Improve Your Business’ Cash Flow

Without a healthy cash flow, even “profitable” businesses with strong gross margins may not be as healthy as they seem.



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 word “profitable” evokes a sense of financial well-being. 

But in today’s retail environment, profits alone are not enough; cash flow is the new financial reality. 

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. 

Recently, a client came to me for a strategy to deal with a bank request. The bank wanted the retailer to produce an additional $200,000 in cash. Not profits, cash. If you were given a similar mandate, what would you do? Three practical solutions quickly come to mind: cut expenses, increase sales or cut inventory. Let’s examine all three.

Come to the Seminars

Wed., March 16, 9:30 - 9:45 AM
Mini Session: Where Better Inventory Management Begins
Room W204A

This mini session answers the question: What is open-to-buy, and how can it work for you? Mini session instructor Paul Erickson will show you why open-to-buy is an exciting tool that, in the hands of a fully committed retailer, can profoundly affect financial improvements. You’ll also learn what it can do for you and if all retailers need it.

Wed., March 16, 10:30 - 11:45 AM
Psychology of Price
Room W203B

How can you benefit from pricing psychology? This session will explore the benefits of different competitive pricing strategies that you can easily implement in your store. You’ll discover the three elements your initial markup must satisfy to achieve your profit goals, learn how to effectively use pricing psychology to increase markup, and see how cost-based pricing can limit your profit potential.

Wed., March 16, 12:30 - 1:45 PM
If Inventory is Your Retail Heart, is it Healthy?
Room W203B​

If inventory is the heart of business, how healthy is your heart? Starting with the basics, this session will show alternative concepts to inventory management, techniques, and formulas to improve inventory turnover, cash flow, revenue growth and gross margin. As Paul Erickson speaks from experience, you will learn specific techniques to control your inventory, improve your stock sell-through and increase your margins.


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
Increasing sales sounds like 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.

Cutting Inventory
The third option is to 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 percent 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.

Building a Strategic Merchandise Plan
Strategic planning is the answer. This means bottom-up dollar merchandise planning at the store and class level. 

Usually, 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, what the banker only sees with regard to your inventory is numbers on a financial statement, so it is understandable why a bank 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 you depend on for your line of credit. 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.

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. 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. 

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!

Paul Erickson is senior vice president of RMSA. Based out of Minneapolis, Minn., he has served retail clients throughout the U.S., Canada, Latin America and the Caribbean. Widely recognized for his talents as a retail educator, his passion for client service and for preparing independent retailers to excel in the area of inventory productivity and control has been central to both his personal success and that of the RMSA client base.





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