How's your cash? How to impact your retail finances
"Money is a terrible master but an excellent servant," P.T. Barnum.
Indeed, money can be both a blessing and a curse, depending on how we manage it. For retailers, financial management is crucial to the success and sustainability of their business. It's not just about making a profit, but also about managing expenses, cash flow, investments, and the levers that make ‘em all tick.
In this article, lets run through a couple of “Do you's” together to help align the focus on your retail finances in an effort to not only recognise some of these levers, but pull the heck out of it to maximise your performance and ensure a cashflow positive business.
Do you know your cash flow?
Cash flow management is critical for the viability of any business. More businesses fail for lack of cash flow than for lack of profit. Retailers can be unrealistic in predicting their cash flow, overestimating income and underestimating expenses. Additionally, businesses can fail to anticipate a cash shortage and run out of money, even if they are profitable.
Retail businesses need to have a clear understanding of their cash inflows and outflows, which means so do you. To do this, they create a cash flow statement that tracks all the money coming in and going out of their business. This will help them make better decisions about when to make purchases, when to pay bills, and when to invest in their business.
A cash flow plan has three basic parts: cash coming in, cash going out, and the difference between the two. Good cash flow planning helps a business run on its own money, reducing the interest costs of short-term borrowing that eat into profits.
To project cash flow, start with the amount of cash on hand, including bank account balances and actual currency. Make a list of anticipated inflows and outflows, including the amounts and timing of each. Then track these movements on a cash flow spreadsheet – doesn’t have to be complicated, just in place and consistently in use.
Do you have a budget?
A budget is a financial plan that outlines expected income and expenses for a specific period, usually a year. It provides a clear view of how much money is expected to come in and how much is expected to go out. This information is important when it comes to cash flow because it helps to forecast how much cash a business will have at a given time.
By creating a budget, retailers can anticipate their income and expenses and plan accordingly. For example, if a retailer knows that they will have a large expense in the coming months, they can adjust their budget to ensure they have enough cash on hand to cover it. Similarly, if they anticipate a period of low sales, they can adjust their budget to reduce expenses and preserve cash flow.
In short, a budget is a critical tool in managing cash flow. It provides retailers with the ability to anticipate and plan for future expenses and income, which is essential for maintaining a healthy cash flow. A budget can also help you make informed decisions about your business, such as determining which areas require additional investment and which areas can be scaled back. By tracking your expenses and income, you can identify patterns and trends in your financial performance, allowing you to adjust your strategy and improve your bottom line.
As an extra, having a budget can help you prepare for unexpected events and emergencies. By setting aside funds for contingencies, you can ensure that your business is able to weather unexpected expenses without jeopardizing your financial stability.
Key Tip: Learn and be close to your average Gross Margin % across your business. This will be your first indicator in how you are tracking in line with your cashflow requirements. If you aren’t making enough GM% to cover your inventory & expenses, your product profit will not flow to your net profit and back into you cashflow.
Do you have a system for inventory management?
Inventory management is another crucial aspect of financial management and is essential for retail businesses to keep track of their stock levels and avoid stockouts or overstocking. Effective inventory management is essential for the financial health of a retail business, as it can help to ensure that the business always has enough products to meet customer demand, while also avoiding overstocking that can tie up capital and lead to wastage.
One key aspect of inventory management is forecasting demand. By analysing historical sales data and trends, as well as factors such as seasonality and market trends, a retailer can make more fairly accurate predictions about how much of each product they are likely to sell in the future. This, in turn, can inform purchasing decisions and ensure that the business maintains optimal inventory levels.
Another important element of inventory management is stock tracking. This involves keeping an accurate record of how much stock is on hand, how much has been sold, and how much is still in transit. By regularly tracking stock levels (and core KPIs such as Stock Turn or Weeks Cover) and adjusting orders as needed, a retailer can avoid stockouts (where a product is out of stock) or overstocks (where excess inventory sits on the shelves for too long), which at the end of the day impact your customer.
Effective inventory management also involves managing the timing of purchases and payments. For example, a retailer may negotiate favourable payment terms with suppliers in order to maintain cash flow and avoid tying up too much capital in inventory. Additionally, retailers may (in this day and age, should) use inventory management software or other tools to help automate and streamline inventory-related tasks, reducing the risk of errors and freeing up time for other important financial management tasks.
Key Tip: Don’t underestimate the power of understanding stockturn and how you perform inline with category benchmarks. Recognising how much cash you have tied up on your floor (at retail value), helps you to understand how well those products are working for your business and turning themselves over to make a buck!
Do you have a plan for managing debt?
This is straightforward, but with a high weighting.
Managing debt is critical for retail businesses to avoid cash flow problems and maintain financial stability. Retailers can create a debt management plan that includes tracking their debts, prioritising which debts to pay first, negotiating with creditors for better terms, and consolidating their debts. By managing their debt, retailers can improve their credit score, reduce their interest expenses, and free up cash for investment in their business.
As a contingency, you should always have a figure (though this figure may change by season) in which you need to go to the bank for support. Believe it or not, MOST businesses aren’t cashflow positive 12 months of the year and do need to lean on external support time and again. Being aware of this and acting sooner rather than later is highly advised.
Key Tip: While methods like accelerating receivables and slowing payables, or negotiating your supplier terms from 30-days to 60-days can seem ideal, remember that the Piper still needs to get paid. Extending your liabilities out isn’t the longer term answer, coming back to how effective your budgeting and operational performance will help you exponentially more.
Do you have a plan for growth?
Finally, retail businesses need to plan for growth to remain competitive and increase their profits. Retailers can create a growth plan that includes identifying new markets or products, investing in marketing and advertising, expanding their product lines, and exploring new sales channels. By planning for growth, retailers can improve their profitability, attract new customers, and increase their market share.
This plan for growth should be linked to your Budget, and your Cashflow Forecast. Something I constantly did in setting by overall budgets where:
Cash flow really is king, and poor cash management is the number one killer of businesses today. Producing profits may be the sign of a good business, but profits matter little if a business runs out of cash. By focusing on these key "do you's", retail-focused financial literacy can help businesses to manage their finances more effectively and make informed decisions that will drive cashflow sustainability, growth, and profitability.
Retail Performance
Josh has spent over 15 years working in the retail industry, specialising in sporting and fashion retail. He holds an MBA from Swinburne University, which has allowed him to hone his skills as a financial and commercial analyst, as well as become an expert in in this space through corporate and consulting roles.
Complimenting his financial skillset, Josh has extensive experience working across a broad range of retail capabilities, from the executive level down to daily operations, making him a tactile expert in retail strategy, HR, training and development, policy and procedure development, visual merchandising, store fit-out, retail marketing.
With the ability to connect the dots from concept to execution and delivery of change, this separates Josh apart as a leader in the field. He is known for being a highly sought-after trainer who can effectively implement business performance solutions and programs.