Sales and the green monster
How business growth eats cash
With the 1912 construction of Fenway Park in Boston, a unique tradition was created for the iconic ball park with the addition of what was nicknamed, “the green monster”. Legend says the green monster, which is a wall in left field, was built to prevent people who had not bought a ticket from being able to see the game for free.
Even with the spring training field of the Boston Red Sox in Fort Myers, Florida, the tradition continues with a duplicate of the green monster in the same position. Attending a game there recently, this writer saw a connection between the green monster and your business.
When we as retailers get together and discuss our individual businesses, it seems the first measurement of comparison is that of sales.
“How have sales been for your store in the last year?”, goes the question. And with that, discussion participants add the results and explanations from their businesses.
There appears to be an unwritten rule that the “winner” is the business owner who can have the sales increase that is the largest and longest ongoing. While this seems to be an accepted practice for the discussion and selecting a winner, there is the potential for a sizable downside for the winner.
Unfortunately, many of us think that along with a sales increase comes the potential for an increase in the margin due to buying in larger quantities; there are to be some increase in operating expenses such as salespeople, delivery and installation, and a few others. The bottom line of all of this is that the bottom line of your income statement is going to look a whole lot better.
The theory is correct, and in most cases when the owner is paying attention to their operating expenses, the bottom line of the income statement is going to look better.
However, just like in Boston’s Fenway Park, there is a green monster looming out there for the business. There is a similarity to the green wall that while Boston’s version was designed to keep people from seeing what is on the other side, this improved income statement is hiding a green monster from the owner.
Unlike the Fenway Park green monster, when you understand the seriousness of the green monster in your business, you will definitely want to pay (it will cost a bit of your time; not money) to see what is on the other side.
The green monster of the retail business has another name; cashflow.
Having a profit is great, but the question is whether or not you will have the cash on hand to pay the bills as they come due. This is cashflow and you either have it in your business or you do not. The good news is that when poor cashflow can be fixed.
The cashflow (green monster) problem occurs because the sales increase requires that the business spend money before the income arrivers. The business is not going to suddenly increase sales with the same inventory. A sales increase is going to occur because of an increase in inventory; an increase in advertising; or a decrease in margin. All three of these change how much cash comes into your checking account.
Unless you are going to persuade your vendors, and employees, to allow you to pay your bills on a much delayed schedule, somehow your business is going to have to come up with cash to sustain the business growth.
You might consider going to the bank and borrowing money, however you will have to note that whatever interest rate the bank charges you is going to reduce the net profit on your income statement by a like amount.
Does this mean that a sales increase is bad for your business? Absolutely not! You are only going to make more money by one of these three: increasing sales, decreasing expenses, improving your margins, or a combination of the three.
As all experienced retailers know, you can only control expenses so far as well as increase your margins so far. The rest of the profit you are wanting to increase will have to come from increased sales.
The “home run” for your business occurs when you are able to plan the sales increase. This also means that you have to be able to calculate the increase in operating expenses, what your margin will be and with that information create a budget for your store. The suggestion is that you create a budget that projects twelve months in advance.
Once you have created the budget you consider how much cash you have on hand at the beginning of the first month and then look at what is going to affect the amount of cash on hand. While you add the profit to that amount, you have to also consider how much inventory you are paying for during the month. Also to be considered is the principle payment on any loan as that amount is not appearing on the income statement. The same is true for any depreciation as it is a non-cash item.
While stated in a very simple example, the resulting number is an anticipated amount of cash on hand at the end of the month. Perform this exercise for the twelve consecutive months and you have a twelve month projection of cashflow.
Are you seeing numbers at the bottom of this projection that are too low or a negative number? That is an indication of an oncoming cashflow problem. Now you are in a position of deciding if you want to control the sales increase or borrow money to cover the deficit.
At the ball game, it feels good being on the right side of the green monster; you get to enjoy some food and the game as you have paid for your seat. You don’t want to be on the other side of the green monster; only hearing the roar of the crowd as something exciting happens.
The same is true for the green monster of your business. You will want to be on the right side of the green monster where you can see what is going to happen. It is kind of scary being on the wrong side of the green monster in your business. You don’t want to be there.
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.