This “New Normal” Needs a New Nine Step Approach

“If we can just hang on until things get back to normal.”

Have you heard business people say that?  We have heard it a lot, and our response is always the same: “Don’t wait anymore.  Things won’t get ‘back to normal’.  This is ‘the new normal’!”

What do we mean by “the new normal”?  We mean that there is a new set of rules, and a new set of expectations.  And for retailers to survive, they must adjust to the “new normal”.  They must develop new ways of managing and directing their businesses.  And The ROI proposes a new and timely tool: “The Nine Stepper”.

Consider these features of “the new normal”:

Flat Population Growth
In the last decade, the population of developed nations grew only about 1 percent each year.
The Turbulent Economy
To be sure, if the world’s equity markets continue to rock and roll, is there any wonder why consumer confidence does the same?
Splintered Markets
At one time there was a “mass market”.  Today, we have at least 25 particle markets.   In our view, retailing is a mirror of society.  We are seeing increasing diversity and fragmentation in our society, and it is reflected in these particle markets and retail niches.
Frustrated Consumers
Choice is becoming the curse of the modern age.  We are confronted daily with more and more choices.  New kinds of stores and websites.  New kinds of products.  New ways to shop (all day, all night, by phone, by fax, by computer, by catalog, by subscription.)  And this is happening as many consumers feel squeezed.  Squeezed by reduced buying power.  Squeezed by more and more demands.
Dramatic Changes in Competition
New forms of retailing continue to emerge, much of it enabled by advancing technology.  Just identifying all the competitors is a challenge in itself.  Your customer sees all the different ways to buy what you sell.  You must recognize your competition the way your customer does.  Otherwise, you will be blindsided when your market moves away from you.

The Old Standbys Are Not Enough
The “new normal”.  It is tough and demanding.  How will you respond?  The temptation is to return to your “managing in tough times” approaches.  Slash expenses, put in more hours yourself, extend suppliers, and cut back on inventory purchases.  Unfortunately, even if you can do these things, it is likely they won’t be enough.  Sorry, but those “tried and true tactics” may not be sufficient in “the new normal.”

Here is why.  Those old standbys are focused almost exclusively on the income statement (also called the profit and loss statement, or P&L.)  What is needed in the “new normal” is this: You must dedicate your attention to that other part of the financial statement you receive from your accountant or bookkeeper.  You need to put considerable thought and energy into your balance sheet.  You must steer your balance sheet with at least the determination you have been steering your P&L.  Effectively controlling a retail business in the “new normal” must start and end with your balance sheet goals.

The balance sheet is the most telling measure of the financial strength of your business.  Without financial strength, your retail operation lacks staying power, and could be flattened like road kill.  Most vitally, once you focus on your balance sheet, your expectations for profits, expenses, and even sales will change.  This is how to adjust to the “new normal”!  Drive your business from the balance sheet to the P&L statement!

This is a very powerful idea.  We will walk you through a nine-step process (hint: step #7 is the crucial one).  Start practicing now with the Nine Stepper. The “new normal” will be with us for quite a while. 

How to Use This Approach
The chart below has three major parts: (Click here to download a .pdf file; print out hard copies.)

• the income statement summary;
• the balance sheet summary;
• the ratio analysis summary.

Each of these major parts is divided by time: last year’s results, this year’s results (or anticipated results), and next year’s targets or goals.  Now, simply follow the steps in the proper order! 

Steps 1, 2, 3 and 4: Recap the Trends
The first three steps are easy, and should not take you long at all.  To start, simply pull out your most recent financial statement for your fiscal year, and plug into Step 1 and Step 2 the numbers from your income statement and balance sheet for last year. (Remember to round off; $424,317.22 would be entered as $424.3)  Then, after some thought, enter into Step 3 and Step 4 your current estimates for how this fiscal year will end up for you.  Don’t get hung up at this point; close counts!  Guesstimates work just fine!

Steps 5 and 6: Check the Vital Signs
Steps 5 and 6 begin to lay the groundwork for answering “How do we best face the future?”  In these steps, you will calculate key ratios for last year and the current year.  For each year, determine your Current Ratio, Debt-to-Worth ratio, and, if you have profits, your ROA - return on assets percent. (See The ROI’s Quick Guide to Ratios for reminders of the formulas, or use The ROI’s Online Key Ratios Calculator in the Members-Only Collection.)

Here’s the point: Steps 5 and 6 tell you whether your retail operation is getting stronger or weaker, and to what extent. 

Now for Step 7: “Am I Running This Business...or Is It Running Me?”

This is the big one.  Do this step conscientiously, and you are really running your store instead of allowing it to run you!

In Step 7, enter the Current Ratio you desire for next year that will keep your payables current.  In this economic climate, you cannot expect your suppliers to be your bank.  You have got to be strong enough to have a decent bank relationship and keep your suppliers paid promptly.  Raising your targeted Current Ratio is a good goal.

