Financial Statements & Ratios
Bal ance Sheet
The balance sheet is an under-utilized financial statement. If properly analyzed, it provides significant insight into the financial structure of the store. This page examines the composition of the balance sheet while the pages that follow derive some key ratios from the balance sheet information. Both the assets and liabilities sides of the balance sheet offer insight into the investment posture of the business. The assets side reflects where investments are made and the liquidity of the firm. The liabilities side identifies which business stakeholders made the investment and where the debt lies. Assets Many stores tend to be cash short. Ideally cash balances should equal at least two to three percent of total assets. For stores below that level, the potential for cash flow problems continually exists. The bulk of the asset investment for most companies is in accounts receivable and inventory. For the typical Core Hardware store, these two items are 3.2 percent of assets and 49.2 percent of assets, respectively. The importance of these two factors in maintaining financial liquidity cannot be overstated. Several sets of subsequent ratios will focus on how well these two asset categories are utilized. Liabilities and Net Worth Liabilities and net worth represent the two methods of funding assets. Two items are of special significance on this side of the balance sheet. These items involve the ability of the store to make use of interest-free financing and the level of financial conservatism employed. Accounts payable represents an interest-free source of capital for the store. In most cases stores are trying to use accounts payable to finance a major portion of their inventory investment. This involves both efforts to turn the inventory faster and efforts to negotiate longer credit terms. The amount of net worth or owner equity on the balance sheet indicates the financial conservatism of the store. Net worth is the sum of the owners' paid-in capital, plus loans from owners, plus all earnings retained in the business. For financially conservative companies, net worth is typically fifty percent of total assets, or higher. If net worth is less than one-third of total assets, the store is exceptionally aggressive in its use of debt. In this case, some degree of caution in future expansion would be suggested.
Conven-
Contractor
ience
Core
Super
Home Center
Oriented
Hardware
Hardware
Hardware
Supply
Assets (% of assets)
Cash & Marketable Securities
19.6
21.9
21.0
18.0 10.2 43.0
19.5 16.0 42.6
Accounts Receivable
5.4
3.2
3.3
Inventory
50.0
49.2
50.5
Other Current Assets Total Current Assets
3.0
3.5
4.2
1.1
3.3
77.9 22.1
77.8 22.2
79.0 21.0
72.3 27.7
81.4 18.6
Fixed & Noncurrent Assets
Total Assets
100.0
100.0
100.0
100.0
100.0
Liabilities & Net Worth (% of assets)
Accounts Payable
8.6 0.0 8.9
8.6 0.0 7.4
9.2 0.0 9.5
6.8 2.4 5.8
9.4 0.0 5.1
Notes Payable
Other Current Liabilities Total Current Liabilities Long Term Liabilities Loans From Stockholders Net Worth or Owner Equity Total Liabilities & Net Worth
17.6 12.9
16.0 17.0
18.7 16.5
14.9
14.5
7.9 0.0
5.0 0.0
0.0
0.0
0.0
69.5
67.0
64.7
77.2
80.5
100.0
100.0
100.0
100.0
100.0
10
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