I am going to outline a very typical retail scenario, one that occurs way more frequently than you might expect. Once the problem is described, we will analyze it and see what you might consider if this were happening to you.
Problem: Your accountant tells you that you have a net profit of let’s say $50,000, but your bank account says the exact opposite.
Where’s the Cash?
Why 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 ot get it out? How can we prevent the same thing from happening again?
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 you are purchasing more than you are capable of selling. The extra inventory is carried on the books as an asset, is added to the net profit, and therefore taxable. The harsh reality, 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.
This is not an uncommon scenario. However, this 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.
A retailer that finds him or herself 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. 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 to 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 spiffs to employees. With the dollars that will be freed up by these 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.
In order to keep this scenario from reoccurring it is important for the merchant to discover what caused the cash crunch in the first place. Fewer customers buying less obviously translates into lower sales volume, but I would contend that the real problem stems from the store’s approach to sales and inventory forecasting. Your answers to the following questions might uncover some flaws in the planning process.
- Are sales and stock levels planned at the classification level by store from the bottom up or are they planned from the top down beginning at the total company level?
- Are sales plans retrended at least monthly and adjusted up or down based on rate 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?
- 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 and you hope for the best?
Perhaps you recognize patterns in the above that describe you from time to time. If this does happen to you, the key is to recognize it, identify the problem and be proactive about finding a solution.
Ritchie Sayner is Vice President of Business Development for RMSA Retail Solutions. Contact Mr. Sayner at rsayner@rmsa.com, or 816-505-7912.