Cash Flow vs. Profits: The Ultimate Retail Dilemma

16 Ritchie Sayner

As a retailer what is more important to you profits or cash flow?

The initial response from most merchants posed that question is: “Profits of course!”

On the surface that answer makes sense; who wouldn’t want more profits? The mere word “profitable” itself evokes a sense of financial well-being. In today’s retail environment though profits alone are not enough; cash flow is the new financial reality.

I have reviewed countless profit and loss statements that showed extremely strong gross margin figures only to find out that the store had no cash. Since accounting does not factor in the element of time turnover does not appear on a profit and loss statement. Therefore the financial picture created by a “profitable” business with poor cash flow can be a false reality.

Recently a client came to us for a strategy to deal with a bank request. The bank wanted the retailer to produce an additional $200000 in cash not profits – cash. If you were given a similar mandate what would you do? Well hope is not a strategy and crying is not an option. To paraphrase Tom Hanks’ famous line about baseball from the film “A League of Their Own” there is no crying in retail. Three more practical solutions quickly come to mind: Cut expenses increase sales or cut inventory. Let’s examine all three.

Option: Cutting Expenses

Putting excess expenses on the chopping block is an obvious first step to save some cash. The problem here is that most retailers feel they have already trimmed expenses to the bone. If you have recently renegotiated your leases reviewed payroll costs and scrutinized the remaining administrative costs there may not be much left to cut.

Slashing costs too deeply can actually have a negative effect on business. Several “big box” retailers have experienced this recently as sales have been undermined by deep cuts in staffing and training. Prudence and caution are priorities when examining expenses.

Option: Increase Sales

Increasing Sales

Increasing sales sounds like a viable option but how? You can promote more but you might experience a margin hit which will most certainly raise a banker’s eyebrows. You could buy more inventory which might drive volume but the risk is that the cash problem could worsen if the additional stock does not perform as it should. You could advertise more but that would only increase expenses if the ad campaign didn’t pull enough customers in.

Option: Cut Inventory

The third option is to cut inventory. Cleaning out excess stock will generate more cash in the short term. The dilemma however is how to consistently build cash over the long term. I prefer the scalpel approach as opposed to the meat cleaver method. Anybody can slash and burn inventory and generate quick cash but the aftermath of kneejerk business decisions can haunt you for months to come. This is the very reason that I object so strongly to the marketing strategy of 20% off everything in the store or what is often referred to as “the lazy man’s markdown.”

This promotional approach does little to solve merchandising problems since the desirable items that could have sold at full price are the first to sell at discounted prices. Aside from a momentary bump in cash the downside is reduced margins and broken size runs. Worst of all the problem inventory is still a problem.

A Better Answer

Strategic planning is the answer. This means bottom-up dollar merchandise planning at the store and class level. Most often a retailer’s line of credit (LoC) is tied to inventory. A banker’s valuation of inventory is what he thinks he can liquidate it for given the outside chance that the bank ends up with the keys to the store.

The Value of Inventory

They get nervous whenever the word “cutting” is mentioned. Understand that to a banker goods that are a year or two old have the same value as merchandise that was received yesterday. In most cases (although not all) what the banker sees with regard to your inventory is only numbers on a financial statement. Given their reference point it is understandable though not always justifiable why a lending institution might require more collateral when stock levels are reduced. For that reason it is paramount that you keep the communication channels wide open with the bank if you depend on them for your LoC.

Demonstrate to bankers using sales and inventory reports that fresh “balanced” inventory has a better chance of increasing sales than simply having more inventory. It is also a good idea to have your banker visit your store and even attend a management or buying meeting. Treat the banker as part of your management team.

Cash Flow: The New Financial Reality

Ritchie Sayner
JUL-AUG 137357H_Layout 1 5/31/13 12:22 PM Page 16
Published in the Jul/Aug 2013 issue of Shoe Retailing Today copyright © 2013 National Shoe Retailers Association Tucson AZ www.nsra.org. All rights reserved.

Anyone working in the retail business longer than a week knows the positive effect that new products can have on sales when received at the proper time. Customers don’t visit your store to see what came in last year. It is the constant flow of fresh inventory that drives profitable sales. A strategic merchandise plan that blends inventory balance with properly scheduled deliveries and timely markdowns is the pathway to faster turnover which drives sales volume.

There are few problems in retail that can’t be remedied by increasing sales and cash flow. Hence my new retail math formula: Cash Flow + Sales Increases = No Problems!

Ritchie Sayner is vice president of business development at RMSA.

Retail Solutions

Contact him at RSayner@rmsa.com or at 816-505-7912. Retailers are invited to follow him on Facebook at http://www.facebook.com/RitchieSayner.

Dress-shoe sales hit their low in June and all five reached their high points in October except Oxfords for which December barely beat out October. That four-month time period is a critical one for dress-shoe retailers as they build inventories and adjust orders in advance of the final third of the year when 43% of the year’s dress-shoe dollars roll in.

