The sales receipts show that you had a good month and your expenses haven’t been too out of line. In fact, the books show that you actually made a small profit in what is otherwise a slow month. However, here it is once again at the beginning of a month, and you have a negative balance in the checking account. The reason isn’t related to profits—it’s cash flow. This is the bane of the retailer. Where many beauty stores falter is that they hyperfocus on profits rather than cash flow. There is, of course, nothing wrong with profits—it’s what pays your salary. But properly managing your cash flow ensures that you have money when you need it, and you don’t find yourself in the red at inconvenient times.
What is cash flow? It is simply the movement of liquid money in and out of your establishment. A P&L statement will show you how much money you made and all your expenses. A statement of cash flow, on the other hand, gives you an indication of what money you have at any given time. It captures real money that is moving to and from your bank account.
Think of it like this. At the end of any given day, you may have a report that shows you had $5,000 in sales. Of that, assume that $1,000 was in cash, $3,500 was in credit cards, and the remaining $500 was made up of sales to friends and family who told you they’ll pay you by the end of the week. Depending upon when your credit card processor settles the batch of your credit card sales, even though you may have had $5,000 in sales, you really only have $1,000 of cash in hand. The rest is waiting on the credit card processing and your cash- strapped family and friends to settle up with you. If on this same day, you had $8,000 in payments that went through your bank, you have a very negative cash flow for the day.
Taking the attitude that it will all catch up one day and everything will be alright could be why you find yourself short at the beginning of the month. But don’t fret; there are some steps you can take to improve your situation. Here are eight suggestions to more effectively manage your cash flow.
Establish a Budget
Some store managers become lackadaisical as the years progress and forget about one of the most basic accounting functions—the budget. Perhaps they’ve been doing it long enough that they have a sixth sense about money moving in and out of the business. But this often masks the true situation, and they are typically the ones without money in the bank when they need it the most.
Setting and sticking to a budget is the best way to manage your cash flow. By now you’re probably able to forecast sales fairly closely for each month of the year. You also know what bills are going to be due soon. Preparing a monthly budget assures that you keep track of all the expenses you expect for the month,and that you have the funds to sufficiently cover those bills while leaving you with an excess of cash to start the next month.
If you’re already setting a budget each month, make sure you have a line item for contingencies—usually 10 percent of your monthly expense is enough to cover the unforeseen circumstances that can occur. For example, you may not have included in one month’s budget that one of your cash registers would go down. Getting it repaired and replaced as quickly as possible is important and, unfortunately, expensive. A contingency budget allows you to incur that expense without too much hardship to the bottom line. And, if you don’t use your contingency fund for the month, carry it over to the next, giving you more profits by the end of the year.
Keep Tabs on Inventory
As you probably know, about 80 percent of your sales come from 20 percent of the products sitting on your store shelves. But what if you could get 80 percent of your sales from 30 percent or more of your products? It is possible, if you’re properly managing your inventory. Some stores leave products on the shelves too long, hoping that one day a customer might just need that item.
If you haven’t sold a single item from one particular product line in four months or the sales are paltry at best, get rid of it. The shelf real estate is too valuable to have poorly selling products taking up space. Replace those with something that will sell. Also, if you see that something is selling remarkably well—such as products catering to multicultural clientele—by all means, research this category and stock more of those products.
One area that can kill your cash flow management is accounts receivables. If you’re currently allowing certain customers to pay when they can, ultimately you’re hurting your ability to pay bills or even make payroll. Remember that cash flow relates to money you have in hand. If you make a sale, but allow the customer to pay later, you have essentially lost the products and don’t have money to show for the loss of those products. This presents a negative cash flow.
Having to follow up and track down these payments is also a costly endeavor. If you spend just one hour a month attempting to collect past due payments, think how costly that is. What else could you have done in that hour to make the store more money? Most customers will understand if you tell them that you can no longer take IOUs. They realize you have a business to run with narrow profit margins. Some may balk at this new policy, but very likely, they have been the ones you have had to contact repeatedly to get paid.
