5 factors that can damage your cash flow

Don’t let poorly managed cash flow damage your business. For product businesses, cash flow is incredibly important and is much harder to manage than for service-based businesses. With the need to outlay a significant amount of money on purchasing stock, carefully managing your cash flow is absolutely vital for your business' survival.

1 BUYING TOO MUCH UPFRONT

The quickest way to damage your cash flow is to commit to too much stock before you know if a product will sell.

If you are introducing a new product or range into your business, it’s important to start small. It might be that you want to add a new type of supplement to grow your range; instead of buying six or seven types just try one and see how it reacts and then repeat and add more to your range at a later date. The important thing here is to avoid a sudden change and introduce a whole new range untested.

If you are buying from a new supplier for the first time to add a new brand into your shop, you should try two or three of the brand’s best sellers. Talk to the sales rep and ask what the best sellers are and start with those.

Try to negotiate payment in stages or introduce new products or ranges by agreeing a trial payment structure. Once you’ve seen how the buyer reacts to them you can decide to buy more. This is a much better approach than buying a whole new range from a particular brand when you first want to introduce it.

Make sure that the demand matches the supply; being in a position where you need to order more stock is more manageable than dead stock. Some suppliers or manufacturers will require you to order a minimum amount, but be wary of getting caught in the trap of ordering more stock to meet those minimum order quantities and then end up with more than you can sell.

One tip is to buy products on a trial basis. Wherever possible, buy less volume until you have proof it will sell. Starting off slowly is a necessary means to ensure long-term success.

2 BUYING TOO MUCH FOR YOUR SALES

Dead stock is stock that you have invested in but are not selling. While you may want to feel more secure having stock to sell, are you aware of what the right amount is? Take time to assess what sells before taking a risk in investing in products without a credible sales history.

Looking at your analytics can be invaluable for this. If you’ve got an EPOS system that provides analytics on the types of products that you sell, you can use this data to understand so much more. You can take a look at the mix of products – to avoid having too much stock in one area you can run the analysis and can see if vitamins, for example, make up 10% of your sales yet they have 20% of your stock. This highlights an underperforming area in which you can effectively reduce stock levels. Keeping up-to-date inventory logs enables you to do this kind of analysis.

Once you are aware of what the demand is, what works and what doesn’t, create a more precise plan. This means setting clear stock budgets and targets. If these are based on a realistic plan, they will help ensure that you have enough stock without eating up too much of your profits.

When you have a budget and targets, you can see how well you are doing based on how well you stay within budget and on target. Having a plan also forces you to be really clear about whether or not you are on target – and if you have a rule that you can’t bring in more stock until you are back below target, it will avoid stock piling up in your business.

3 TAKING ON TOO MANY COSTS IN YOUR BUSINESS

It is easy to allow costs to creep up on you. Adding a few things here and there seem harmless at first but add up very quickly to become a budgeting issue if not dealt with properly. How often do you review what is really necessary? There are probably a few things that you could get rid of that would help alleviate spending costs.

In order to avoid those creeping costs, take notice of what is happening. For every cost that is added in, be very clear on how many products you need to sell to generate the profit needed to cover that cost. Review if that goal is realistic and attainable. Is it worth it?

A great habit to introduce is printing out your monthly bank statements and then go through each line circling every business-related cost. Then you can decide which costs you can feasibly cut or reduce. When was the last time you got a quote for your business insurance? When did you last go through all of your utility bills and check if those can be reduced by changing supplier?

Another area where costs can creep into your business is subscriptions! We all do it, sign up to a publication and then never get around to reading it, or a software package that never gets used. My message here is make sure every cost going out from your business is needed. If costs are tight go through your expenditure with a fine-toothed comb taking a closer look at anything that isn’t 100% essential.

Once you have dealt with the extra costs, and set realistic goals, you can start looking at where you can cut back. Cancel all the subscriptions you do not use, for example. Keeping your overheads to a minimum gives you more flexibility.

4 NOT HAVING CLEAR TARGETS

Unclear targets are perhaps the most easily avoidable causes of damaged cash flow. Not knowing how much stock you should have, or what your planned sales are, make it very difficult, if not impossible, to effectively manage your cash flow. Budgeting is vital, and without goals, setting budgets cannot be done as you do not have a clear set of priorities for what needs to be allocated and when.

Map out your cash flow! To do this carefully, you need to be clear on how much you are going to sell and how much stock you will be buying in. The ideal situation is that you map out your sales and expenses by week so you can easily see what your future cash flow position is going to be. When selecting products to stock, think hard whether you are presenting an opportunity for incremental sales or cannibalising existing sales.

People often avoid making forecasts of their sales because they’re worried they’re not going to get them right, but having a forecast isn’t about getting the forecast right all the time – it’s the act of mapping it all out – so if in a particular week your sales are higher than expected you can see what that will mean for additional cash flow. And if your sales are lower than expected, you can see the impact on your cash flow.

A cash flow tool that breaks it down on a weekly basis maybe easier to use for business in a day-to-day way than if you are looking at a monthly cashflow statement prepared by an account. So, if at all possible, don’t wait for your accountant to tell you what your cashflow position is. Have something in your own business that you can refer back to and give insight into whether or not you are going to have enough money in your bank to cover your bills, for example.

This will also help you have a clear budget on how much you can spend on stock. If you are placing re-orders or purchasing new products – you will be able to see instantly if you have got enough money to buy those products instead of being unclear about what your budget it is.

Once you know what it is you want to achieve and how to properly manage it, only then can you know how to do that effectively. Trying to manage your finances, without these clear guidelines, will only make managing your cash flow that much more demanding.

5 NOT MAKING ENOUGH ON EACH SALE

Even if you are selling well, if you are not making enough money on each sale after all expenses (including your time, if you make products yourself) then you will struggle enormously with your cash flow.

The higher your percentage margin (the percentage of the product price that is profit), the easier your cash flow will be. If you are buying products from another brand, you should be achieving around 50% margin. When was the last time that you checked exactly how much you are making on every sale?

Have a target rate of sale for each product or range – forecast what you expect to sell and model your profit. It may be beneficial to mix faster selling lower margin products with slower selling more expensive higher margin items.

One area you can look at is negotiating the price you pay. For example, if you are placing a large volume order, always ask if you can have any kind of volume discount, or does your supplier offer any kind of discount for loyalty or for repeat orders?

Make sure that you are not under-pricing your products, and that your prices reflect what your product is worth, the market that you are in and what your customers are prepared to pay.

Any work that you do to improve your profit margin on your products will pay huge dividends in terms of managing your cash flow.

Being aware of these five factors is a great first step to taking control and improving your cash flow. If you need any more advice, get in touch to find out how I can help.

Catherine Erdly is Founder of Future Retail Consulting and can be reached via email, [email protected], or at www.futureretail.world where you can arrange a free, no obligation 20-minute discovery call.