Cash Flow is the Lifeblood of Every Retailer
Having enough cash on hand to keep the doors open, fund payroll and buy inventory. In our retail consulting practice we have found that maintaining free cash flow is the number one thing that keeps retail owners and operations executives awake at night.
We have found that when many retailers get into a cash crunch they start getting aggressive in cutting costs. Payroll and employee development are usually the first things to go and are closely followed by eliminating or postponing inventory purchases. Those may be good responses, but they are reactionary and if not done smartly can have a significant negative impact on revenue…which just makes the cash flow issues worse.
Where has all the cash gone?
There are a number of ways that a retailer can lose or tie up cash unnecessarily. These include:
Excess inventory: Unlike other industries, that invest heavily in equipment and long-term capitalized assets, up to 80% or more of a retailer’s investment is tied up in inventory which is an asset that needs to be turned over and sold in order to recover and reinvest the cash. Carrying too much inventory and/or the wrong inventory ties up valuable cash that can be spent on products that could be selling, funding marketing programs or going into the bank.
Inefficient Use of Payroll: Most retailers try to keep an eye on their expenses. But payroll, as measured as a percentage of revenue, has a funny way of creeping up over time. When sales decline it is easy to fail to react quickly on the payroll side of the business. This may include cutting staff, but more often simply needs to be a reallocation of hours. The same can be said on the other side of the business…Many retailers fail to staff adequately to take advantage of customer traffic. The key is to write the schedule based on the store’s needs vs. the needs of the employees.
Poor Expense Control: Whether it is spending money on large items like fixtures or services or on small items like Windex and paper towels, failing to monitor and evaluate expense items can quickly deplete cash. A great example is when a retail client spent over $500 per month per door on an automated cash security system car service when their business had shifted to over 90% credit card transactions. That is a lot of money when you take that cost across 50 locations!
Excessive markdowns: When a retailer has invested in too much inventory or the wrong inventory they need to move it out in order to recover at least part of their investment. Reactionary, mark downs are necessary, but they do not recover the lost cash. In fact, after paying for marketing cost and associated payroll, you can be in worse shape than you were before you sold it! The best retailers make a plan in advance of purchasing their product for building in end-of-life markdowns. In addition, many vendors will assist you with end-of-life issues.
Erosion of Gross Margin: Margin erosion is the slow but steady decline in overall margin percentage over time. It results from failing to react to cost increases from vendors; failing to account for increased fixed or variable expenses; and competitive pressures.
Lack of Forecasting and Planning: Every retailer should be forecasting their sales, inventory, payroll and expense items on a monthly basis. Once you have a template set up, it is easy to account for seasonal shifts and current sales trends. One of the results of the planning process should include your planned cash position at the beginning and end of every month. If you are hitting your revenue targets but cash is lower than planned you know to look at inventory, payroll or expenses. If your margin is declining you know to look at pricing and sales practices.
Would you like assistance with increasing revenue, reducing costs and optimizing you profits? Contact us today for a free one-hour consultation!
- David Goodwin is the Principal of the Retail Advocacy Group. As a 30 year veteran of the retail industry he has directed the activities of hundreds of retail locations and thousands of retail sales representatives and store managers. RAG offers consulting services, retail sales training and management training programs. You can learn more at www.retailertrainingservices.com.