Here’s where you can really impact your cash flow. Look for ways to save the store money, no matter how small those savings are. Over time, they add up. One area that often gets overlooked is insurance. You’ve probably had the same agent and carrier for years. Shop around. Getting quotes from competing insurance agencies is free. If you can’t find a lower cost for the same coverage, great! You have an awesome agent. But it you do find a lower price, give your current carrier a chance to re-evaluate what they charge you for insurance—especially if you have only a few or even no claims. You may be surprised how much you can save.
“Setting and sticking to a budget is the best way to manage your cash flow.”
Similarly, negotiate lower credit card fees with your provider. You may assume that they’re all the same—around three to five percent—but what other fees and minimum monthly charges are they sticking to you? Often you’ll find other credit card processors are willing to give you an introductory rate just to get your business. After a year, look for the next company that will do the same thing. This can potentially save you thousands of dollars over 12 months.
Also, work with your suppliers to ensure you are getting the best deals possible. You may find that some are willing to drop delivery or truck charges just to keep your business. Every business you work with from window cleaning to maintenance and from giant vendors to the smallest supplier want to keep your business. All you have to do is ask for discounts and reduced fees. Many are willing to do what they can to continue working with you.
Maintain Cash Reserves
Admittedly, this is harder to do than most of the items presented here. It’s easy to say save money, but difficult to achieve. However, if you do implement many of the suggestions given, you will save your store money. As those savings add up, avoid spending recklessly and put some funds aside. This will help you when you find yourself in a negative cash flow situation.
Offer Customer Incentives
Most of the tips provided so far have been about how to save money, but making money is also a way you can achieve a positive cash flow. Use buy- one-get-one strategies, loyalty cards, email blasts, seasonal opportunities, social-media tactics, sales on low-selling products and other moves to increase your sales dollars.
Use all the marketing ideas you have at your disposal to get customers into the store and leaving with bags full of items. Combining an increase in sales with a decrease in expenses is how the good stores become great stores at managing their cash flows.
Know Your Tax Payments
It’s a necessary evil of running a business—taxes. And there are a lot of them. There are payroll taxes, state sales tax, local sales tax, property taxes, income taxes and even taxes for just being in business. They come at regular intervals and no matter how behind you get on your bills, these payments must be paid. Even if you get so far in debt that you have to declare bankruptcy, the taxes you owe do not go away. Bankruptcy will not absolve you of these payments.
Therefore, know what taxes you owe and when. After a year or so, it’s fairly easy to determine how much you are going to owe to any particular agency. Make certain you are accurately reflect- ing these payments in your budgets.
Stretch Your Payables
It may seem hypocritical to suggest collecting receivables promptly from your customers, and then say that you should try and avoid paying things right away to your vendors, but this is business. The ultimate goal of managing cash flow is to increase the amount of money coming in, while reducing the amount going out at any given time. Even if you have already negotiated excellent rates with your sup- pliers, you can also put off to tomorrow what you would have paid today.
For example, many vendors will let you pay your bills to them 30 days after you receive their products or services. Take advantage of that. If there is no penalty for paying 29 days from today, then do just that. If they permit 60 or 90 days, again avoid the temptation to get the bill off your desk.
Conversely, some suppliers will give you a discount if you pay early. In those cases, don’t delay. If a vendor is offering you a 10 percent discount if you pay upon delivery, then increase your cash flow for that purchase by 10 percent by paying right away. Some may give you a five-percent discount for paying within 30 days; or any combination of discounts to get you to pay early. Those are the ones you pay as soon as possible so that you can reduce your expenses. It may not seem like much on a single invoice, but if it’s a supplier who makes regular deliveries, those savings over a year can add up quickly.
Managing your cash flow is not a sexy topic for store managers. It takes effort and it can be frustrating at times. As you’re managing the store’s finances, always try and think in terms of how much liquid money is moving in and out versus what the sales and expenses look like on a report. Real cash on hand is much better than a dollar figure on a piece of paper.