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Coping with a cash crunch

The challenges can be seen before the occur

One phrase that is sure to be spoken by every retailer at least once in their lifetime is, ‘If I had known that was going to happen I would have ordered differently’.

Generally that phrase is spoken after having examined the balance of the business checking account as the retailer finds that hindsight causes them to rethink a decision they have made. It may be a situation where the retailer did not order sufficient inventory because there was concern for a potential shortfall in the checking account.
The other scenario occurs where the shortfall does occur in the checking account and the retailer has inventory they need to instantly convert to cash so they can pay their bills.

Neither of these situations are desirable; they represent missed opportunities all because of a misreading of the current and future cash position of the store.

While there is no magic wand to be waved that can prevent a cash crunch, there is a tool you can create for your business that will allow you to have the ability to accurately predict your cash needs. With this tool you can accurately predict the amount of inventory your business will have for each of the next twelve months. In short, with an investment of an hour or so each month, you can change your business model from that of reacting to what has happened in your business to a scenario where you are planning what will happen in your business.

What is this special tool? This column mentioned in the previous issue of Smart Retailer, a format for your profit and loss statement in which you added columns to provide you more information about your business. In addition to the dollar amounts, it was suggested your having columns for percentages, same month last year, year to date, year to date last year, budget for the month and budget for the year to date.

Contrary to a rumor of retail, creating a budget for your business is quite simple. All you need are your last twelve profit and loss statements, a pencil, and a couple of hours.

The exercise requires your looking at each item on the profit and loss statement, and after careful consideration, writing down your expectation for that same item next year. You would do this for sales, gross margin, and all of your operating expenses. Within a few minutes you have created your best estimate of what is going to happen in that month of the following year.

In the last article it was illustrated that by arranging your operating costs into groups – advertising, occupancy, payroll and other – you can more easily get a clearer idea as to what is happening in your business.

In the budget you are creating, you can again look at these groups of expenses to see if they are within the guidelines it will take to make your business profitable.

If you have taken the time to set a goal of a certain percentage of sales as your net profit, this budget will allow you to see if that goal is achievable. While creating the budget it is important you look at each item individually for each month. As you create the budget you will likely have only a few items that are the same dollar amount month after month. The same can be said for your gross margin. It is unlikely a business is going to have the same gross margin for each of the twelve months.

Items that are a fixed dollar amount each month could be the rent or mortgage payment. The majority of expenses are going to vary from month to month. Your heating/cooling expense is going to be higher in the summer and winter. Your payroll is likely to be higher in December or in the summer months if you are a shop at a seasonal resort. The key is that you are taking the time to think about what happened last year and what you expect to happen next year.|

Of course, you are making a prediction for something that is twelve months away; a lot can happen between now and then. That is why you used a pencil. After a couple of months of sales, the prediction is only ten months out. Plus you have two more months of experience that can help you to make adjustments.

The adjustment can be repeated every couple of months up to the time you have ordered all of the merchandise for that month. At that point your biggest commitment, purchasing inventory, has been put into action.

The math to creating this plan is going to be as easy as it was to create the budget. Starting with the budget you created, the number you first need is the dollar amount in your checking account at the start of the exercise.

Add to the checking account amount the net profit for the first month’s budget and the cost of goods sold. Subtract the amount of inventory you paid for during the month as well as subtract the principle part of any loan payments you make.

The resulting number of this exercise represents the amount of cash you are expecting to have in the checking account at the end of the month. The cash on hand at the end of the first month is the same as the cash on hand at the beginning of the second month. The exercise repeats for the second month and every month through the entire year.

As mentioned, all of the exercise is written with pencil. With the budget you have created you can calculate what will be the inventory turn rate for the next twelve months. If the calculated anticipated turn rate is out of line, be it too high or too low, you can review the budget to see where you can change your planned inventory purchases.

Of great importance is your looking at the anticipated cash on hand for each of the twelve months. This article cannot tell you what that dollar amount should be. Only you can determine the dollar amount that you are comfortable with. If the amount in any month is lower than what you need it to be, then you have the time between now and then to do several things.

There may be expenses that you could decrease or eliminate. You could look at the way you are pricing merchandise to see if there are areas where you could extend your margins. You may have to decrease the amount of inventory you have ordered. Another option may be to arrange for a line of credit for your business.

The solution is likely to be a combination of several of these; rarely is there a single solution to any challenge in a business. Very important to note is that this challenge is somewhere in your future. You have been put on notice that the challenge is coming. You know how big the challenge is and as is likely the case, how long the challenge is going to last.

Comparatively, your performing this exercise is somewhat like that of an automobile. Without this tool you are riding in the car; with this tool you are in the driver’s seat. As the owner of the business, isn’t that why you got into business to start with.

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This article is copyrighted by Tom Shay and Profits Plus Solutions, who can be reached at: PO Box 1577, St. Petersburg, Fl. 33731. Phone 727-464-2182. It may be printed for an individual to read, but not duplicated or distributed without expressed written consent of the copyright owner.
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PO Box 1577
St. Petersburg, Fl 33731
(727) 464-2182
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