Here is my article for the upcoming Auto-Star Newsletter. Let me know what you think.
Cash Flow, is the most serious issue retailers struggle with. Poor cash flow management is the #1 reason most businesses fail.
There are numerous items that can impact cash flow for retailers. These include loss prevention, debt management, tax planning, receivables management, and inventory management. Typically the majority of retailer’s assets are tied up in inventory, and while it is critical to generating cash, it also has a knack for consuming large amounts of available cash. The focus on this segment will be inventory management.
I have been through thousands of retail sites; some for personal shopping, and some for professional business. In about 5 minutes of walking through the store and the receiving area I can tell which retailers have too much cash tied up in inventory. The aisles and shelves in the store are cluttered and product maybe dusty. In the receiving area there are boxes of inventory stacked to the ceiling and possibly an offsite storage facility for more inventory. How much margin is lost renting storage space?
A few years ago I had a retailer who wanted to put me and our software system to the test. We chose the stationery section in his store as a starting point. There was about 8 feet of shelf space dedicated to this category and he had no idea if that was the appropriate amount of space. In addition, once a year the vendor allowed the store to return unused inventory for a 10% restocking fee. We counted the inventory, ensured his costs were correct, assigned bin locations, and started the analysis. We found 18% of the inventory in that category was driving 90% of the revenues. Usually you will see closer to the 80/20 rule but this was really an eye opener for the retailer. He returned over 70% of his items and reduced the shelf space to 4 feet for that category offering.
We monitored that store for a full year after the changes had been made. We found that sales in that stationery category jumped 200% with only half the shelf space allocated. Inventory turns shot way up and no longer was cash tied up in dead stock. Since then, the retailer has taken that process and applied throughout his store with great success. Cash flow has improved so dramatically they are now looking at building another store.
If you are overwhelmed with inventory and the process to get it under control, start small. Focus on one category at a time. Using vendor returns or markdowns, move that dead stock and create space for the money makers.
It is easy to get caught up in increasing revenue, achieving better margins, etc. Ultimately the goal is to make money by increasing net profit, while simultaneously increasing ROI and cash flow. Any of these three on their own are simple to achieve. The challenge is to ensure you do all three simultaneously. Increase your sales, decrease inventory and operating expenses and increase cash flow. If you achieve this you cannot fail.
