Getting Ahead of the Recession | Monthly Retail Sales Are Showing Some Trends | Four Month Cash Flow Outlook | Two Revealing Ratios
Monday, January 23, 2023

From The Co-Founders

Patricia M. Johnson & Richard F. Outcalt
Outcalt & Johnson: Retail Strategists, LLC  •  Retail Turnaround Experts

Recession? No Thanks, Not for Me!

Try as we might, it seems that there will be no avoiding a recession in 2023. How deep it is, and how prolonged, still remains to be seen. 

For retailers, it's not a matter of whether your business will be impacted, just how much. Alas, retail does not lend itself to being recession proof.

However, there are ways to make your business more recession resistant.

The place to start? First, find out what your Debt-to-Worth ratio is right now. That is the #1 measure of the financial strength of your business. It's a key indicator of your ability to weather an economic downturn. 
  • It's easy to calculate. Look on your most recent Balance Sheet. Find the Total Liabilities (short-term plus long-term) – accounts payable to the vendors; other accounts payable; any notes payable; credit card balances; long term loans; etc – and divide that Total Liabilities amount by the Net Worth, or Equity, of the business. 
  • The lower the Debt-to-Worth ratio, the financially stronger your business. The "debt" is what is owed to others (just like the mortgage on your house); the "worth" or equity is your ownership of the business. 
  • As an example, if your Debt-to-Worth ratio now is 5 to 1, it means that your total debt is 5 times the equity in your business. With a recession looming, consider getting that Debt-to-Worth ratio to 4 to 1, or 3 to 1, or even 2 to 1, and you will be more recession resistant.
So, with this as your starting point, your goal is to get your Debt-to-Worth ratio lower. How to do that? 

Well, it won't be easy. But here are some ways to start.
(By the way, prepare your mindset: you likely will be incurring losses. Since the only way to pay amounts owed is with cash, you must choose cash over profits.)
  • Convert more assets into cash – whether through clearance sales, cutting departments, closing stores – and use that to pay down debt. 
  • Cut back on money going out, and apply those funds to expenses already incurred.
  • Reduce inventory purchases: fewer vendors; fewer lines; more special orders; etc. 
  • Reduce expenses: involve your staff in these decisions; they will have practical ideas of costs that can be reduced. 
And every month, recalculate your Debt-to-Worth ratio. This is a very important step! You must monitor your progress. Is the Debt-to-Worth ratio going down?!

As you reduce debt, your Debt-to-Worth ratio will be improving – that is, it is getting to be a lower and lower number. And that means the survivability of your business is increasing during what may be a downward economic cycle.

And once the recession subsides, your business will be well-positioned to seize the opportunities of a better economic climate. 
Tips • Tactics • Strategic Insights • Commentary

Each week's From The Co-Founders commentary is posted on The ROI site.

How's Your CASH FLOW?

Even a profitable business can experience not having enough cash.

If only retailers had some warning, some indication of the looming shortfalls of cash, they could – and would – make adjustments, right?

After all, cash flow has just three basic parts: Cash Coming IN, Cash Going OUT, and the DIFFERENCE.

This can be calculated very simply, like on the back of an envelope.'s not easy to find envelopes these days!

So The ROI has built this basic Cash Flow Gadget to use instead, and put it online for free.
Quick Cash Flow Outlook
The Monthly Retail Sales for December were released last week by the Commerce Department.

Our Six-Month Trend Charts comparing results to the same month the previous year were updated that same day to include the latest numbers. Go here to see these results.

And take a couple minutes to look at the results from more than just your particular sector. The value of having a chart showing trends over the past 6 months does jump out. 
Monthly Retail SALES Trends

Webinar of the Week

Two Tell-All Numbers About Your Business
FREE Access • TOPICAL TUESDAYS Webinar of the Week

It is essential for every retailer to know what numbers matter to the outside world of vendors and lenders. 

Spoiler alert: You won't find them on your P&L!

Whether sales are up, down or sideways, there are two questions that zero in on the true health of your business:
  • Will we be able to pay our bills on time?
  • Is our business getting financially stronger? Or weaker?
The TOPICAL TUESDAYS Webinar of the Week by Pat Johnson and Dick Outcalt, Co-Founders of The Retail Owners Institute, will show how you can answer those questions for yourself. It just takes paying attention to 2 key ratios. And about 12 seconds to calculate each one!

After all, your vendors and lenders are already doing this! (That's why they ask for your financial statements.)

Shouldn't you know what they know??
FREE Access • Webinar of the Week
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