Hardwood Floors June/July 2018

By Bree Urech-Boyle

A simple profitability ratio that most companies track very closely is the profit margin. This is profit divided by sales during a given time period. IBISWorld goes on to say that, “industry profit, defined as earnings before interest and taxes, fluctuates with cyclical patterns of investment in the downstream building markets and the price movements for materials and labor. The unprecedented slump in demand from the downstream construction market severely narrowed the industry’s margins during 2012 even after recovery was underway. After subsequent years of recovery, IBISWorld estimates that the average industry profit margin, where profit is defined as earnings before interest and taxes, accounts for 5.5 percent of revenue, up from 3.9 percent in 2012.” Compare your profit margin each month, quarter, or time- frame that works for your company. You could put the data in graph form to easily visualize how you are doing over time. This can help you make changes in your operations including quoting for business or finding ways to cut costs to get the

Liquidity ratios are important because they measure a company’s ability to pay debt obligations in the short term. Many times you must pay up front for supplies for a project before you are paid, which can create cash flow problems. The current ratio is a popular liquidity ratio that is calculated by dividing current assets by current liabilities (i.e., things due to be paid soon). According to IBISWorld, a company that does industry and market research, “the industry of flooring installers in the United States current ratio for April 2016 – March 2017 was 1.7. Over this same timeframe, the current ratio was 1.8 for small companies (less than $10 million in annual revenue), 1.6 for medium companies ($10-50 million), and 1.5 for large companies (over $50 million).” If you have $145,000 in current assets (e.g., cash, accounts receivable) and $80,000 in current liabilities (e.g., current payment due on loan, bills due soon), then you have a current ratio of 1.81 and are right in line with most flooring installers making less than $10 million a year.