What Story Are Your Financials Telling?
I have always had a burning desire to know how my business measured up to industry peers. Were we above average, middle of the pack or a bottom feeder?
Years ago, while moderating a workshop at KBIS, the workshop presenter invited me to join an industry-specific peer group that he was facilitating. Sensing this is where I could gain some perspective about my business, I accepted the invitation.
My first meeting had me sitting around a boardroom table with owners of eight other kitchen and bath businesses from different geographical areas. The format was simple: sharing information, issues and challenges, and poring over each other’s financial statements.
I arrived at this meeting confident, perhaps even a bit cocky; I knew my numbers. The feeling didn’t last. My peers were starting to ask rapid-fire questions about the financials. I found myself struggling to provide satisfactory answers. Embarrassment and insecurity quickly replaced confidence.
That experience taught me several things. Primarily, I need to spend more time with the financials to understand the relationship between the numbers and the information revealed, and that most kitchen and bath dealers/owners don’t fully understand the importance of their financial statements. The latter is because most have grown up on the design and selling side of the business.
As a business owner, it’s critical to comprehend and own the financial side of the business; otherwise, you may never realize the company’s full income and profit potential. While accountants and bookkeepers play an essential role, it’s the role of owners to learn the meaning of these financial statements and determine what should be done to improve company performance.
So, a little primary education in this arena will set the stage for understanding the crucial values derived from knowing what your financial statements are saying about the state of your business.
The Difference in Financial Statements
Financial statements are divided into three categories: Income Statement (also known as a Profit and Loss Statement), Balance Sheet and a Cash Flow Statement.
An Income Statement measures your company’s financial performance in the current year. It’s measured by how much revenue (sales) has been recorded versus how many expenses have been incurred to generate that revenue level; the difference – revenue minus expenses – is called Net Profit.
A Balance Sheet measures your company’s cumulative performance since the inception of the business. It’s measured by how many assets you have acquired over these years minus the liabilities incurred in the process; the difference (Assets – Liabilities) is called Net Worth. The net worth is derived from several components: initial capital, retained earnings and the current year’s net profit, which is the common link between the Income Statement and the Balance Sheet in any given year.
Cash Flow Statements provide a summary of how cash enters and leaves the company. It measures how well a business manages its cash. Cash is king. Cash is the lifeblood of any business, and how well it’s being managed needs to be documented.
Cash and Accrual Accounting
There is a significant difference between cash and accrual accounting, and not knowing the difference and its impact on a business can lead to severe consequences. The main difference between the two types of accounting is when revenue and expenses are recognized and recorded.
Cash Accounting records revenue when cash is received. A 50% down payment on a newly signed kitchen would show up as revenue on the income statement. With no expenses to record yet, the financials could reveal a sizable net profit. The pitfall for this kind of accounting is that it might overstate the health of the business. Under this scenario, the company could be cash-rich, lulling the owner into a false illusion that the business is profitable when in reality, the business may be losing money.
Accrual Accounting recognizes and records revenue when it is earned. Revenue recognized upon delivery of a product or service aligns with the associated expenses and services provided.
The accrual method provides a more accurate picture of the business’s overall health by including all revenue when earned and all expenses when incurred. This more accurate financial data places an owner in a better position to make sound business decisions and limits the risk of overpaying taxes.
Managing by Percentages
Managing a business by reviewing and looking at strictly numbers can be challenging. It can be easy to overlook a change in revenue or an increase in expenses when focused primarily on the numbers – or, worse, not knowing what the numbers mean. It also makes it difficult to compare one financial statement to another or understand the changes occurring over time.
A more straightforward method to manage is inserting a column into a financial statement where any line item amount is expressed as a percentage of the overall net revenue. Total revenue is listed as 100%, and cost of goods, gross profit and all other line items are expressed as a percent of the total revenue. This method makes it easier to analyze the performance of a business over time and compare it with peers or industry benchmarks.
Benefits of Knowing Your Financials
Your financials tell a story about your business, what is occurring at the moment, and a telling tale about your organization’s history. It’s important to be adept in reading, interpreting and using your financial statements as a guide to making wise business decisions.
There are many benefits to being financially savvy. First, you can protect yourself from possible embezzlement. Placing all your trust in a bookkeeper without having financial know-how creates exposure that is often hard to overcome.
