Cash Flow, The Lifeblood of Every Independent Retailer

  

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The key is budgeting and benchmarking, so that there is a dynamic plan that assures the business is able to provide for its cash needs.

Cash flow. If there's one thing that will keep you awake at night, it's cash flow. More often than not, when I get a call from a perspective client, they're calling because they're struggling with cash flow. They may state it in different terms, perhaps that they're concerned about too much inventory, excessive markdowns, poor planning, or weak margins. These problems are leading to a larger problem, the problem that's really causing the sleepless nights: poor cash flow.

Cash flow.

Cash flow is the lifeblood of any retailer, large or small. Without cash flow there is nothing. When cash flow is positive, there's a tomorrow. When cash flow is negative, there's an abyss.

Where has all the cash gone?

There are a number of different ways an independent retailer can bleed cash. Some are more obvious than others, but independent retailers are susceptible to all of them. Let's take a look at some of them:

• Excess inventory. Typically, most of a small retailer's assets are tied up in inventory, in some cases as much as 80% to 90% of those assets. This makes small retailers unique from many other small businesses. Inventory is the critical cash-generating asset of any retailer. Unfortunately, inventory also has a funny way of consuming available cash.  New items, new categories, broader assortments, greater depth of stock. There's always something to buy, and (what seems like) a good reason to buy it. Carrying too much inventory, or the wrong inventory, consumes valuable cash. All too frequently when a small retailer wants to know where the cash has gone, I can walk them out to their sales floor and show them their cash, hiding in broad daylight, disguised as inventory.

• Excessive markdowns. All too frequently, too much inventory leads directly to excessive markdowns. All of that cash disguised as inventory has to be turned back into cash somehow. But if too much inventory drained cash in the first place, marking it down to clear it out, while absolutely necessary, doesn't resolve the cash crunch, because you're not generating full margins on those sales. The heavy discounting associated with excessive markdowns all too often leaves too little cash to pay the accumulating backlog of payables, or fund the purchase of the next season's merchandise.

• Margin erosion. When markdowns are excessive, margins are clearly impacted, but margin erosion, while far more subtle, can have just as serious an impact on cash flow.  Margin erosion is the slow, but steady decline in overall margin percentage. It can result from not maintaining margins in the face of cost increases from vendors, or in bumping up against natural price points. Again, as margins erode, there's simply not enough cash being generated to cover the merchandise payables, much less the other expenses of the business.

• Excessive payroll. As carefully as most small retailers watch their expenses, payroll as a percentage of sales, and thus as a percentage of incoming cash flow, has a funny way of creeping up, up, up. When you think about it, it's actually pretty easy to understand why. Every independent retailer wants to be sure their is enough staff to work with customers at all times. And many independent retailers are family run businesses, and one of their core values is to run the business like a family. When sales take a dip, an owner frequently is loath to lay off anybody, or cut back hours, or even scale back annual raises and bonuses. The thinking usually goes something like this, "I'll find someplace else to cut back, I'm not going to cut payroll unless I absolutely have to." By then, cash flow is usually under pretty significant stress.

• Capital expenditures. Here's one place where cash can vaporize in a real hurry. In the mid 2000's, when times were good, there was so much cash coming in that it was easy to assume the good times, and the cash, would just keep on coming. Many small retailers decided to aggressively invest in their businesses, all too often without a sober assessment of the return the investment would generate. When business suddenly hit a wall at the end of the decade, many were caught short on cash with investments that weren't beginning to generate the sales necessary to refill the coffers. Of course, it doesn't take a downturn in business for an ill advised investment to leave a small retailer gasping for cash.

• Poor planning. I've said it time and again, and I'll keep on saying it; show me a smaller retailer that truly takes the time to plan out their business, and I'll show you a successful small retailer. If sales and inventory levels haven't been adequately planned, there's no way of quantifying how much merchandise should be brought in each month. And if cash flow isn't being planned, if there isn't a series of budgets and benchmarks for cash outflows, as a sales plan provides a budget and benchmarks for cash inflows, there's no way of assuring that each month is generating the necessary cash flow to sustain the business.

In the end, the key is budgeting and benchmarking, so that there is a dynamic plan that assures the business is able to provide for its cash needs, and identify potential pinch points in future months, when there's still the time to develop a corrective plan of action. With a cash flow plan, there's a pathway to success before you, as well as many a good night's sleep.