April '17

For the Business of Apparel Decorating

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16 || P R I N T W E A R A P R I L 2 0 1 7 For more than 10 years, Dell Computers has consistently earned a flow ratio of about 0.75. That's something to crow about. Now, compare that number to the apparel industry. Some big- name brands had flow ratios of 1.80 in 2016, while other apparel companies I've researched have flow ratios nearing 4.00. It's no great surprise that these latter companies had to lay off workers and flirted with bankruptcy protection just to remain in business. I forewarned you that flow ratios are simply a quick way to assess the cash management acumen of a business. The trend of the flow ratio is far more important than the snapshot of its calculation today. If you calculate the flow ratio for our activewear company ex- ample from the chart on page 14, using the 2015 year-end num- bers, you should get 3.36 for an answer. The fact that the company was able to reduce its flow ratio from 3.36 to 2.41, a drop of 28.3 percent, in one year is no small feat and probably attests for the remarkable effort made by management to reduce the inventories and A/R numbers over the same period. I'd be surprised if many decorated-apparel businesses were capable of getting their flow ratios much lower than 2.50 because of a num- ber of raw materials they must stock to produce and deliver small runs of custom-made garments with short turnaround time. But, regardless of what your company's flow ratio is today, be more aware of the direction it's headed. Find your file of consolidated balance sheets. If you are fortunate enough to have them often generated, calculate your year-to-year flow ratios for as far back as you can and graph out the results. Take note of how it's trending. Then, most important, find ways to reduce inventory prudently, collect on your invoices faster and negotiate longer terms with your suppliers. SOME PARTING ADVICE Because the flow ratio uses the consolidated balance sheet of a com- pany, it is a true measure of a business's long-term game plan. For that reason, you should not compare flow ratio quarter to quarter. Rather, you should analyze the trend of this indicator from year to year. This will account for and negate seasonality in one's business. Also, the flow ratio doesn't directly recognize new-product devel- opment, brand-name value, changes in management, acquisitions, divestitures, and the like. You would need to isolate each one of those significant events to accurately trend a company's flow ratio over time. Still, for the simplicity of the calculation, you can't beat its power. Good luck! YOUR PERSONAL BUSINESS TRAINER

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