This last week I was able to hit the great city of Las Vegas. Las Vegas is a city where nothing would be there without gambling and gaming. I was there to speak to a group of sports stores called Pro Image Sports. The group had about 120 stores across the United States. They sell professional and college sports gear. The group was in Las Vegas for the Sports Licensing and Tailgate show. I did a one hour keynote to the group on financial intelligence. It was a great day for finance and looking at sports memorabilia. If you want any accessory or item of clothing for your team – college or pro…this was the place for you. I’m not sure I would really like to have Alabama fine china for my Sunday dinner but if that is for you then this was your show.
The session was interesting. These stores are mainly in malls and do about 500k to 800k a year. They are small but profitable businesses. Many of the owners/franchisees got into the business because they love sports. What so many small business owners learn is that to survive long-term one should also develop a love for cash flow and profit. We had a great discussion on three key things any financially intelligent business owner should be looking for. That is EBITDA, Cash Flow, and Equity.
I first focused on EBITDA with the group that is an acronym (earnings before interest taxes depreciation and amortization). It is thought to be an indication of future cash flow in the business by bankers and investors. It is a metric that comes directly from the income statement and therefore is loaded with estimates and assumptions. The reason this is a key metric for this group is it is used for loan covenants and business valuations. Most small businesses are valued by multiples of EBITDA.
In a small business nothing is more important than cash flow. If you don’t have cash to cover your payroll then you shut the business down. Many small business owners don’t understand that profit is not cash. Nope not even EBITDA. So watching cash flow is critical. In retail business like a Pro Image store the key is to manage inventory. If the owner purchases too much inventory that does not move then cash is tied up in the business that is not available for other things.
Finally, all businesses should be building equity on their balance sheet. Equity is a representation of ownership value at its most basic level. We learned that there are two ways to grow equity in a business. One is to get outside investors to buy stock. Two make a profit and retain it in the business. For any small business owner the second option is really the only one. If you grow equity by selling stock you will lose control of the business to other owners.
At the end of the day, any business must generate cash flow to meet its obligations and be profitable to grow equity. If you have both profit and cash flow things will always work out for the business.