Financial Management for Music Stores

Welcome to the Financial Management for Music Stores course.  Join Alan Friedman, Friedman, Kannenberg & Co. PC, as he covers the essential financial tools and ways to manage your retail store's finances and increase your financial ease of doing business. 

Once you've completed the course, you can take a brief online test (that includes videos and training materials) to receive a Certificate of Completion. 

Directions to take the Financial Management for Music Stores certification test: 

1.  To begin the test, please click on this link:   http://namm.rollbook.com

2.  Click on "Sign up for a new account" to self register.

3.  Click on the Catalog tab in order to choose the Course.

4.  You can start and stop at any time, and resume the testing module from where you left off during your previous visit.

5.  Print your Certificate upon successful completion of the test.

Alan Friedman is a CPA and Senior Partner with the accounting firm of Friedman, Kannenberg & Company, in West Hartford, Connecticut..  Alan and his firm have extensive experience in providing accounting, tax and consulting services to the music industry, servicing professional musicians and bands, music stores, instrument and product manufacturers, recording studios, music schools and other music industry professionals. Alan has written for International Musician, Music Inc. and Music & Sound Retailer magazines. Alan’s firm is a member of the National Association of Music Merchants (NAMM), the Retail Print Music Dealers Association (RPMDA), the National Association of School Music Dealers (NASMD), the American Music Conference (AMC) and the National Association of Certified Valuation Analysts (NACVA).  http://www.fkco.com/ and Music Trade Articles: http://www.fkco.com/resources/music-trade-articles

Note:  Information provided in any NAMM course is not a substitute for financial or other professional advice. Please make sure to check with your accountant or other advisor(s) with regard to how these financial practices can be used in your specific business. 

Finance and Business Principles

Welcome to NAMM’s Financial Management web resource.  This site is intended to provide you with an online educational resource for “best practices” in the fiscal management of a retail music store. 

A variety of key financial topics will be addressed, with more to be added over time. These topics will be categorized under the following major financial areas of store operations: 

Target Audience
 
These resources are designed for owners, managers and employees of retail music stores. The materials focus on the basic financial principles you need to understand in order to operate a retail music store successfully.   

By reading and applying these principles, you should be able to:

  • Understand how to manage inventory effectively
  • Correctly report different types of revenue
  • Calculate how much to spend on sales salaries, rent and advertising
  • Create a budget for your store
  • Approach your bank for financing
  • Recognize the signs of internal fraud 

Again, we welcome you to these financial resources and encourage you to check back often as new topics are added.  

Understanding Financial Management

Alan Friedman talks about today's competitive marketplace, and why it’s imperative for music store owners to be able to generate, understand and act upon key financial reports, often on a daily basis.   While generating sales and other revenues is “mission one” for most retailers, proper fiscal management is a close second in terms of the most important activities for any music store.   

Some of these reports include financial statements (balance sheet, income statement and statement of cash flows), budgets and forecasts of revenues and expenses, open-to-buy and inventory stocking reports, cash requirements and related receivable and payable reports, and inventory analysis reports, to name just a few.
 

Understanding Financial Data

While most of these key reports can be generated by good retail accounting software, many store owners don’t know how to interpret this financial data and therefore don’t know how to act upon it.  Furthermore, the unique and varied income-generating activities of most music retailing operations (such as sales, rentals, repairs and music education) cause confusion in their accounting, financing and reporting.  This ultimately leaves many music store owners and their bookkeepers, controllers, accountants and bankers with a feeling of frustration and bewilderment over how to best address and master these fiscal areas of store operations. 
 
This online resource is intended to shed light and give financial guidance on these vital areas of store operations to store owners, employees and their professional advisers.
 

Inventory Management

Why is inventory management important?  Like all other business owners, executives and managers, music retailers have the inherent responsibility of carefully managing operating revenues, expenses and cash expenditures in an effort to preserve and maintain cash flow. But music retailers have the additional responsibility of managing inventory levels—the largest ongoing cash expenditure of any typical retailing business.

 
Because so much of a retailer’s cash is tied up in inventory, the mismanagement of inventory can put even the most profitable retailer out of business in short order, from a lack of cash flow. This is why it’s crucial for every retailer to understand the basics of good inventory management.
 
Watch this video for an understanding of the importance of effectively managing your music products inventory and related cash flow.

 

How Much Inventory Should I Buy?

How much inventory should I be buying for a store the size of mine?  Buying inventory is easy—buying the right amount of inventory at the right time is a bigger challenge. It’s no secret that retailers in the music products industry often suffer from having too much inventory on hand. There a variety of reasons for this situation, ranging from the vast number of stock keeping units (SKUs), to vendor purchase requirements for coveted product lines. But most high inventory levels result from both a retailer’s love of product and a lack of understanding of the key tools and measurements used in effective inventory management.

