KEY RATIOS
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First, thank you to all who participated in our survey concerning topics for future newsletters.  You have given us some excellent ideas and we will be addressing many of your suggestions in the upcoming months.  Since so many of you asked about various ratios and this is the beginning of the calendar year of 2012, we will begin with a series of articles on key retail ratios, how to calculate them and what they mean. 

Let me introduce you to Company PQR,  an imaginary company that sells better quality mens and womens apparel.  This is a retail store located near the center of the continental United States in Kansas. 

Company PQR Balance Sheet     Assets: Cash 50,000 Accounts Receivable 100,000 Inventory 450,000 Total Current Assets 600,000 Furniture & Fixtures 1,400,000 Total Assets 2,000,000 Liabilities: Accounts Payable 250,000 Long Term Notes Payable 1,000,000 Total Liabilities 1,250,000 Owner's Equity 750,000 Total Liabilities and Owner's Equity 2,000,000

Income Statement Company PQR     Sales 1,000,000 Cost of Goods Sold 510,000 Gross Profit on Sales 490,000 Total Operating Expenses 410,000 Operating Income 80,000 Interest Expanse 75,000 Interest Income 0 Net Income Before Taxes 5,000 Notes Total store space = 4,000 square feet Overall Store Initial Markup (Markon is 55%

Now, let’s start looking at some useful ratios for retail businesses and see what they can tell us.  In the next few newsletters we will discuss:

Current Ratio
Quick Ratio
Debt Equity Ratio
Gross Profit Percent
Operating Expense Percent
Income (Loss) on Net Sales
Inventory Turn Rate
Stock Turn Rate
Cumulative Gross Profit
GMROII (Gross Margin Return on Inventory Investment)
Return on Assets
Return on Investment Percent (Net Worth Percent)
Net Sales to Net Worth Ratio
Sales Per Square Foot
Annual Sales Growth Rate Percent

This month, we will look at the first three: current ratio, quick ratio and the debt to equity ratio.

Current Ratio
Calculation:  Current Ratio =Current Assets / Current Liabilities
The current ratio measures short-term, debt-paying ability and serves as a dependable indication of a business’s solvency.  “Current,” in this case, means within the year.  It deals with those liabilities due within the year and with assets that can be converted to cash within the year.  This ratio changes daily and is susceptible is wide fluctuations from day to day and month to month.  Generally, the goal for the current ratio is greater than 2.0.

	Yesterday	Merchandise Received	Today
Current Assets	600,000	200,000	800,000
Current Liabilities	250,000	200,000	450,000
Current Ratio	2.40		1.78

Quick Ratio
Calculation: Quick Ratio = (Current Assets – Inventory) / Current Liabilities
The quick ratio, also known as the acid test ratio, also measures a company’s ability to pay its short-term obligations (it’s solvency).  Inventory is excluded from this calculation because inventory make take a full year or longer to convert entirely into cash.  The quick ratio offers a more strict test of solvency than the current ratio.  A ratio of less than 1 indicates that a company will have problems paying its short-term debts in a timely basis.  The optimum for this ratio is 2 to 1. 

In the case of our sample, the calculations would be as follows:
($50,000 + $100,000) / $250,000 = 0.60 to 1.  If our sample company fails to meet their sales goal or experiences any financial bumps during the next 90 days, they may find a temporary cash crunch and not be able to pay their bills on time.  Of course, that issue is compounded if it is a regular occurrence.  The Owner(s) need to be searching for ways to increase profit and cash flow.

Net Worth (Equity or Owner’s Equity)
Calculation:  Net Worth = Total Assets – Total Liabilities
It goes without saying, this needs to be a positive number.  If you have more liabilities than assets, your business is financial trouble or to put it bluntly, it is technically insolvent or bankrupt.  That means that if you liquidated everything, you still could not pay all  of your obligations. 

The Net Worth of Company PQR is $2,000,000-$1,250,000 is 750,000. 

Debt to Equity Ratio
Calculation:  Debt to Worth Ratio = Total Liabilities / Equity (Net Worth)
This ratio compares the amount invested in your company by creditors to that invested by the owner(s).  The more a company is supported by debt, the riskier it is.  In other words, the higher the ratio, the lower the staying power of the business.  This is a measurement of a business’s staying power.

Our sample company has a Debt to Equity ratio of 1.67 to 1.  Our sample company has some debt that is placing it in a rocky financial position.  In other words, for every $1 the owner has invested in the company, the creditors have $1.67 invested.

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WINDOW WASHING
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I do not claim to be an expert window washer, but I was amazed by the number of requests from readers who asked about washing store windows in DIY fashion.  A study of multiple websites and several Google searches later, here is a list of the most consistently recurring comments concerning do-it-yourself window cleaning.

Tools needed: Bucket, sponge, squeegee, warm water (unless the day is already warm or windy—then use cool water), a clean towel or cloth, dish soap such as Dawn (which was recommended on several sites by name) and a ladder or step stool (if needed). This shows what I know:  I usually use vinegar and water in a squirt bottle and newspaper if I have to clean my windows.

According to the directions, add a few drops of dish soap to the water then thoroughly wet the sponge and scrub window in a circular motion after cleaning the edges of the window.  While the window is still wet, use the edge of the squeegee to dry about an inch all the way down one side.  Then, starting at the top, draw the squeegee across the window from edge to edge and wipe it off.  Every time the squeegee touches the glass, it should be wiped off on a cloth.  Continue using the squeegee until the entire window is done—working from top to bottom and right to left (or left to right).  The trick is to not allow the window to dry before using the squeegee on it so you have to be quick. 

Most sites recommended that you not wash windows in bright sunlight or on windy days as that beautiful streak-free shine comes from running the squeegee across a wet window.  Also, all of the DIY sites said most people who have trouble cleaning windows do not replace the rubber blade of the squeegee often enough or work quickly enough.  It is not a job for starting and stopping in the middle of a window.

If you currently use a window service, I strongly recommend that you practice at home until your home windows shine before attempting the windows of your business. 

OPEN-TO-BUY SERVICE
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Good inventory control will help your company be more profitable, yet too many retailers keep buying too much.  To find out how using an Open-To-Buy can help you, click here or visit us at: http://the-retail-advisor.com/open-to-buy.html

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