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Retailers Under Financial Stress

  
  
  

It is the very rare retailer that doesn't come under financial stress at one time or another. Especially in the current environment, there are a far greater number of retailers under stress than there would be in a more favorable retail climate.  

However, declining sales is only one of a number of causes of financial stress and tightening cash flows. Sales don't necessarily have to be declining for there to be cash flow problems. There have been many retailers who have gotten into trouble despite the fact that sales were flat or even increasing slightly. Cash flow is impacted by bottom line results. The issue could be on the top line, but it's just as possible for it to be anywhere in between.  

There could be gross margin slippage, both margin percentages as well as margin dollars. This could be due to wholesale cost increases that are not being passed on in the form of higher retail prices, or perhaps due to increased promotional activity in an effort to liquidate excess inventory. When margins slip, a retailer finds itself trying to pay for purchases that are fully valued, with discounted sales revenue, while still having to pay all of the other expenses.  

Inventories could have been allowed to grow out of control, tying up precious cash. When this happens, payables due to vendors frequently back up. When inventory backs up, more inventory has been purchased than could be sold, but all of those purchases still need to be paid for. The cash that's needed to pay the bills is sitting on the sales floor, disguised as inventory.

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