Cash Flow…When you think of it what comes to mind?
I know the answer to that question. You see I am an entrepreneur and a small businesswoman and so are most of my clients.
Simply put, cash flow is the amount of money flowing into your business (revenue/sales) and flowing out (expenses) each month.
If you have more money coming in than going out, your cash flow is positive. If it’s the other way around, you are in for some sleepless nights.
But for the most part when we think of cash flow we think of the amount of money to meet our commitments. That’s what this post is all about.
Cash flow is essential to any business but if you’re in retail, it is even more important. This is because your inventory is the life of your business. If it’s not managed properly it becomes the #1 factor that will really suck your cash flow and threaten the life of your business!
The big question is what can you do to prevent your inventory from eating up your cash flow?
Here are 6 hot pieces of advice which can help you stop your cash-flow-sucking inventory dead in its tracks…
Understand The Relationship Between Inventory and Cash Flow
Inventory is usually the largest purchase you will make. Therefore, you want to sell it off fast otherwise you are tying up cash you need to spend in other areas of the business.
However, even in retail, the 80-20 rule or Pareto analysis obtains.
This means that 80% of your sales is generated by 20% of your stock. At first you may want to celebrate this…until you realise that the remaining 80% of your stock is generating only 20% of the sales!
Let’s really understand this. 80% of your inventory is remaining on shelves in your store or in your storerooms represented by 80% of the cash you invested in that inventory.
In other words, if you spend $100,000 in stock and $20,000 (20%) is used to generate sales, $80,000 worth (80%) is now hanging around, waiting to generate $20,000 in sales.
The important question is how did this happen in the first place?
The answer to this is in my next tip…
Avoid Assortment Creep
A significant cause of the problem of having large amount of slow-moving stock on hand is something called assortment creep.
According to business know-how, assortment creep is the slow, steady, almost imperceptible addition of items and categories to existing merchandise and product assortments, which adds to inventory levels, but not significantly to sales, thus tying up valuable cash and diluting overall inventory productivity.
This is often driven by the owner’s desire to be everything to everybody or trying to offer every possible product that your customer might want.
At the foundation of this is a feeling, born out of your insecurity, that because you’re small, you must sell a little of everything to attract and keep customers.
A better approach would be to…
Develop a Purchasing Plan to Protect Your Cash Flow
A good purchasing plan is to first identify your niche and the key customers and their buying habits in that niche. You can easily get this information from you point-of sales.
Having established your sales targets for a particular period (you did, didn’t you?) you are now ready to “buy smart”. But before you build up your inventory, be sure that your forecast is realistic and based on sound data.
Now, when you invest in inventory, you should spend more on those items which are more closely aligned with the need of your customers and spend less on the other sources of your sales.
You can also support this approach by carefully selecting your other items from the 6 categories of items which every retail business must sell namely: Destination Merchandise, Image Enhancers, Transaction Builders, Traffic Builders, Profit Generators and Turf Protectors.
This will help your stock to move faster, help you achieve your sales targets, keep your customers coming back and reduce the amount of cash you have tied up in inventory.
If you still end up with too many of the wrong item, you can…
Reduce the level of inventory on hand
Some store owners hold on to slow or “non-moving” stock like some of us hold on to bad relationships. Mind you, I totally get it, after all, you bought that stock with love of the item and love of the customer in your heart.
But if you’re guilty of assortment creep and you end up with quite a bit of old, outdated, unpopular or dust-gathering stock, you’ve got to let it go.
Hold a sale and send these items packing. Not a joke sale but a real “ring- down” sale with prices slashed low enough to entice customers to buy and resulting in an increase in your cash flow fast.
In addition, it’s a great way to keep your regular customers. Nothing drive customers to the competition like regularly coming into a store and seeing the same old stock for an extended period.
You also need to…
Layout your store to impact your cash flow
Many small retailers do not readily make the connection between the way they layout their stores and display their goods and the impact on cash flow.
Walmart founder Sam Walton firmly believed that your store’s physical environment affects the ways in which shoppers interact with your merchandise, and that this ultimately affects how much money your customers spend.
Admittedly, a discussion on this would require a post on its own but here are two ideas to get you thinking.
Research shows that there’s a natural inclination in which most customers physically move through a store as they shop. They are inclined to move counter-clockwise which means that the space just to the right of the door is always premium real estate.
To impact your cash flow, this is the space where you will display your high-profit items. If you’re in hardware for example, this space is WASTED on paper rolls and toilet paper!
On the other hand, you should place your essentials as far from the door as possible. You want to increase the time your customers spend in your store and force them to cover as much ground as possible. The more ground they cover and the more time they spend, the more money they will spend.
And don’t forget to…
Manage your inventory to manage your cash flow
Managing your inventory does include monitoring and controlling the movement of items, especially through the point-of-sale, annual stock count and all the other obvious thing that you do.
But a really important aspect of effective inventory management is to improve your stock turn. Your stock turn or inventory turnover is the rate at which inventory is sold in a particular time period, mostly a year.
If you take too long to turnover your inventory, you have it hanging around and as I mentioned before this is a nightmare for your cash flow. There is actually a ratio you can use to calculate this.
You also want to be reviewing your monthly stock movement reports to spot buying trends of your customers. Being able to read evolving changes in your niches improves your buying decisions and of course, your cash flow.
You should also control access to inventory. By having just a few handpicked employees accessing inventory, you improve control and reduce pilferage.
Now it’s over to you…
I know you now have a better handle on the impact of inventory on your cash flow. Not only that, but now you have some good advice to help you reduce the impact of inventory on your cash flow.
It’s now entirely up to you to implement them and put more money in your pocket while improving the operations of your business.
Just remember that understanding and managing your inventory is critical to your cash flow and, ultimately, to your company’s profitability.
If you need help with improving your cash flow, just go ahead and contact me…I’d love to work with you.