From July through October last year loafers claimed 27% of all dress-shoe business followed by pumps with 23% and Oxfords with 17%. Margins hovered near a healthy 52% for all three. Similar to casual shoes this female-dominated category reached the widest gender split in October last year 83% to 17%. Inventory investment by dollars was 75% to 25% in October.

A Look at Brands Offers Critical Insight

One brand dominated athletic-shoe unit sales in the four-month period from July through October last year with 65% share according to Leisure Trends data. Second position went to a ballet company and its popular dance shoes. A variety of running brands occupied the next several spots with shares ranging from 1% to 3%. Retailers who subscribe to Leisure Trends data have fast access to brand and model information and can use it to evaluate product mixes across multiple categories.

Casual shoes had a more “equitable” representation of brands in the same four months with the top brand reaching a share of just 19%. The second-place manufacturer garnered 11% and the remainder of the top 15 had shares ranging from 2% to 5%. Each subcategory within casual had a strikingly different brand profile so it is critical for retailers to maintain a healthy brand mix and avoid betting heavily on just a few marks.

Among dress shoes the top brand barely pushed into double-digit share with 11%. The variety of brand representation here was even more pronounced than for casual shoes.

Few names were consistently at the top across the subcategories but after the top three or four brands the data show an eclectic mix.

Retailer Access to LT Data Is Easy and Free

Retailers who are NSRA members are entitled to free unlimited access to Leisure Trends data covering all categories brands and models in the independent shoe retailer market across a variety of metrics including units sold dollars sold cost of sales margin and units and dollars on-hand in inventory. Signing up is easy; contact Greg Shoenfeld at 303-786-7900 ext.136 gshoenfeld@leisuretrends.com; or Ben Pickel ext. 160 bpickel@leisuretrends.com.

Suppliers and manufacturers interested in subscribing to specific retail sales reports by category or brand and model may contact Julia Clark Day at 303-786-7900 ext. 107 or jday@leisuretrends.com for a free demonstration.

Other Liability Coverages include:

• Workers Compensation which covers your liability for employee injuries.
• Employment Practices which covers suits due to discrimination harassment or unfair employment practices.
• Employee Benefits Liability which covers you for errors made in administering an employee benefits plan.
• Business Auto and Hired/NonOwned Liability which covers liability relating to use of autos by the business.

In addition you should make sure policies are in place if you have exposure to liquor aircraft watercraft or director and officers liability.

Keep in mind one of the most important parts of liability coverage: It pays for your defense in addition to your limits. Believing that you did nothing wrong doesn’t mean you won’t get sued if someone claims you did. The costs to defend even a trivial or false claim can be substantial. Businesses have spent thousands of dollars defending themselves from wrongful discharge then in the end been found innocent.

Insurance Policy Review Recommendations

As an insurance provider I recommend that clients review their insurance policies at least annually and when they make any changes to their business. Talk to an experienced agent who understands not only your business but also your industry.

About Kristy Longfellow-Hodik

Kristy Longfellow-Hodik is co-owner of Hobson Insurance which has specialized in business insurance for retailers and pedorthists for more than 30 years. For more information or a free review of your coverages contact her at:

• Telephone: 800-296-7985
• Email: kristy@businessquote.com
• Website: www.businessquote.com

In upcoming articles Longfellow-Hodik will address loss prevention cost control and what to do in the event of a claim.

Liability Insurance

Continued from page 14

Sales Trend Notes

Continued from page 47

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Summary

In the retail industry while profits are essential cash flow has become the critical financial reality. Retailers often face situations where strong profits do not translate to sufficient cash leading to financial challenges. Strategic planning including expense management sales increase and inventory adjustments is crucial to maintaining a healthy cash flow and ensuring business sustainability.

“Cash Flow + Sales Increases = No Problems!”

Real-World Examples of Cash Flow Management in Retail

The importance of cash flow over profits is a crucial lesson for retailers. Here are some real-world examples that illustrate the strategies discussed in the article.

• A boutique clothing store struggling with cash flow issues decided to cut excess inventory strategically. Instead of a blanket discount on all items they focused on clearing out only the outdated stock which helped generate immediate cash without significantly impacting profit margins.
• A small electronics retailer faced a cash flow crunch and opted to increase sales through targeted marketing campaigns. By offering limited-time promotions on popular items and leveraging social media they managed to boost sales and improve cash flow without overstocking inventory.
• A furniture retailer needed to improve cash flow to meet a bank’s requirements. They conducted a thorough review of their expenses and identified areas for cost reduction such as renegotiating supplier contracts and optimizing logistics which helped free up cash without compromising customer service.

Discover Proven Retail Strategies!

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Ritchie Sayner’s renowned book:
Retail Revelations – Strategies for Improving Sales Margins and Turnover 2nd Edition.

This must-read guide is perfect for retail professionals looking to
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