Cash is King – How to manage your cashflow as a Retailer

September 11, 2014

Antony Welfare - Cash is king

The management of cash will make or break a business – businesses fail due to lack of cash, not lack of profits; therefore managing the cash and the bank account is extremely important.

The retail industry is a great ‘cash’ industry that most industries would be jealous of, due to its ability to manage to a positive cash flow situation. This means that as a retailer (in certain sectors) you can retail products that are bought by the customer before you have paid the supplier – this is called positive cash flow, as you will have the money in the bank from the customer before you pay for the products you just sold. Since the financial crisis this has been much harder to achieve, but striving to achieve a positive cash flow is a great target.

The way to manage to a positive cash flow situation is to set up your suppliers’ payment terms for a longer period than you need to sell the item; for example, if you negotiate payment terms of 60 days with your supplier and you sell the product to your customer for cash on Day 30, you will have 30 days left before you pay your supplier. Of course, to make this happen you need to have a trading history, a good credit record and be able to sell the majority of your stock sooner than you pay the supplier.

Whichever method you use to manage your supplier relationships and customer relationships, you need to manage cash on a daily basis. A simple reconciliation each day of your sales revenues and your costs can easily ensure you know where you are with your finances.

An example cash flow statement is below:

Antony Welfare - Cashflow

In this example cash flow, we started the period with £5,000 in cash in the bank and made cash sales of £10,000. We then paid the rent and ended the period at £10,000 cash in the bank. This was then rolled forward to the next period and we then spent £2,000 on staff expenses leaving £8,000 in the bank.

As you can see, this simple model will ensure you can monitor and manage your cash – at the end of any period you should be able to reconcile the Balance carried forward figure easily to your bank balance and any borrowings you may have.

Planning your cash flow from Day One will help you understand your peaks and troughs with regard to cash. Most retailers have seasonal peaks and, in the main, this happens at Christmas (for example an electrical retailer will make 60% of their profit and sales in the three months from November to January). Managing cash during the quiet periods could be challenging, as there will be times of the year when sales are very low, but you still have to pay monthly bills etc. Planning this in advance will allow you to approach your bank and ask for a flexible loan or an overdraft – most retailers will use flexible financing through the quieter sales periods.