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Finance 101: Where To Stash Your Dealership’s Cash

Judging by the growing number of business loan applications dealers are filling out these days with banks and other lending institutions, a major problem with retailing today is that there are not enough financial resources — spell that “capital” — invested in this segment of the business.

At the same time, one must look far and wide to find an entrepreneur who does not have some portion of his personal wealth tied up in investments in publicly held securities. Without that diversification, what protection does the businessperson have for the capital accumulation he may have spent a lifetime building?

As every venture capitalist knows, the secret to success in any business lies in getting a decent return on one’s investment in that enterprise. The percentage return is determined by dividing the net profit for the period, as expressed on the firm’s operating statement, by the company’s net worth or capital, as seen on its balance sheet. Return is significant in terms of what the owner/manager might get for his or her money if invested elsewhere.

In the case of an appliance/consumer electronics store, return on investment averaged somewhere between 15 percent and 17 percent through the third quarter of 2001, if trade association figures are to be believed. Considering the less than robust economy with which the trade was already coping prior to Sept. 11, that isn’t half bad.

Of course, one must make certain that all relevant data is taken into account when one calculates an honest return. For example, if the boss’ wages, salary or “draw” is in excess of what the company would pay an equally qualified manager, the difference should be considered ordinary salary rather than a return on investment in the enterprise.

Similarly, anything less than pay equal to what the boss is taking home for doing his job should be added to net profit.

Fortunately, in our capitalistic business system, there are a sufficient number of places one can turn to determine how well the business investment is paying off as compared with alternate ways of putting that money to work — such as in publicly-traded equities. For those who dabbled in Wall Street during the same period, returns for blue chip securities would have brought that average down to five percent or less, although this too isn’t half bad considering what alternative investments are paying.

Carefully weighing all investment options, the astute businessperson should also give some thought to the publicly-held bond market, especially when tax-free interest earned amounts to some 8 percent or more of the funds invested.

The objective, it must be remembered, is not to deplete the capital available for running a profitable retail business, but rather to diversify the holdings of the owner/manager. This way, no matter which way those investment fortunes are going, the boss does have room to adjust his holdings to market conditions.

Of all the decisions faced by independent retailers today, none are more bewildering than where they will put the limited capital they have available for investments. Surely this deserves the best thinking of the entrepreneurial mind.