How to improve cashflow and increase sales
Published 13/02/2016 | 00:00
Q I HAVE a retail business and I'm struggling to keep on top of my cash flow, what am I doing wrong?
A Cashflow is often referred to as the life-blood of a business. By managing the money that is coming into and out of your business well, you will keep your business alive and allow it to thrive. However, even the most profitable business ventures will fail if they run short of cash.
If you are experiencing cashflow problems you are certainly not alone. In fact, cashflow is one of the most cited reasons why more than half of Irish businesses fail in their first four years.
Here is an example of how we helped one of our clients in the retail industry improve cashflow and increase sales in their business:
Our client had a very profitable retail cash business but were constantly at the top of their overdraft and could not see a solution to their problem. When we started to work with them, one of the first things that stood out for us when analysing the numbers, was the high level of stock held -this was the core of their problem. This particular company held over €500k of cost price stock, their belief, as with most retailers, being that they needed to have stock in place just in case.
We conducted an inventory check and found that over €350k (70%) of the stock was on hand for over 12 months. Therefore the bulk of the businesses profit was tied up in stock, and in reality 60% of this was now out of fashion and unlikely to sell at full price.
We also identified, when reviewing their sales figures, that our client was purchasing stock that they felt people wanted as opposed to what people were actually buying. For example 27% of the value of stock was one particular type of product, however this product was only 11% of sales.
The key strategy employed was to put in place a new purchasing policy to identify their A/B products - those that sell and have the best margin, and stop ordering C/D products.
Purchasing was reviewed weekly as opposed to the previous ad hoc strategy of waiting for the salesman to call. We also renegotiated credit terms with our suppliers from on average 45 days to 60 days, which gave us more time to sell the inventory and reduce our Cash Gap liability.
Year on year, we helped our client to reduce the amount of stock on hand held at year end by 27%. Their gross margin also increased by 11% from 56% to 62%. We also reduced the amount of days spent in overdraft from 198 to 76 days.
Our 10 key ways to improve cashflow in a retail business are:
1. Conduct regular stock-takes and review your purchasing on a weekly basis.
2. Measure your best selling & highest margin products.
3. Stop purchasing those 'hard to shift' products.
4. Implement a strict purchasing policy.
5. Reduce old stock and increase your cash-flow by having a stock clearance sale.
6. Contact your suppliers to renegotiate your credit terms in order to give you more time to sell stock and reduce your cash gap liability.
7. Examine your cost base on a monthly basis and implement cost-cutting measures, this goes hand-in-hand of boosting your cash flow
8. Pay bills as close to the due date as possible without incurring late fees.
9. Determine the break-even cost for products or services, and ensure you set pricing accordingly.
10. Perform pricing surveys of competitors on a regular basis and consider using loss leaders to entice customers in the door.