Not everyone is a shopaholic, but we all have a close connection with the retail stores in our life. They are the main point of purchase for almost all the necessities in our life; whether it is food, clothes, household requirements like furniture and utensils, to almost everything under the sun. Many of these retailers are small and medium enterprises with one or maybe a few store locations . There is a constant churning in this space where some of the most agile, well managed end up operating for decades, whereas others end up closing within a few months to a couple of years (unfortunately, most commonly the latter).
During the financial recession of 2008, retail stores were impacted to a special degree depending on the category of materials they were selling. During the early part of the last decade there was abundant growth and many stores saw healthy profits and an ever increasing demand from the consumers. However as the recession developed, the consumers immediately tightened their purse and reduced their purchases to bare necessities. We all saw a good number of stores close down during this period. On closer inspection the main culprit of this can be pointed to a single reason: CASH FLOW PROBLEMS.
For a retailer cash flow is the life blood of the entire store. This applies to a greater degree for smaller stores as they cannot handle the cash flow pressures of extra inventory easily. The retailers purchase inventory and stock it for a given period. They wait for the customers to purchase and pay for these goods to generate profits. Generally the purchase of inventory can be made on credit in most industries (mostly a standard 30 day account). The retailer might have to provide purchase of goods on credit in certain industries and others, may do so for loyal customers only. Hence managing the entire cash flow becomes vital so that the retailer can receive payments regularly from customers in order to pay back to the distributor as per their trade terms. If the retailer ends up stocking extra inventory (due to a lack of sales) this payment cycle could be greatly affected. Extra inventory requires extra space and extra maintenance. In order to get the cash back the retailer might be forced to announce discounts on this inventory, which results in reduced profit margins.
Hence bad cash flow management leads to: Extra inventory, dissatisfied distributors, discounts for recovery of cash, lower margins, and long term unsustainable operations.
If you are facing a cash flow problem the best way to solve it is to take it head on. One can apply Pareto Principle to solve this. It states that there is always an 80/20 rule in functioning of enterprises. That is: 80 percent of margins are obtained from 20 percent of products.
Make a list to find the products which provide least margins and have longest turnover cycle. This will give the retailer an exact list of products which are causing cash flow issues. Announce a sale on these ‘under-performers’ and get quick cash to invest in other products which have a lower turnover time.
The second major step is getting disciplined. If an enterprise is suffering cash flow issues, it is generally caused by superfluous investment or indiscipline. The customers should be politely asked to pay the bills on time or to reduce the credit facility for them as far as possible. The staff expenses need to be reigned in as much as possible without hurting customer service. Many retailers have a seasonal variation in demand. Demand might increase during the Christmas days or during hot summers depending on the products sold. Staffing flexibility is often required to ensure good customer service at all times, while maintaining low overall expenses, hence the high rate of casual employment in the sector.
In the end it can be said that long term success in this sector has a lot to do with the capability of the management team. If any issues creep up it is required that the owner/manager speaks candidly with all the parties involved: the customers, distributors, staff and also look at the functioning of other competitors. Sifting through all the information and feedback it is possible to get an exact action plan of how to solve any cash flow issues and have a long and successful enterprise.