April '17

For the Business of Apparel Decorating

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14 || P R I N T W E A R A P R I L 2 0 1 7 Vince DiCecco is a dynamic and sought-after seminar speaker and author with a unique perspective on busi- ness development and management subjects, primarily in the decorated and promotional apparel industries. With over 20 years of experience in sales, marketing, and training, he is presently an independent consultant to various apparel decorating businesses looking to im- prove profitability and sharpen their competitive edge. Visit his new website at, and send email to YOUR PERSONAL BUSINESS TRAINER B Y V I N C E D I C E C C O Measuring Your Business's Cash-Management Acumen Go with the Flow (Ratio) I trust you're familiar with your business's consolidated bal- ance sheet. Your accountant or accounting software should provide you with this valuable financial statement from time to time. But have you ever wondered what it can tell you about how your company manages its money? Before it gets filed away, consider becoming familiar with flow ratio. Flow ratio offers a neat and simple way to assess how well any company's management team is making that "vision thing" a re- ality. But, don't consider this ratio to be the end-all, be-all of fiscal indicators. When properly interpreted, it certainly can help identify whether your business needs to tighten up its cash-flow practices. Let's define it, run some numbers, and see if understanding the trend of your flow ratio can help make your company more profitable and successful. A SIMPLE CALCULATION The flow ratio measures ebb and flow of goods and cash in and out of a business. T-shirts get ordered, printed, and shipped, and cash receipts roll in. Sounds simple, right? The beauty of the calculation is that any school-aged child who can subtract and divide is able to figure out your flow ratio. Here's the formula: Flow Ratio = (Current Assets – Cash) ÷ (Cur- rent Liabilities – Short-Term Debt) Cash, for this purpose, is made up of cash and its equivalents, mar- ketable securities, and short-term investments. Short-term debt is determined to be notes pay- able and the portion of long-term debt that is currently due. When you take a closer look at your balance sheet, you should see your current assets are comprised of cash, accounts receivables, and inventories. There may be some "other" items, such as prepaid taxes and expenses, but that to- tal should be relatively small, so I've set it aside for the time being. Current liabilities are largely made up of short-term debt, accounts payable, and accrued expenses. Let's see what the flow ratio is for a fictitious company that happens to make and market branded activewear in our industry. To begin, its consolidated balance sheet (in thousands) looks like the chart to the right. Is this good? Is this company in trouble? Let's apply some logic to these numbers and find out. WHEN IS AN ASSET NOT A GOOD THING? By subtracting cash from current assets, we are drawing focus on two components over which management has great influence: invento- ries and accounts receivable. But, are these really assets? A high inventory count is an indication that there's plenty of stuff sitting on warehouse shelves or moving around the shop floor as raw materials and works-in-progress—stuff that is not bringing in any money yet. When a company has a substantial amount of money due from its customers, it could be an indication that its credit and collection practices need attention. Why would any business deliver goods or render services and not bird-dog payment for said products boggles my mind. Could it be that it is extending payment terms to less- than-creditworthy companies? December 31 December 31 2016 2015 CURRENT ASSETS: Cash and cash equivalents $62,000 -0- Accounts receivable $54,800 $79,600 Inventories $149,700 $203,750 Current Assets $266,500 $283,350 CURRENT LIABILITIES: Accounts payable and accrued liabilities $82,000 $81,200 Income taxes payable $3,000 $3,100 Current portion of long-term debt $6,000 $6,200 Current Liabilities $91,000 $90,500 Using the December 2016 data, the company's flow ratio is 2.41: $266,500 – 62,000 $204,500 Flow Ratio = _______________________ = _______________ = 2.41 $91,000 – 6,000 $85,000

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