 
Accordingly, most music retailers begin to address cash flow issues by asking a simple, yet important, question: How much inventory should I buy?
 
Watch this video to start learning the basics of good inventory management by first determining how much inventory you should be buying.

 

What are Inventory Turns?

In simple terms, "inventory turns" refers to the number of times you sell your entire inventory, in dollars, over a 12-month period. Your inventory turnover is calculated by dividing your cost of goods sold by the amount of average dollars invested in inventory over the same 12-month period. This inventory management indicator is becoming an even bigger issue in music retailing because of the immediacy of product offered to online shoppers. Trying to stock all things for everyone is not only nearly impossible, it causes inventory turns to decrease which, in turn, hinders the vital cash flow needed to run the business.

 

The Value of Understanding Inventory Turns

This analytical tool to measure inventory productivity should be important to everyone in the industry for many reasons. For the retailer, a better inventory turn usually indicates inventory is “fresher” which, in turn, creates a happier customer and more customer traffic on the sales floor. For the supplier, high inventory turns can mean greater purchases from their music store customer. This, in turn, helps suppliers meet sales quotas and grant purchase discounts to the retailers. Conversely, a slow inventory turn suggests that a store owner may be trying to run a museum instead of a vibrant music store.

 

Watch this video to learn more about inventory turns and what is considered a typical inventory turn for this industry.

 

How Much Inventory Should I Carry?

How much inventory should I be carrying at any point in time?  Managing inventory levels is arguably the most difficult challenge for any retailer, music retailer or otherwise. The challenge stems from many unpredictable factors, including having to guess what your customers will ultimately buy, unexpected downturns in the economy, real estate and the stock market, changes in technology, erratic manufacturing and product availability, high purchase requirements by suppliers with coveted product lines, and a general lack of prudent inventory management knowledge by many retailers.

How Many Dollars Should be Tied Up in Inventory? 

Invariably, retailers may often find themselves carrying too much product, too much of the wrong product and/or not enough of the right product. This leads retailers to search for an answer to how much inventory needs to be carried to achieve profitability. Of course, that answer depends on store size, profit margins achieved, operating overhead and a few other factors. But there is a simple way to roughly calculate how many dollars should be tied up in inventory at any point in time, at least to the point of knowing whether you are over- or under-inventoried.
 
Watch this video to learn how to calculate an inventory level that’s right for your store.

 

What is Gross Profit?

What is Gross Profit and how much should I be earning?  Gross profit is a financial term referring to the direct result of sales performance and impacted by a few different variables.  While the sales price you earn and related cost you pay for a particular product chiefly determine the gross profit you achieve, there are other related variables that determine the gross profit you are earning.

The Variables

Some of those variables are sales discounts given to your customers, the MAP price set by the vendor, and purchase discounts offered by your suppliers. Gross profit can be negatively impacted if the sales staff is discounting the products they are selling. Furthermore, gross profit tends to vary by product categories, from large-ticket items to print music and accessories.

Manage and Increase Gross Profit

There are a few things you can do to help manage and increase gross profit.  By asking your vendors to “keep their pencil sharp” on prices and tying sales staff compensation to profits, you can begin to attack the trend of decreasing profit margins and see an increase in gross profit dollars.  Remember, gross profit “percent” does not pay the rent and other operating expenses; it is the actual profit “dollars” generated, at any gross profit percent, that covers those expenses.

Watch this video to learn more about ways to increase your gross profit, putting more cash directly to the bottom line!

 

What is GMROI?

Are you a music store owner with a lot of inventory and a lot of cash flow problems?  Do you often wonder where your money is going each month, and why you still can’t take a decent owner’s salary?  If the answer to these questions is “yes,” you probably don’t know what your GMROI is.  This great analytical tool is for you!  Regardless of if you have to calculate it by hand (even though your Point-of-Sale software will probably do this for you), tracking GMROI can revolutionize the cash flow of your business.

 

How to Calculate GMROI

GMROI, or Gross Margin Return On Investment (the investment, in this case, is inventory), is a great tool to use to track the efficiency and productivity of your largest investment—inventory.  It is calculated by taking the gross profits made over the last 12 months and dividing it by the average inventory dollars on hand over those same 12 months. This calculation can be run on your entire inventory, or even a single SKU, to see how productive your inventory investment is working for you. 

 

Reporting Revenue

How should I be reporting all of my store's revenues?  “I laid off my repair technician three months ago because money was tight.  We’ve been scrambling to catch up with the repairs and now my road rep told me we’ve lost four accounts because our repairs have gotten so bad.  What should I do?”