Also in Step 7, enter your goal for your Debt-to-Worth ratio.  Now remember, this is the numerical measurement of the financial strength of your business.  This is the first place to look when asking whether the business is getting weaker or stronger.  Rule of thumb: only a 1:1 or lower Debt-to-Worth ratio is acceptable for a bank loan today.  Many retailers have grown accustomed to being “bankable” with a 1.5, 2.0, or even 2.5 to 1 Debt-to-Worth ratio.  No more.  Not in the “new normal”!

Finally, what Return on Assets is reasonable to expect next year?  Frankly, the question is: “With all this money tied up in the business (total assets), are we getting an adequate return?  Or should we liquidate and put our money somewhere else?”

Step 8: The Rubik’s Cube Begins!
Step 8 is kind of fun.  What profit did you assume in Step 7 in order to calculate the ROA?  Well, add that amount to the Net Worth in Step 4 and you will have the Net Worth for Step 8. 

Similarly, what Debt-to-Worth ratio are you striving for in Step 7?  Given your projected Net Worth in Step 8, calculate what amount of Total Liabilities you are limited to in order to achieve that ratio. 

Finally, total your liabilities plus your anticipated Net Worth in the last line of Step 8, and use the same number for the total assets further up.  (Remember, the balance sheet has to balance!)

Now, by reviewing Steps 2 and 4, fill in the balance sheet line items in Step 8 while keeping within the totals.

Step 9 - The Suprise Ending
Step 9 starts with entering the net profit you are expecting (ROA again) and forcing the income statement to produce it.  That’s right!  Force your business to produce the results you desire, and guess what: You are running it.  It is not going to run you! 

As you draft and redraft your projected P&L (Step 9), it will change your targeted ratios and projected balance sheet in Steps 7 and 8.  You will be compelled to focus, streamline, and target your retail business in order to achieve your goals in Steps 7 and 8.  Essential functions - and their associated costs - will remain. Others will be adjusted – some upward, some downward – or eliminated altogether. 

True, the Nine Stepper brings frustration.  But work and re-work this Rubik’s Cube.  The business you save may be your own!

Why Use This Nine Step Process?
Now, let’s review what is going on here.  Instead of managing and/or planning only from projected sales, margins and expenses first, this economy - the “new normal” - requires that you plan those elements last.  That’s right.  The last number you arrive at is your sales projection, which, if unrealistic, forces other changes and a healthy dose of realism.

In the “new normal”, it is perilous to try to manage your business only from the P&L statement.  Bigger may not be better.  Only better is better.  And “better” is measured by your financial strength, which shows only on the balance sheet, not on the P&L.  You cannot work any harder.  Now is the time to work smarter.  And this new way of planning can serve you very well in “the new normal.”

This “New Normal” Needs a New Nine Step Approach

“If we can just hang on until things get back to normal.”

Have you heard business people say that?  We have heard it a lot, and our response is always the same: “Don’t wait anymore.  Things won’t get ‘back to normal’.  This is ‘the new normal’!”

What do we mean by “the new normal”?  We mean that there is a new set of rules, and a new set of expectations.  And for retailers to survive, they must adjust to the “new normal”.  They must develop new ways of managing and directing their businesses.  And The ROI proposes a new and timely tool: “The Nine Stepper”.

Consider these features of “the new normal”:

Flat Population Growth
In the last decade, the population of developed nations grew only about 1 percent each year.
The Turbulent Economy
To be sure, if the world’s equity markets continue to rock and roll, is there any wonder why consumer confidence does the same?
Splintered Markets
At one time there was a “mass market”.  Today, we have at least 25 particle markets.   In our view, retailing is a mirror of society.  We are seeing increasing diversity and fragmentation in our society, and it is reflected in these particle markets and retail niches.
Frustrated Consumers
Choice is becoming the curse of the modern age.  We are confronted daily with more and more choices.  New kinds of stores and websites.  New kinds of products.  New ways to shop (all day, all night, by phone, by fax, by computer, by catalog, by subscription.)  And this is happening as many consumers feel squeezed.  Squeezed by reduced buying power.  Squeezed by more and more demands.
Dramatic Changes in Competition
New forms of retailing continue to emerge, much of it enabled by advancing technology.  Just identifying all the competitors is a challenge in itself.  Your customer sees all the different ways to buy what you sell.  You must recognize your competition the way your customer does.  Otherwise, you will be blindsided when your market moves away from you.

The Old Standbys Are Not Enough
The “new normal”.  It is tough and demanding.  How will you respond?  The temptation is to return to your “managing in tough times” approaches.  Slash expenses, put in more hours yourself, extend suppliers, and cut back on inventory purchases.  Unfortunately, even if you can do these things, it is likely they won’t be enough.  Sorry, but those “tried and true tactics” may not be sufficient in “the new normal.”

Here is why.  Those old standbys are focused almost exclusively on the income statement (also called the profit and loss statement, or P&L.)  What is needed in the “new normal” is this: You must dedicate your attention to that other part of the financial statement you receive from your accountant or bookkeeper.  You need to put considerable thought and energy into your balance sheet.  You must steer your balance sheet with at least the determination you have been steering your P&L.  Effectively controlling a retail business in the “new normal” must start and end with your balance sheet goals.

