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Managing for Bottom Line Cash Flow, Part Seven

  
  
  

In the world we now live in, financial health requires a commitment to proven retail business fundamentals, a commitment to operational discipline, and a heightened attention to detail.

In my last post, I discussed how pre-season planning, just-in-time principles and limiting promotional activity promotes positive cash flow. There are a number of proven retail fundamentals that drives positive cash flow. Let’s move on to expense control.

5. Effective Expense Control

In financial parlance, expenses can be categorized as fixed costs, variable costs, step-variable costs, and so on. Fixed costs are just that, costs that remain fixed regardless of the volume of sales. Variable costs can vary with the level of sales, and step-variable costs are fixed over a range of volume, but can vary across different range of volume.

(In my experience there’s also irrational costs, in which the cost doesn’t seem to have any relationship to sales levels, but that’s another story.)

The important point is that variable costs are manageable costs. Fixed costs are less so. As it turns out, all costs are variable costs over time. Given enough time, all costs can be managed. The objective for retailers is to make every cost variable, all the time, as much as possible, to make them as manageable as possible.

Take rent expense, for example. When Leyman Brothers went out of business two years ago and the world hit a wall, what did the major national retailers do? They went straight to their landlords. Their mission was to reduce their rents, but another way to think of it is that they began to manage lease expense, which is typically thought of as a fixed cost, as a variable cost. They weren’t all successful in getting accommodations immediately, but suffice to say that many eventually got accommodations of some sort or another.

Variable cost structures are manageable cost structures. And the more manageable the cost structure, the more control a retailer has over cash flow.

Finally, I need to touch on address payroll. Payroll is usually a step variable cost, due to a mixed of full-time (fixed cost) and part-time (variable cost) employees. That makes payroll pretty manageable.

All too often, payroll levels are evaluated as a percentage of sales. The best retailers understand, however, that great employees are integral to generating plus revenues. Still, payroll cannot be allowed to be totally divorced from sales levels. And payroll is often the last place managers want to go, but all too often it’s the first place they do go. (Occasionally, from my experience, it’s the first place they need to go!) But every retailer still must be able to deliver memorable customer experiences, and that requires engaging, passionate employees.

Variable cost structures promote positive cash flow.

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