 
Does this scenario sound familiar?  If so, do you even know whether you’re making money at repairs…or rentals, and lessons?  If not, there’s a good chance you’re not tracking or reporting these revenues separately and correctly.  Multiple sources of revenue should be stated and tracked separately to make sure each is carrying its own financial weight in your business. 
 
To find out the common sources of revenue in the music industry and how best to track them, watch this video.

 

Sales Salaries

How much should I be spending on sales salaries?  Sales salaries are one of the most debated areas of the retail landscape because different types of music dealers (full-line, combo/MI, school music, keyboard and print only) in different parts of the country find it difficult to determine appropriate compensation for sales staff.  It’s not unusual to find salespeople feeling underpaid while the business owner (and many times the accountant) suggests that sales staff are either fairly, or typically, over-compensated.
 
One beneficial aspect of sales salaries is that they can be tied directly to sales performance. Other areas of the business might include employees who deliver intangible benefits where measurement of appropriate compensation can be somewhat challenging. That said, fair compensation for your sales staff will help keep them motivated to sell more and prevent them from increasing their compensation by various inventory-disappearing techniques.
 
Watch this video to learn more about establishing a healthy compensation plan for both the employer and sales employee.

 

Rent

How much should I be spending on rent?  Everyone knows the old saying about rent and retailing:  “It’s all about location, location and location.” As relevant as this statement is today, the Internet has greatly impacted rent expense and has made its measurement somewhat convoluted. Your customers can now research virtually any product they want via the Internet, which leads directly to the key question: “How can I convince potential customers to come to my store to buy this product from me?” 

The new retailing mantra is now: “It’s all about connection, connection and connection.”
 
Customer Convenience
 
Customer convenience is swiftly becoming the most important factor in addressing/answering the "How" question above;  “convenience” to the customer has become the new version of "location." However, at what price does the rent prohibit the retailer from the connection that results from being in the right place at the right time with the right product to serve the right customer? 
 
Watch this video to learn more about rent expense and what’s considered an appropriate amount for most retailers. 

 

Advertising

How much should I be spending on advertising?  Advertising is an important expenditure for any retailer. Yet the field is always changing, which requires you to explore and consider new avenues of delivering your message to keep the image associated with your store fresh and to attract the best customers to your store. The good news is that with changing advertising media, some of these new ways to advertise actually require less manual labor and are extremely cost-effective.

Taking advantage of these advertising mediums is one thing, but knowing how much to spend is sometimes difficult to determine. From display ads in the phone book to expensive product displayed in your storefront windows, advertising comes in all shapes, sizes—and costs.

Watch this video to help determine an appropriate amount of money you should budget and spend for advertising.

Budgeting

Watch this video for an easy lesson on creating a budget and steering your music store toward profitability and success.

What's the best way to establish a budget for my store?  The word “budget” is not at the forefront of most people’s minds, either professionally or personally.  However, have you considered how the space shuttle makes its way though orbit each time it lifts off?  No doubt, the project started with a plan (and a budget) for all the time and resources needed for a successful mission.

Operating a music store without a budget is like driving down a highway blindfolded (this is true for any business). Giving members of your staff goals and targets is a great way to improve your store's cash flow and the bottom line.  Plus, if you’re not tracking your progress toward a budgeted goal, how will you know if you’re reaching that goal—or worse, missing your target (with corresponding results)!
 
 

Bank Financing

How do I convince my bank to lend to me?  There’s an old saying, “The time to get a banker is when you don’t need one.”  That’s because most people wait until there’s a severe cash flow crisis before they contact a banker to obtain a much-needed loan. Unfortunately, a retailer's chances of getting a loan are greatly diminished if the store is unprofitable and losing money. But even the most profitable music stores can put themselves out of business if they don’t have the financing needed to acquire inventory, buy computers to improve office efficiencies, or make leasehold improvements to attract new customers and keep the current ones returning.

 
Just think about the nature of instrument rental programs. By the time a fall-dated invoice is due to a supplier, most music stores have very little rental income to pay those invoices, even though rental programs are usually very profitable. Bank and vendor financing is critical to the success of any music store’s rental program.
 
Watch this video to learn how to entice your banker into lending you the money you need to grow your business.

 

Internal Fraud

What are the warning signs that internal fraud or theft might be occurring at my store?  Every year, statistics are compiled about internal fraud and theft that happens in U.S. retail stores—and those statistics are startling:

Internal fraud is a $600+ billion domestic problem that grows every year.  Fraud and theft activities do not usually stay small; if an employee can get away with it once, they’ll try again for a bigger dollar amount until they’re caught.  

How does this happen? Are there warning signs that internal fraud might be occurring in your store?  

Watch this video to learn what to look for to help minimize the chance of internal fraud at your store.