Retailers of all sorts spend the month of January evaluating their previous years’ business performance. Christmas sales make such a contribution to a retailer’s year-end bottom line that any serious evaluation must wait until the holiday numbers are in. Some retailers find themselves sitting on a pile of cash in January that they use for getting current on bills, paying down debt and buying new inventory. Others find that their financial “hole” has only gotten bigger, and they frantically search for a way to keep treading water until business turns around. Such is the life of a retailer.
For those just coming off a successful year, the plan for the current year is often “just keep doing what we’re doing.” Makes sense to me. If the economy is stable, your customer base is growing, competitors aren’t eating you alive and cash flow is good, keeping the course is probably a good plan.
But that’s not often the case, is it? After all, this is retail. Whether you sell in a bricks-and-mortar store, online, in a mall, a flea market or show venues, we’ve come to understand that over the course of a year the bottom line is written in red ink more often than it is written in black ink. “Black Friday” is the day our profits go “into the black” (hopefully) and the rest of the year we’re seeing red.
But the funny thing about profits (even when we have them) is that they’re not always in cash. Too often we look at January’s financial statements and see that we have made a profit for the year but our bank account is empty. Where did the cash go? Inventory, for one thing. If you’ve got inventory that has been sitting on your floor for most of the year, that’s where your profits are: In your inventory, instead of as cash in your bank account. January 15 is the day that estimated income tax payments are due. Try getting the IRS to accept your Adrian Pearsall chair as payment for your taxes. It won’t work; the IRS only takes cash (unless they seize your assets, which they will then turn into cash).
Your landlord probably won’t take goods in trade, either; or your insurance carrier or the power company. But you already know that, and if you don’t have any cash but do have a lot of bills due you probably don’t want me rubbing it in.
My apologies; I feel your pain. Cash management was a lesson that I had to learn the hard way as well. When I was in business back in the Days BC (before computers), I paid out somewhere in the mid-five-figures over the years to glean this information from CPAs and “business consultants.” The problem with most of the advice I was given was that it was “boilerplate.” The advisers had no concept of the antiques business. They didn’t “get it” that we can’t just pick up the phone and order another gross of 1965 Kentucky Derby mint julep glasses. They didn’t understand that we often spend more time chasing down inventory to sell than we do selling the inventory.
But I did walk away from my “close encounters with consultants” with two valuable tools: A cash flow statement and an open-to-buy inventory plan. The cash flow statement enabled me to look ahead to when I might expect a shortage of cash so I could plan what to do about it before the wolf was at the door. The open-to-buy plan kept me from buying more inventory than was needed to support healthy sales. The result of having these tools was that I had a leaner inventory and more cash in the bank. With a leaner inventory, my inventory turned faster while sales remained at budgeted levels. The result was more profits. Combined with a cash flow plan, more profits meant more available cash, which put a smile on my face and helped me sleep better at night.
To use these two tools, you need monthly budgets for sales, expenses and debt repayment. Having those presupposes that you have bookkeeping software that generates timely monthly statements. If you’re paying your bills monthly (like most of us), you can’t effectively plan cash flow using quarterly statements. If you do so, you will be constantly looking backward saying, “Oh yeah, I remember that I didn’t have any money to pay bills back in March” or some such thing. Timely statements (within two weeks of receiving your previous month’s bank statements) are imperative. With today’s online banking, getting your bank statement the first few days of a month is pretty easy.
To point you in the right direction regarding getting your own cash flow statement and open-to-buy plan set up, I’ve found a couple of videos that I think are worth watching. Most online accounting videos seem to be laced with chloroform; they put me right to sleep. These videos are easy to understand (but have some coffee ready just in case).
You can find cash flow statements here
and open-to-buy plans here
Once you understand the basic principles involved you should be able to easily create your own statements. If you have trouble with the concepts, there are free templates available from SCORE www.score.org/resources/business-planning-financial-statements-template-gallery or your accountant will be glad to charge you to supply you with the information and worksheets. Better-quality small business accounting software packages have these planning tools built-in.
This whole cash flow/open-to-buy exercise is about having enough cash when you need it. With sufficient cash in the bank, you can stay in business even if sales take a brief nosedive or if you get sick or your store floods. It all starts with planning, and a clear understanding of where your cash goes. It’s always better to work things through on paper in advance than to be backed into a corner with no place to go but bankruptcy court.
Without proper planning, your business, your sanity and your bank account are at risk. Retailers need realistic projections of where they are headed, a strategy to get there and contingency plans if things go awry.
Hope is not a plan. As the Cheshire Cat said to Alice in Through the Looking Glass, “If you don’t know where you’re going, any road will do. ”
Previously published by Antique Trader Magazine
Originally posted 2014-02-09 13:12:00.