There are several tests you can
quickly run to check the cash levels in your business. The first is called a current ratio test. This ratio compares your current assets (cash, accounts receivables, and inventory) to your current liabilities (accounts payables, taxes payable, and other short-term debts). The formula looks like this:
Current Assets ----------------------------------------- = Current Ratio Current Liabilities
When looking at the current ratio,
you are hoping to see a number some- where around two, or a ratio of 2:1. This means that you have enough current assets to pay your current liabilities two times over. Higher than two is great — just be wary of too much cash and risk exposure. Another test very similar to the
current ratio test is the quick ratio test. This is the same ratio as for the current ratio test but excludes inventory from current assets.
Current Assets (minus inventory) -------------------------------------- = Quick Ratio Current Liabilities
For this ratio, you are looking for a
result around 1:1. A quick ratio higher than 1 is great; it indicates that your cash flow should remain strong.
your accounts receivable and need to work on collections. Accounts payable turns. Divide
accounts payable by cost of goods sold for the year. You want a number around 12, which means you are carry- ing about one month’s worth of bills in your accounts payable. A lower number indicates you owe too much and need to make payments. Just as a doctor would compare
blood test results to the desired levels, you need to do the same with these ratios, and if needed, take steps to improve the health of your business.
Heart of HR The heart of your company is your employees. Make sure that you have the right people in the right jobs. The cost of labor has been increasing dramatically over the last four to five years, so it is more important than ever to keep this area under control. Labor cost should run about 25 percent of merchandise or inventory sales (sales minus delivery, service charges, wire commissions, and other non-product income). This percentage target is only for the gross labor; taxes and benefits are a separate expense and should not be included. Divide gross payroll by inventory sales to get the percentage. If you are over 25 percent, you either need to reduce labor or increase sales. (Make sure that you have adjusted prices on your products as costs have increased.)
The heart of your company is your employees. Make sure that you have the right people in the right jobs.
A couple other ratios to check are: Inventory turns. Divide your inven-
tory by cost of goods sold for the past 12 months. You should have a result of eight or higher. A result lower than eight indicates you have too much cash tied up in inventory. Accounts receivable turns. Divide
accounts receivable by sales for the past 12 months. You should have a result of at least 24. If your number is lower than 24, you have too much outstanding in
Weight of Expenses The weight of your flower shop are the expenses that you have on a regular basis. If the expenses get too high, your business and cash flow will become sluggish and slow to respond. Keeping your expenses under control allows you to have the cash you need to ebb and flow with the cycles of your business. Take the time this summer to look at all of your expenses and cut away unneces- sary fat.
Reflex Reaction Time Business reflexes is the ability to react to changes in the marketplace and the economy. We are experiencing a time of flat and declining sales with rising expenses. As a business owner, you need to plan and react accordingly.
Use Your Ears Make sure that you are listening to your customers to keep up on the latest trends and make sure you have the items that they want. But it is also important to know when not to listen. Take what cus- tomers say with a grain of salt. No one ever wants to pay more for a product, so as you adjust prices, expect some neg- ative feedback. As long as the feedback isn’t overwhelming and your sales don’t take a hit, keep the new prices. Most buyers are not as price sensitive as flo- rists think.
What’s Your Vision? Having a vision is one of the most important skills that business owners need to have. You need to know where you are going with your business and what you want it to look like in the future. For example, do you want your business to be a traditional retailer, a fulfillment center, or perhaps a wedding and event business? How much do you want sales to grow? How many locations do you want? Knowing where you are going can help you make the right decisions along the way. Spend a couple hours every week visualizing and planning for the future of your company and set up short-term goals, long-term goals, and an action plan accordingly. Just as a good doctor and tests
help maintain your physical health, running a few diagnostic tests on your business can help keep it running at peak profitability.
Derrick P. Myers, CPA, CFP, PFCI, is president of Crockett, Myers & Associates, Inc., a financial management and accounting firm that has been working with florists for more than three decades.
The magazine of the Society of American Florists (SAF)
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