Second, you can better measure your financial performance against others in a group, identifying weaknesses where your business can improve. Third, you can ask better questions of professionals so you can secure better advice. Fourth, you can set more intelligent and realistic goals. Fifth, you can furnish more confident leadership, attracting and retaining quality personnel. And sixth, knowing the financials like you know the designing of kitchens can make you a lot more profit!
Commit to gain a deeper financial understanding of your business. Invest in yourself to learn the financials, and the story conveyed. Financial knowledge comes with reward – realizing the full profit potential of the business and leveraging it appropriately. 
Dan Luck owns Bella Domicile in Madison, WI. He has been an SEN Member since 2002 and has led the SEN Leadership Team since 2018. Visit sendesigngroup/education for more information. Dan welcomes
questions and comments at [email protected].
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Homeowners Seeking Functionality, Style
NEWPORT NEWS, VA — As the nation approaches the year-and-a-half mark of the COVID-19 pandemic, homeowners continue to reevaluate their living spaces, “with many looking for ways to put the ‘home’ back in a more functional house.”
That’s the key conclusion of a major new consumer survey conducted by Ferguson Bath, Kitchen & Lighting Gallery in an effort to better understand how the global public-health crisis impacted trends in home renovation and updates. The survey, fielded this spring on behalf of Ferguson by G&S Business Communications, involved some 1,100 U.S. adults aged 18+, according to the Newport News, VA-based distributor of plumbing, lighting and related products.
The Ferguson survey, whose results were released in July, found that 64% of Americans made an update of some kind to their home, or to a room in their home, during the pandemic. The most popular reasons for the update included being tired of the home’s current style (34%) and needing to make changes for better functionality (32%), Ferguson reported.
The kitchen (47%) and the bathroom (44%) were the top choices when it comes to specific areas of the home people would want to redesign or upgrade based on spending more time at home during the COVID-19 pandemic. A growing number of Americans say they would want to redesign or upgrade their outdoor space (30% in 2021 compared to 23% in 2020), Ferguson reported.
Interestingly, the room people spent the most amount of time in last year compared to previous years was the living room (50%), with 33% of Americans working from home in their living rooms during the pandemic. A third (33%) spent more time in their bedrooms and nearly a third (32%) spent more time in the kitchen. Younger generations were more likely than older generations to say they spent more time in the bedroom and bathroom, but just as likely to say they spend more time in the living room.
“There are likely a number of reasons why the living room grew in importance over the past year, since it was used as a gathering place during quarantine, for home schooling and other activities,” Ferguson reported. “We may also see this trend, in part, because people who work from home often set up their workstation in their living rooms.”
Just over a third of respondents (34%) said they started working from home during the pandemic, Ferguson said. Within this group, a third said they have been working in the living room and a third have been working from an existing office, the company added.
Among other survey findings:
- Among those who started working from home during the pandemic, 62% made changes to their lighting in their home office space. Americans prioritized functionality over aesthetics when changing lighting in these spaces. Twenty-eight percent changed their lighting to see their work/computer better, and 22% changed their lighting to look better on video.
- Americans also spruced up their office space in general during the pandemic, creating a more multifunctional space. Eleven percent put a coffee maker in their office and 10% installed a refrigerator to hold coffee creamer, water and other beverages for easy access.
- Nearly half of Americans say they would buy smart home products to make their lives easier (49%), while others say they would buy them to save time (32%) or to improve the energy efficiency of their home (31%).
- As an example of the desire for convenience and hygiene, 41% of surveyed Americans say they would like touchless faucets in their home. Almost a third (32%) would like a refrigerator that notifies them when the door has been left open. And although bidets haven’t traditionally been standard in America, 17% of Americans say they would like a bidet in their bathroom and 26% would like a bidet seat. A quarter (25%) said they want a smart toilet. Younger generations, not surprisingly, are likely to want these products and features (see graph above).
