Will You Pass the Music Retail Financial IQ Test?

At 2017 Summer NAMM, financial expert Alan Friedman of Friedman, Kannenberg & Co. presented an interactive session to test music retailers’ financial IQ. According to Friedman, music retail is more competitive than ever, and retailers who come out on top are the ones who take control of their business by being fiscally smart.

“Now, it’s not good enough to just make revenues,” he said. “You have to make sure you’re controlling your expenses, paying your bills on time, avoiding common financial mistakes and not ignoring vital financial principles.”

Friedman posed 10 questions and asked for a show of hands and answers from the audience. Take the quiz to see how well your financial IQ rates.

1. While profitability and cash flow are both important, which one is ultimately more important than the other?

[Answer: Profitability] Cash flow is not a problem. It’s a symptom that signals something else is wrong with a business. If you have to pick one or the other, profitability is ultimately more important. If you’re not profitable, you’ll have severe cash-flow problems that you won’t be able to recover from. “As long as you’re profitable year-to-year, eventually the cash will appear,” Friedman said. As a profitable music retailer, you can fix cash-flow problems by getting secured loans.

2. Which of the following is not one of the most important factors to consider when buying inventory?
a. Will my customers want this product?
b. How quickly can I sell this product?
c. Can I make a profit selling this product?
d. Can I get a bigger discount for a larger order?
e. How quickly can I pay my supplier?

[Answer: D] This could induce you to buy more product than you need. It’s OK to have a higher cost if you can move the item in 30, 60, 90 or 120 days. “The name of the game in this industry is turns,” Friedman said.

3. Which of the following should always be of primary concern when buying inventory?
a. Whether this product is sold by my competitors.
b. Whether I can pay for this product on a credit card.
c. How much of the same inventory is in stock or unsold in my store.
d. Whether I can get a discount for early pay.

[Answer: C] When there are large amounts of product unsold, current purchases should probably be reduced. Don’t let other issues become distractions. “You’ve gotta move product, and it should always be of primary concern,” Friedman stressed.

4. Which of the following is an absolute truth?
a. Gross profit dollars and percent measure overall store profitability.
b. You must achieve at least 33 percent gross profit margin to be profitable.
c. High gross profit dollars coupled with a high GP percent virtually eliminates any chance of cash flow problems.
d. Even if you have GP dollars and percent, your store could still be losing money.

[Answer: D] A high gross-profit and -percent margin are always financially good, but high overhead could be causing net losses. When you know what your margin is on product and how quickly you’re selling it, you can do some analysis on how well it’s all working for you.

5. Which of the following statements is not correct about calculating inventory turns?
a. It’s a measurement of how fast product is being sold.
b. It’s indicative of profitability from the sale of goods.
c. It’s a measurement used to identify aging goods.
d. It’s indicative of cash flow from the sale of goods.

[Answer: B] The calculation of inventory turns has nothing to do with profitability but has everything to do with cash flow and cash tied up in aging and obsolete goods.

6. Which of the following GMROI statements is true?
a. GMROI is a great inventory management metric because it takes into account both profitability and cash flow.
b. GMROI can identify possible out-of-stock shortages.
c. You can attain a high GMROI by either selling goods more profitably or by selling them faster.
d. All of the above.

[Answer: D] And consider downloading the free app from fkco.com that calculates GMROI.

7. Which of the following would generally not be included in arriving at net repair income?
a. Repair parts, including any freight-in costs.
b. Repair labor, including outside repair services.
c. Store advertising for repair services.
d. The cost of small tools used by the repair department.

[Answer: C] Generally, advertising costs (irrespective of whether to promote sales, rentals, music education or repair services) are reported as overhead operating expenses. Your income statements should identify other common income streams, including repair income, instrumental rentals and lessons. That way, you can see how much money you’re making in each activity.

8. Which of the following is not an appropriate credit vehicle for financing saleable inventory?
a. Bank revolving line of credit.
b. Bank note fully amortized over five years.
c. Vendor trade payable with extended payment terms.
d. Floor planning from third party finance source.

[Answer: B] According to Friedman, long-term amortizing notes should be used to finance long-term assets, such as rental instrument pools, vehicles, leasehold improvements, office equipment and computers. “Lines of credit should be cleaned up and paid off over the course of a year,” Friedman said.

9. Which of the following is the primary difference between rent-to-own and rent-to-rent contracts?
a. When the title passes to the customer.
b. When the periodic rental payment is due.
c. What type of instrument is rented.
d. How sales tax is computed.

[Answer: A] On rent-to-rent contracts, title never passes to the customer. Instruments always remain on your balance sheet and should be depreciated. On rent-to-own contracts, title passes only after either the last contracted rental payment is made or when the customers pays off early on the remaining contract.

10. Which of the following would not cause a store treating its music teachers as independent contractors to find themselves in violation of most state labor laws?
a. A store that sets the hourly teaching rates.
b. A store with a non-compete clause in their contract.
c. A store that schedules the lessons for each teacher.
d. A store that pays worker’s comp insurance for its teachers.

[Answer: C] This by itself does not indicate control over how income is earned and is commonplace with most in-store lesson programs. Friedman advised retailers to speak with a labor lawyer due to an increase in state labor audits.