5 Business Finance Terms All Retail RDs Should Know
By RDBA Contributing Editor Amanda Rubizhevsky, MPH, NC
As is discussed in this week’s article on business acumen, understanding your retail company’s business helps you be more effective in your retail RD role. Having a general understating of business finance terms, including those listed here, will boost your comprehension of the finance side of the house.
Profit margin: This measures how much out of every dollar of sales a company actually keeps in earnings. For example a 15% profit margin means the company has a net income of $0.15 for each dollar of total revenue earned. Supermarkets are typically a low margin business, ranging from 1-2%.
- Gross margin: the net sales less the cost of goods sold. The gross margin reveals the amount that an entity earns from the sale of its products, before the deduction of any expenses (i.e. the electric bill or payroll).
- Net margin: is the revenue that remains after all operating expenses, taxes and other expenses have been deducted from a company's total revenue.
Cash Flow: The movement of money into and out of a company. This movement, aka flow, is tracked on a cash-flow statement, which reflects how much money the company brought in and how much it paid out within a given time period. Reviewing cash-flow trends shows businesses how well they are performing. It also enables business to see where they are bringing in the most money and where they are spending too much.
Assets: A business asset is a piece of property or equipment purchased exclusively or primarily for business use. Business assets span many categories, such as vehicles, real estate, office furniture and even the fixtures and shelves in your store. Business Assets are listed on the firm's balance sheets as items of ownership. Business assets are different from business expenses, which include supplies and are simply deducted. Fixed business assets such as real estate and tangible property differ from current assets such as inventory (i.e. produce).
Turnover: Inventory turnover: shows how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days." Inventory Turnover = Sales divided by Inventory.
- Payable turnover: measures how a company manages paying its own bills. Or more precisely, how many times a company can pay off its average accounts payable balance during the course of a year. A higher ratio is generally more favorable as payables are being paid more quickly.
Balance Sheet: The financial statement that shows the financial position of a company by listing the company’s assets, equity and liabilities. For example, to determine if a company’s books are balanced, the equity and liabilities should equal the assets. If this calculation is correct, it means the company’s financials are in good order.