Cash Flow-The New Financial Reality
Profits vs. Cash Flow
As a retailer what is more important to you: profits or cash flow? The initial response from most merchants posed that question is… profits of course! On the surface the answer makes sense—who wouldn’t want more profits? The mere word itself “profitable” evokes a sense of financial well-being. However in today’s retail environment profits alone are not enough; cash flow is the new financial reality.
The Illusion of Profitability
I have reviewed countless profit and loss statements that showed extremely strong gross margin figures only to find out that the store had no cash. Since accounting does not factor in the element of time turnover does not appear on a profit and loss statement. Therefore the financial picture created by a “profitable” business with poor cash flow can be a false reality.
Facing Financial Challenges
Recently a client came to us for a strategy to deal with a bank request. The bank wanted the retailer to produce an additional $200000 in cash not profits…cash! If you were given a similar mandate what would you do? Well hope is not a strategy and crying is not an option. To use Tom Hanks’ famous quote from the film A League of Their Own “There is no crying in retail (baseball).” Three more practical solutions quickly come to mind:
- Cut expenses
- Increase sales
- Cut inventory
Cutting Expenses
Putting excess expenses on the chopping block is an obvious first step to save some cash. The problem here is that most retailers feel they have already trimmed expenses to the bone. If you have recently renegotiated your leases reviewed payroll costs and scrutinized the remaining administrative costs there may not be much left to cut. Slashing costs too deeply can actually have a negative effect on business. Several “big box” retailers have experienced this recently as sales have been undermined by deep cuts in staffing and training. Prudence and caution are priorities when examining expenses.
Increasing Sales: A Viable Option But How?
You can promote more but you might experience a margin hit which will most certainly raise a banker’s eyebrows. You could buy more inventory which might drive volume but the risk is that the cash problem could worsen if the additional stock does not perform as it should. You could advertise more but that would only increase expenses if the ad campaign didn’t pull enough customers in.
Option Three: Cut Inventory
Leaning out excess stock will generate more cash in the short term. The dilemma however is how to consistently build cash over the long term. I prefer the scalpel approach as opposed to the meat cleaver method. Anybody can slash and burn inventory and generate quick cash but the aftermath of kneejerk business decisions can haunt you for months to come.
This is the very reason that I object so strongly to the marketing strategy of 20% off everything in the store or what is often referred to as the lazy man’s markdown. This promotional approach does little to solve merchandising problems since the desirable items that could have sold at full price are the first to sell at discounted prices. Aside from a momentary bump in cash the downside is reduced margins and broken size runs. Worst of all the problem inventory is still…a problem.
Strategic Planning is the Answer
This means bottom-up dollar merchandise planning at the store and class level. Most often a retailer’s line of credit is tied to inventory. A banker’s valuation of inventory is what he thinks he can liquidate it for given the outside chance that they end up with the keys to the store. Because of the way bankers perceive the value of inventory they get nervous whenever the word “cutting” is mentioned. Understand that to a banker goods that are a year or two old have the same value as merchandise that was received yesterday.
In most cases not all what the banker only sees with regard to your inventory is numbers on a financial statement. Given their reference point it is understandable though not always justifiable why a lending institution might require more collateral when stock levels are reduced. For that reason it is paramount that you keep the communication channels wide open with the bank if you depend on them for your LOC. Demonstrate to them using sales and inventory reports that fresh “balanced” inventory has a better chance of increasing sales than simply having more inventory. It is also a good idea to have your banker visit your store and even attend a management or buying meeting. Treat the banker as part of your management team.
Importance of New Products
Anyone working in the retail business longer than a week knows the positive effect that new products can have on sales when received at the proper time. Customers don’t visit your store to see what came in last year! It is the constant flow of fresh inventory that drives profitable sales. A strategic merchandise plan that blends inventory balance with properly scheduled deliveries and timely markdowns is the pathway to faster turnover which drives sales volume.
Retail Solutions
There are few problems in retail that can’t be remedied by increasing sales and cash flow. Hence my new retail math formula… Cash Flow + Sales Increases = No Problems!
Ritchie Sayner
Summary
In today’s retail environment cash flow has become more crucial than profits as a profitable business can still face financial challenges without adequate cash. Retailers can address cash flow issues by strategically cutting expenses increasing sales and managing inventory effectively. A well-planned merchandise strategy emphasizing fresh inventory and maintaining open communication with financial institutions is essential for sustaining cash flow and business health.
“Cash Flow + Sales Increases = No Problems!”
Real-World Examples of Cash Flow Management
Here are some real-world examples illustrating the importance of cash flow in retail and how businesses can strategically manage it to overcome financial challenges.
- A small clothing boutique faced a cash flow crisis when their bank demanded an additional my keyword00000 in cash reserves. By strategically cutting unnecessary inventory and focusing on high-margin items the boutique was able to generate the needed cash without compromising their product offerings.
- A local electronics retailer increased their cash flow by renegotiating supplier terms to allow for extended payment periods. This gave them the flexibility to maintain a balanced inventory without the immediate pressure of cash outflows allowing them to invest in marketing efforts that boosted sales.
- A chain of grocery stores improved their cash flow by implementing a just-in-time inventory system. This approach reduced excess stock and minimized storage costs ensuring that cash was not tied up in unsold inventory and could be used for other operational needs.
