Sales – This average takes into account markdowns, discounts and shortages. Used to cover both operating costs and net profit. 33.2 H/O

24. Budgeting Process - 3 • Expenditures are clearly related to expected performance, cost can be adjusted as goals are revised. • Resources are allocated to the proper departments. Prevents unexpected cash flow problems. • Expenditures for various departments, product categories and so on are coordinated. • Because the budget is structured, even the small retailer can become more efficient. • Cost standards are set – Example advertising = 5% • Expenditures are monitored – preventing over inventory situations. • A shop can analyze the difference between its expected cost and actualperformance. • Your store can now be compared to national averages.

25. Ongoing Budget Process Who Who Develops the Budget $$$$$

26. Ongoing Budget Process Who Time Frame What is the budget time frame $$$$$

27. Ongoing Budget Process Who Time Frame How Often $$$$$ How often are budgets planned?

28. Ongoing Budget Process Who Time Frame How Often $$$$$ Define Category What level of detail is to be used.

29. Ongoing Budget Process Who Time Frame How Often $$$$$ Define Category Just how flexible do you want to be and how fast to react. How Flexible

30. Ongoing Budget Process Who Time Frame How Often Goals $$$$$ Goals based on Customer, employee and management needs Define Category How Flexible Next LEvel

31. Ongoing Budget Process Who Time Frame How Often Goals Standards $$$$$ Performance Standards, customer service, employee motivation levels, sales and profit levels… Define Category How Flexible

32. Ongoing Budget Process Who Time Frame How Often Goals Standards Planned $$$$$ Expenditures are planned in terms of performance goals. Most retailers use Incremental Budgeting for estimates based on past budgets and performance. Define Category How Flexible

33. Ongoing Budget Process Who Time Frame How Often Goals Standards Planned Actual $$$$$ Actual Expenditures are made. Retailers pay rent and employee salaries, buy inventory and so on.. Define Category How Flexible

34. Ongoing Budget Process Who Time Frame How Often Goals Standards Planned Actual Monitor $$$$$ Monitoring a budget is two-fold – 1st actual vs. planned costs are compared – 2nd Retailers must determine if their overall goals are being met. Define Category How Flexible ROY

35. Ongoing Budget Process Who Time Frame How Often Goals Standards Planned Actual Monitor Adjust $$$$$ Adjustments should be made along the way to reach the end goal Define Category How Flexible ROY

36. Ongoing Budget Process Who Time Frame How Often Goals Standards Planned Actual Monitor Adjust $$$$$ Final Goals are realized! Define Category How Flexible ROY

37. Budgets - Cash Flow – 4 According to the SBA #1 leading cause of failure of small businesses is underestimating costs and overestimating revenue! Seasonal businesses need to take special note of cash flow requirements. Create a monthly cash flow projection to accommodate business needs over the year.

38. H/O

39. Budget Process Open To Buy Match budget purchases to Monthly needs by category and review weekly/ monthly or quarterly End

40. 5 Common Budget Mistakes • Overstating Projections – Be realistic • Do not ignore Immediate needs • Assume that the existence of revenue is indicative of being cash flow positive. • Forgetting about UNCLE SAM! • Mismanaging the advertising timeline. End

41. 1 Final Diagnostic Tool Sale per Square Foot Patrick O’Rourke -CPA for Bizstats “Think of Sales per Foot in terms of sun protection factor – SPF – a healthy SPF will help prevent you from getting burned in a retail business. SPF is one of many retail benchmarks, but I believe it's the best gauge of a retailer’s efficiency, and ultimately, its profitability. It’s also easy to compute – just divide sales by the store's gross square feet. Some retailers calculate SPF based on selling feet (excluding in-store administrative, storage and other space), but this can be subjective and impair meaningful comparisons. “

42. 1 Final Diagnostic Tool Sale per Square Foot Patrick O’Rourke -CPA for Bizstats “An upward trend in SPF is almost always a positive sign of a retailer's health, whereas a downward trend in SPF is often a warning sign that business performance is suffering - even if the company's total sales are increasing. “

43. 1 Final Diagnostic Tool Sale per Square Foot “There can be many reasons for a low SPF. The first reason is obvious - the retailer simply has too much space. By having excessive space, a retailer will be adversely impacted by high fixed costs:  * Rent costs are excessive * Labor costs are excessive, since additional floor space requires additional personnel . * Flooring costs are excessive, since additional space requires additional merchandise. * Insurance, utilities and theft costs all increase with additional floor space.”

44. 1 Final Diagnostic Tool Sale per Square Foot Assuming the store size is reasonable, there are many reasons for a poor SPF relative to competitors. Here are 10 primary reasons for a low SPF - these are considerations for retailers of all sizes: 1.Poor product/merchandising mix 2.Insufficient floor inventory (i.e. empty shelves, missing sizes) 3.Un-competitive pricing 4.Poor location 5.Poor sales & customer service personnel 6.Non-optimal store hours 7.Poor store layout & design 8.Cannibalization of nearby owned stores 9.Insufficient /poor marketing 10.Fixed Consumer perception

45. 1 Final Diagnostic Tool Sale per Square Foot Consider dividing your store into sections when reviewing SPF – this will allow you to review/improve your sales per square foot by category! T-shirts $310/sq Women’s $345/sq Sunglasses $500/sq Accessories $375/sq Surfboards $245/sq Shoes $265/sq Office$0//sq End

46. The Board Retailers Association www.boardretailers.org All information can be found at our website. If you did not get a cheat sheet email me at roy@boardretailers.org