“The best way to predict the future is to create it.”
Numbers run a business. Most kitchen and bath business owners don’t know how the financial statements of successful companies should look. Most owners do not have time to understand them, or they’re worried about what they would see when the hard numbers are staring them back in the face.
This brief article will give you a clear idea of what you need to look for and what you can do to take charge of your company’s financials.
Know and leverage your numbers to grow your business
Your financial statements are the map of your business and the foundation for its potential success. Knowing what they say is knowledge to help you drive your business toward greater prosperity.
Owners who avoid knowing the hard numbers are literally leading with blinders on, while owners who gain mastery of their financials will be guiding their business to its full potential. That’s how you reach the promised land.
Seek mastery of your business by knowing its numbers
Design talent is not a guarantee for business profitability, growth, or success. Having a working knowledge of your firm’s numbers and leveraging them are key factors in growing your operations.
To really know how your business is doing, owners must understand the difference in their financial statements.
The Balance Sheet measures a company’s cumulative financial performance from the first day it’s in business until the date of the report. The details of your Balance Sheet will amount to the value expressed by the following formula:
ASSETS — LIABILITIES = NET WORTH
On the other hand, an Income, or Profit & Loss (P&L) Statement measures your company’s financial performance for the current year. Profit & Loss Statements show a company’s income minus the expenses against it as expressed by the formulas below:
INCOME — COST OF GOODS SOLD = GROSS PROFIT
GROSS PROFIT — OVERHEAD EXPENSES = NET PROFIT
Historically, the industry gross profit percentage is 29%. A business with a gross profit percentage of 36%-38% is a success heads and shoulders above the competition. A great goal to seek is an 8-10% pre-tax net profit.
Key indicators for measuring the success of a business
As you seek to gain mastery of your business, look for the following key indicators found in the Balance Statement that can help you measure its success.
Accrual Accounting. Accrual accounting is a system of accounting for all of the transactions (cash and credit) a business makes when a transaction occurs. Accrual accounting for professional kitchen/bath firms recognizes income when it has truly been earned: upon the project’s substantial completion. This makes it far more accurate than cash accounting.
Current Ratio. A Current Ratio is a way of measuring a company’s ability to pay its bills on time. A healthy current ratio is 2:1. That’s what banks want to see; that a business can pay back its current bills and credit line within the year stipulated.
CURRENT [CASH, INVENTORY,
ASSETS RECEIVABLES] 2
CURRENT [INVOICES DUE;
LIABILITIES CREDIT LINE] 1
A business that has less than a 2:1 ratio could become unstable.
Here’s an important tip: Always take the cash discounts from cabinet suppliers that offer terms like 2% 10 days, net 30. Which, by the way, is a huge 36% ROI and should be taken all the time, even if you have to draw down on your bank credit line to take it. That credit line may charge 4% interest, so you have positive leverage to the tune of 32%.
Debt to Equity Ratio. This ratio is the amount of debt [loans taken out by a company] to that company’s equity.
Here, bankers also want to see a 2:1 ratio. That is, two parts borrowed money for every one part of a company’s equity, representing the profits (i.e., retained earnings) that you have left in the business.
If the ratio of borrowed money exceeds this 2:1 ratio, banks are not likely to make any additional loans.
Retained Earnings. The dollar amount of Retained Earnings that shows up as Net Worth on your Balance Sheet is by far the most important indicator of the four. It’s proof positive that yours is a profitable business year in and year out.
Bankers, who a company approaches to make a loan, want to see that they have a big number in their Retained Earnings. A number equal to 12 months of fixed overhead expenses assures them:
- Your company will survive a deep recession like the one in 2008-2009, or,
- You could be in a position to capitalize on a great business opportunity such as buying another company that could increase overall revenue by 2-3 times.
This is a problem for many kitchen/bath firm owners since most have weak Balance Sheets. Indeed most of them show a negative Net Worth, which means their companies are technically bankrupt!
Some reasons for a negative balance include:
- The company has never made an adequate net profit over the years and is staying alive from the cash flow provided by a healthy customer deposit structure.
- The owner has made distributions to himself, possibly to supplement a below-market rate salary.
- The owner is just “buying a job” for himself and may be able to earn more income and have a lot fewer headaches working for someone else’s kitchen and bath design firm!
- The owner has manipulated the company’s net profits to lower the tax burden.
- A combination of these factors.
Several tools to help you assess your numbers
- Benchmarking Reports. All SEN Members are entitled to one FREE annual benchmarking report per year. Benchmarking Reports produce a multi-page analysis of a company through a host of key financial metrics. Each report will advise you on how these specific metrics can be improved, so you’ll see how you can begin making important changes.
- SEN Business Coaching. Working with a SEN Business Coach will help you a) Understand what the numbers are saying, and b) Prioritize the top 3 actions that should be undertaken to profit from the financial knowledge gained.
- SEN University. The newly launched SEN University offers an industry-specific, 4-Day Premier Executive Business School where there is a deep immersion into the financial side of the business.
Getting engaged with SEN U will help you learn your company’s numbers. Those who have already joined SEN U have aligned their business on the track to genuine wealth.
The importance of retaining our earnings cannot be overemphasized!
In the United States, we do not have chains of independently owned kitchen and bath design firms. However, throughout Europe, independent kitchen and bath businesses have dozens of showrooms, often spilling across the border into neighboring countries. That’s proof that the vast majority of U.S kitchen and bath dealers are not making as much Net Profit as they could or should be!
Consider the key takeaways from the 2008–2009 recession:
- Having 3-6 months of fixed overhead expenses as an emergency fund is insufficient. We must have at least 12 months of fixed overhead expenses to backstop our businesses safely.
- Those funds must be in a liquid investment portfolio; cash must be available in 3-4 business days.
- Real estate does not qualify as a liquid investment. When a recession happens, the value of real estate typically declines. Being the owner of a building that houses your kitchen and bath business is not necessarily the wisest strategic investment, particularly if it represents the greatest portion of your personal net worth besides your home.
- Thousands of kitchen and bath dealers went out of business during The Great Recession and five year recovery period that followed it. That’s further proof that U.S. kitchen and bath dealers fail to know their numbers!
The road to wealth begins with the first step
If you’re not on top of your firm’s numbers, you’re not alone by far. Many owners are right there with you.
As one attendee from our SEN Business School, last month said: “We need to focus on finances for our business decisions.”
You can get a handle on your numbers quickly. The first step is to know what they are. The next step is to identify where your numbers stand against the key indicators mentioned above. It’s far better to bite the bullet and see where you stand than be lost in the woods, not knowing the true direction your business is heading.
The next SEN Business School is slated for November 8-11th, 2021 in Chicago. We encourage you to join us there. You’ll get a handle on how your business is doing and gain access to the tools you need to turn it into an engine for wealth. Contact Shannon Blair or Skyler Ille for more information or to register!
—The SEN Leadership Team