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Forecasting 1989: the blah's or the ahh's? Don't reach for the steroids but do strengthen up!

FORECASTING 1989: THE BLAH'S OR THE AHH'S? Don't Reach For The Steroids, But Do Strengthen Up!

Several times a month I have the opportunity to speak to retail groups around North America. It's not only challenging and invigorating work, but insightful, as well. As a whole, retailers have a very pragmatic and down to earth feel for 1989: they're appropriately apprehensive.

Basically, here's what we've been agreeing will be the scenario for the end of this decade.

1. The economy will become increasingly sluggish. Interest rates will rise as the Federal Reserve continues its conservative stance.

2. Meanwhile, the Congress of the United States will debate and then muscle through a tax increase on consumption, President Bush notwithstanding, thereby thwarting any chance of a significant economic upturn.

3. Firearms retailers will continue to feel the crunch of the unprecedented amount of retail competition, while the impact of both higher taxes and higher interest rates will make it very rough on vast numbers of stores.

4. And, finally, those retailers who actually get stronger in 1989 will be those who best manage not their market share, not even their profitability, but their balance sheet. You bet. It's time we look much more closely at our assets, liabilities, and equity. I'll show you why and how a little later.

In no way am I an economist. In no way am I in a position to predict the economic future with any certainty. But it seems like those who are attempting to do it are more in agreement than I recall in recent memory (now, that's spooky in itself!).

As a group, economists expect that our somewhat placid economy will continue to muddle along well into 1989. Unemployment and inflation should continue to be relatively low, but the threat of a substantial tax increase on the consuming public is expected to dampen a spending psychology which already is less than robust.

It's worth noting that our country has had over six years of continual economic growth (unprecedented, by the way.) During this period, another record has been set: more firearms businesses have begun than in any period in our history.

That's great that retailing is attractive to start-ups. It's wonderful for adding economic strength and vitality. It can be magnificent for the opportunities seized by the individual entrepreneurs. The free enterprise system is alive and well! But what about the added competition this phenomenon has brought us? You've noticed it, I'm sure.

In addition, a great many retail businesses have diversified or expanded and have moved into additional merchandise categories, locations, and new schemes with abandon. Again, opportunities have been recognized and jumped on. Even more competition!

The point is that in every market, in every geographic area, and in every sector of the retail industry, we seem to be abundant in retailing. The country is hugely over-stored; some studies have said we're over 50% beyond reasonable productivity standards! In that case, we're also overmalled, over-inventoried, over-promoted, and frighteningly over-competed against!

So, as I see it, the general economy is likely to level off (or worse), but the retail community may miss the signals of caution. Therefore, it is vital, right now, that firearms retailers review closely their financial strength and their ability to withstand a difficult period. Between retail saturation on the one hand and a Congress which is adamant to "correct the sins of trade and federal deficits" on the other, the future won't be easy, I'm afraid. The question is" What can and should you do?

Here's an exercise that's like your annual physical examination; it may not reveal that anything's wrong, but that in itself is good news. All of you who have read my articles or attended my presentations over the last 15 years know that it's the Balance Sheet (not the Profit and Loss Statement) that measures the strength of a business. And, as you know, a balance sheet has three basic components: Assets, Liabilities, and Equity (Net Worth).

You also surely recall the truism all businesses must live with: Total Assets must equal Total Liabilities plus Net Worth. Profits increase new worth (retained earnings, actually) and losses reduce net worth. If one side of the equation goes up or down, the other side must do likewise. Got it?

O.K. Your goal is to project the composition of your balance sheet at a future date. Now, if your balance sheet condition is a measure of your financial strength, what might it look like, say, a year from now? Hmmm. Curious? Well, follow along, please.

1. Obtain a current balance sheet and use the accompanying chart to enter your fingers.

2. Use the Assets and Liabilities figures from your current balance sheet. For example, if cash is $2,000 and sales are $500,000, then the percent value is .4 percent. Cash divided by sales equals the percent value. Use your current sales figures to find the percent of each asset and liability as it is now.

3. Now, project the asset values using your (conservative) next year's sales projections by multiplying the percentage figures from step 2 by your sales projection. For example, cash of .4 percent times projected sales of $550,000 equals $2,200 projected cash on hand. Thus, if you have $2,000 cash on hand at $500,000 volume, you probably would have $2,200 on hand at $550,000 volume. Find all asset values except inventory in this manner.

4. For your inventory figure on the projected balance sheet use a figure at least 10% higher than your current inventory level (so here's one place you don't use the percent of the sales approach). It's a reasonable expectation: inflation is expected to pick up as one by-product of increased taxes and interest.

5. Skip projected liabilities for now and forecast net worth by adding your expected (but conservative) profits to your existing net worth on your current balance sheet. Probably a third of you will actually have a loss in 1989 after all draws and owner's benefits are accounted for. (If you project a loss, subtract that amount from net worth as much as that smarts).

6. Now you can return to liabilities. Find the Total Liabilities figure for your projected balance sheet by using the formula, Liabilities equals Assets minus Net Worth.

7. Assuming that the change in your long-term debt is only a reduction due to principal payments, the current liabilities must be sufficient for the balance sheet to balance. That is, the current liabilities must make up the difference. (Total assets less long-term debt less net worth equals current liabilities. Hang in there!)

8. Calculate each current liability category in your projected year using the percent-of-sales method described in step 3, except for "Bank Loans Payable."

9. Force a figure for bank notes payable. Since you have the figure for total current liabilities needed, subtract the known liabilities you calculated in step 6 and you will find the notes payable amount, the final figure on your projected balance sheet.

10. Notes payable (bank) equals the "financial gap," the amount your lender(s) must provide a year from now, unless your estimates are not accurate.

The impact of sales and/or assets growth on a balance sheet can be negative, regardless of how well-intentioned you may be. Look carefully at your projected balance sheet to see if your expectations actually improve or deteriorate the financial strength and stability of your business. Will you be getting stronger or weaker?

Three standard ratios will help in your analysis:

. Current Ratio (current assets divided by current liabilities). Measures your liquidity, your ability to pay your bills on time.

. Debt-to-Worth Ratio (total liabilities divided by total equity). Measures your overall financial strength.

. Sales to Assets Ratio (total sales divided by total assets). Measures the utilization of your money.

Compare the ratios for your present and projected balance sheets. For the first and third ratios, larger numbers mean improvement; for the second, a smaller number represents improvement. What's the trend?

Your plans for 1989 may require your assets to grow faster than your increased profits can finance them. When this occurs, as it easily can in a soft volume period, you must increase your debts in one form or another. Debt usually necessitates interest-bearing bank loans which increase your expenses and reduce your projected profits even further. Increased liabilities may in fact substantially weaken your firearms business (raise your debt-to-worth ratio) when your intention all along was precisely the opposite.
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Author:Outcalt, Richard H.
Publication:Shooting Industry
Date:Jan 1, 1989
Words:1416
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