The balance sheet is the most telling measure of the financial strength of your business.  Without financial strength, your retail operation lacks staying power, and could be flattened like road kill.  Most vitally, once you focus on your balance sheet, your expectations for profits, expenses, and even sales will change.  This is how to adjust to the “new normal”!  Drive your business from the balance sheet to the P&L statement!

This is a very powerful idea.  We will walk you through a nine-step process (hint: step #7 is the crucial one).  Start practicing now with the Nine Stepper. The “new normal” will be with us for quite a while. 

How to Use This Approach
The chart below has three major parts: (Click here to download a .pdf file; print out hard copies.)

• the income statement summary;
• the balance sheet summary;
• the ratio analysis summary.

Each of these major parts is divided by time: last year’s results, this year’s results (or anticipated results), and next year’s targets or goals.  Now, simply follow the steps in the proper order! 

Steps 1, 2, 3 and 4: Recap the Trends
The first three steps are easy, and should not take you long at all.  To start, simply pull out your most recent financial statement for your fiscal year, and plug into Step 1 and Step 2 the numbers from your income statement and balance sheet for last year. (Remember to round off; $424,317.22 would be entered as $424.3)  Then, after some thought, enter into Step 3 and Step 4 your current estimates for how this fiscal year will end up for you.  Don’t get hung up at this point; close counts!  Guesstimates work just fine!

Steps 5 and 6: Check the Vital Signs
Steps 5 and 6 begin to lay the groundwork for answering “How do we best face the future?”  In these steps, you will calculate key ratios for last year and the current year.  For each year, determine your Current Ratio, Debt-to-Worth ratio, and, if you have profits, your ROA - return on assets percent. (See The ROI’s Quick Guide to Ratios for reminders of the formulas, or use The ROI’s Online Key Ratios Calculator in the Members-Only Collection.)

Here’s the point: Steps 5 and 6 tell you whether your retail operation is getting stronger or weaker, and to what extent. 

Now for Step 7: “Am I Running This Business...or Is It Running Me?”

This is the big one.  Do this step conscientiously, and you are really running your store instead of allowing it to run you!

In Step 7, enter the Current Ratio you desire for next year that will keep your payables current.  In this economic climate, you cannot expect your suppliers to be your bank.  You have got to be strong enough to have a decent bank relationship and keep your suppliers paid promptly.  Raising your targeted Current Ratio is a good goal.

Also in Step 7, enter your goal for your Debt-to-Worth ratio.  Now remember, this is the numerical measurement of the financial strength of your business.  This is the first place to look when asking whether the business is getting weaker or stronger.  Rule of thumb: only a 1:1 or lower Debt-to-Worth ratio is acceptable for a bank loan today.  Many retailers have grown accustomed to being “bankable” with a 1.5, 2.0, or even 2.5 to 1 Debt-to-Worth ratio.  No more.  Not in the “new normal”!

Finally, what Return on Assets is reasonable to expect next year?  Frankly, the question is: “With all this money tied up in the business (total assets), are we getting an adequate return?  Or should we liquidate and put our money somewhere else?”

Step 8: The Rubik’s Cube Begins!
Step 8 is kind of fun.  What profit did you assume in Step 7 in order to calculate the ROA?  Well, add that amount to the Net Worth in Step 4 and you will have the Net Worth for Step 8. 

Similarly, what Debt-to-Worth ratio are you striving for in Step 7?  Given your projected Net Worth in Step 8, calculate what amount of Total Liabilities you are limited to in order to achieve that ratio. 

Finally, total your liabilities plus your anticipated Net Worth in the last line of Step 8, and use the same number for the total assets further up.  (Remember, the balance sheet has to balance!)

Now, by reviewing Steps 2 and 4, fill in the balance sheet line items in Step 8 while keeping within the totals.

Step 9 - The Suprise Ending
Step 9 starts with entering the net profit you are expecting (ROA again) and forcing the income statement to produce it.  That’s right!  Force your business to produce the results you desire, and guess what: You are running it.  It is not going to run you! 

As you draft and redraft your projected P&L (Step 9), it will change your targeted ratios and projected balance sheet in Steps 7 and 8.  You will be compelled to focus, streamline, and target your retail business in order to achieve your goals in Steps 7 and 8.  Essential functions - and their associated costs - will remain. Others will be adjusted – some upward, some downward – or eliminated altogether. 

True, the Nine Stepper brings frustration.  But work and re-work this Rubik’s Cube.  The business you save may be your own!

Why Use This Nine Step Process?
Now, let’s review what is going on here.  Instead of managing and/or planning only from projected sales, margins and expenses first, this economy - the “new normal” - requires that you plan those elements last.  That’s right.  The last number you arrive at is your sales projection, which, if unrealistic, forces other changes and a healthy dose of realism.

In the “new normal”, it is perilous to try to manage your business only from the P&L statement.  Bigger may not be better.  Only better is better.  And “better” is measured by your financial strength, which shows only on the balance sheet, not on the P&L.  You cannot work any harder.  Now is the time to work smarter.  And this new way of planning can serve you very well in “the new normal.”