Where’s the Cash? Tackling Inventory Management for Better Retail Cash Flow

22 JUL-AUG 09

Problem: Your accountant tells you that you have a net profit of say $50000 but your bank account says the exact opposite. And you feel pressure to start generating cash now.

It is unfortunately a not-atypical retail scenario one that occurs way more frequently than you might expect. It’s helpful to analyze the situation and see what options you might consider if this is happening to you.

Clara Peller made a name for herself in the mid-1980s doing commercials for Wendy’s hamburger chain when she asked “Where’s the beef?” The above scenario is the same idea but let’s call it “Where’s the cash?” A quick study of the two viewpoints shows us the same sales the same purchases and the same expenses. If everything is the same why then does the accountant think you are making money when there is no money in the checking account?

The obvious answer is that the cash is tied up in the unsold inventory. The following questions must now be addressed:

• How did it get there?
• What can be done to get it out?
• How can you prevent the same thing from happening again?

As we can see in both examples sales volume is the same as are purchases and expenses. The “cost of goods” calculation takes into consideration beginning and ending inventory whereas the checkbook shows only cash coming in and cash going out. Therein lies the problem. Clearly this retailer is purchasing more than he is capable of selling. The extra inventory carried on the books as an asset adds to the net profit and is therefore taxable.

The harsh “real world” fact however is that the store sold a million and spent a million-fifty on inventory and expenses and is now fifty grand in the red.

Unfortunately this is not an uncommon scenario. It is a larger problem than it has been in the past due to the economic challenges facing retailers at present. Your “friendly banker” may not be so “friendly” now when asked for a loan. In some cases the bank may even want more.

Collateral in order to extend lines of credit. In the eyes of the bank more collateral may mean more inventory because inventory to them is an asset. And now the real fun begins.

A retailer who finds himself in this situation needs to take immediate action.

The old saying that “Cash Is King” couldn’t be truer than it is today. So the first step in the process is to generate cash by reviewing all expenses and reducing and/or eliminating non-essential expenses. Examples might include renegotiating rents and reviewing payroll typically a retailer’s two most significant expenses.

Secondly contact vendors to see if payments can be pushed back an extra 30-60 days wherever possible.

Thirdly using your POS system run reports showing which vendors and models are not performing up to par and take action. That action could include returning goods for other merchandise in the future returning goods for credit marking slow movers down or offering SPIFs to employees to name a few possibilities.

With the dollars that will be freed up by the above actions reorder proven hot sellers especially in key sizes so sales don’t get missed and look for off-price goods to build traffic and margin.

To keep this scenario from recurring it is important for the merchant to discover what caused the cash crunch in the first place.

Certainly this year the lagging economy can be blamed for part of the problem. When fewer customers are buying less it obviously translates into lower sales volume.

Do You Need to Generate Cash NOW?

Ritchie Sayner

I would contend that the underlying problem stems from the store’s approach to sales and inventory forecasting. The answer to any of the following might uncover some flaws in the planning process:

• Are sales and stock levels planned at the classification level by store from the bottom up (healthy)—or are they planned from the top down beginning at the total company level (usually not as healthy)?

Are sales plans retrended at least monthly and adjusted up or down based on rates of sale?

Is there a markdown strategy in place—or are markdowns taken on an “as needed” basis when slow sellers become apparent or cash is needed?

Are slow movers recognized and dealt with in season?

Are deliveries actually scheduled based on when goods are needed—or are shipments allowed to come in at the whim of the vendor? Or do the shipping instructions read more like ship “as ready complete whenever”?

Are hot sellers identified and reordered in a timely manner?

Are open orders reviewed on a regular basis?

Are there open-to-buy dollars left in season to take advantage of promotional goods—or do these purchases get placed anyway while you hope for the best?

Those aren’t the only questions that need to be asked but asking them will get you focused on inventory flow which is a critical element in cash flow. Perhaps you recognize patterns in the above scenario that describe your business from time to time. If so the key is to recognize it identify the problem(s) and be proactive about finding solution(s). Problem-solving makes for good business.

Ritchie Sayner is vice president of business development at RMSA Retail Solutions which works with retailers to improve performance. He can be reached at RSayner@RMSA.com.

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Ritchie Sayner

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