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Obstacles Linger, Even in Face of Uptick
Supply side challenges continue to hamstring both new housing and the residential-construction trade, even as both market sectors continue to exhibit significant 2021 gains. Among the key statistics and forecasts released in recent weeks by government agencies, research firms and industry-related trade associations were the following:
HOUSING STARTS & NEW-HOME SALES
Despite recent gains in housing production, concerns linger over weakening permit numbers, a slowdown in new-home sales and rising materials costs, the National Association of Home Builders said. Overall housing starts were pegged at a seasonally adjusted annual rate of 1.64 million units, according to the latest available figures, as strong demand helped offset supply-side challenges. Builders continue to contend with rising home prices and materials delays, as well as with shortages of buildable lots, a dearth of skilled labor and a challenging regulatory climate, said Robert Dietz, NAHB chief economist. “The weakening of single-family and multifamily permits is due to higher material costs, which have pushed new home prices higher since the end of last year,” Dietz said. “This is a troubling sign for future housing production (and) a challenge for a housing market that needs additional inventory.”
RESIDENTIAL REMODELING
Residential construction professionals experienced their busiest quarter since at least 2015 in the first three months of 2021, with confidence among remodeling construction and design firms running high, according to Houzz Inc. The online platform for home remodeling and design reported positive results for its “Q3 2021 Houzz Renovation Barometer,” a quarterly gauge of residential renovation market expectations, project backlogs and recent activity among businesses in the construction, architectural and design services sectors. However, the heightened activity is not without challenges, according to Houzz, which reported that supply chain delays, extreme weather patterns, rising product and material costs and labor shortages “continue to create major headwinds for the industry.” In a related development, annual gains in homeowner improvement and maintenance spending are poised to accelerate in the second half of 2021 and remain elevated through mid-year 2022, according to the Leading Indicator of Remodeling Activity (LIRA), released in by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University. The LIRA projects that annual growth in home renovation and repair expenditures will reach 8.6% by the second quarter of 2022, with annual expenditures expected to exceed $380 billion.
EXISTING-HOME SALES
Existing-home sales, despite several months of declines, were up 22.9% from a year ago, and available supply has improved in recent months due to gains in housing starts and existing homeowners listing their homes, the National Association of Realtors reported. “Home sales continue to run at a pace above the rate seen before the pandemic,” said Lawrence Yun, chief economist for the Washington, DC-based NARI, which pegged the latest seasonally adjusted annual rate for resales at 5.86 million units. Total inventory was down 18.8% from a year ago, while unsold inventory is down year to date, from 3.9-month supply in 2020 to a 2.6-month supply at the same time this year, the NAR added.
APPLIANCE SHIPMENTS
Reflecting gains in new construction and residential remodeling, domestic shipments of major home appliances continued their rebound from the impact of COVID-19 in the first half of 2021, the Association of Home Appliance Manufacturers reported. According to the Washington, DC-based AHAM, an April-to-June spike of 23.7% over the same quarter a year ago was largely responsible for an overall year-to-date gain of 26.6% in major appliance shipments compared to the same six-month period in 2019. First-half gains were posted in all key product categories, including food preservation (+31.6%), home laundry (+27.7%), cooking (+24.1%) and kitchen cleanup (+17.4%), AHAM noted.
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Re-Bath Parent Acquired by Private Equity Firm
PHOENIX — Home Brands Group Holdings Inc., the parent holding company of Re-Bath, the nation’s largest bathroom remodeling franchise, has been acquired by TZP Group LLC, a New York-based private equity firm, and a group of co-investors, the company announced. Financial details of the transaction were not disclosed.
“We are thrilled to partner with Re-Bath and its terrific management team, serving a group of committed franchisees across the U.S.,” said Vlad Gutin, a partner at TZP.
“Re-Bath complements our growing portfolio of leading consumer brands (and) we believe that Re-Bath’s unique, high-quality service offering, loyal customers, best-in-class products of leading brands and partnerships with premier, national retailers, coupled with TZP’s relationships and resources, can accelerate Re-Bath’s growth,” Gutin added.
Re-Bath, headquartered in Phoenix, operates more than 100 locations across North America, according to the company, which offers complete bathroom remodels, tub and shower updates, plus aging and accessibility solutions.
“We are excited to embark on our next chapter of growth with TZP’s investment representing a strong validation of the growth and success we’ve achieved and where we are headed,” said Re-Bath CEO, Brad Hillier. “Through this investment, we will be able to leverage TZP’s expertise and resources to further expand our brand to a wider audience and better serve our customers, franchisees, partners and employees.”
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