Cash Flow Management
Cash is the lifeblood of your business. So it’s important that you keep it flowing.
You can get by with less inventory than you’d like; you might need to buy from a distributor what you need to complete a deal or move a customer to something you have in stock, but you can manage. If you’re short a sales associate, you can always jump onto the floor yourself or have salespeople on hand move among several customers. But without the cash to meet your payroll, pay your bills and continue to invest in your company, you’re doomed.
That being said, most independents and custom retailers start their businesses on a shoestring, and they’re often still undercapitalized years later.
I worked with a retailer who finally tired of putting off his vendors. He decided to put a $400,000 mortgage on his building to recapitalize his business. Unfortunately, within six months, he had spent the money he’d borrowed and found himself in much the same place.
How does money disappear? Where does it go? You’d think if you have $100,000 in sales, you’d generate $100,000 in cash. You’d have to pay your Cost of Goods on those sales—let’s say, $62,000—which should leave you $38,000 to pay your expenses. But it doesn’t always work that way.
First, in a given sales period, the sales you make don’t always generate an equivalent amount of cash. The more custom work you do, the less cash you’re likely to collect at the time of sale. Some will go into Accounts Receivable, which you’ll have to collect from the contractor at a later date.
In addition, your Cost of Goods Sold won’t usually reflect the actual cash you’ll need to expend to clear your payables. In some cases, you’ll receive extended terms from a supplier, enabling you to buy (and sell) now and pay later. In other cases, you may have to pay for inventory items before they are installed or sold. Most dealers have in their warehouses a significant amount of inventory that they’ve paid for but haven’t sold or delivered.