5 Common Sources Of A Retail Store's Cash Flow Leakage

When small retailers encounter problems with their businesses, the issues usually involve a lack of sufficient cash. It is not enough to assume cash flow is lacking simply because sales volume has declined. In most cases, the root cause of the problems are more complex.

The challenge for independent retail shop owners is to find ways to maximize their stores' profitability while ensuring they have access to ample cash flow. This is not a simple task. It requires reviewing every facet of their businesses, including payroll, margins, inventory levels, and more. We'll take a closer look at these and other common sources of cash flow leakage below.

Scheduling employees is an ongoing challenge for a lot of independent retailers. You need to have sufficient staff at the store to accommodate customers. At the same time, every additional hour worked by your employees adds to your payroll expenses.

One method of determining how many people you need on any given shift is to base your payroll budget as a percentage of sales volume. As sales volume declines, so too should your aggregate payroll costs. While an imperfect formula, this helps to conserve cash flow rather than wasting it through unnecessary labor.

Your margins are a direct reflection of your retail store's profitability. Unfortunately, there are several factors that can cause them to shrink. For example, if your suppliers raise prices and you neglect to raise your own, profit generated from each sale will decline (assuming other costs remain equal). Or, if you aggressively mark down merchandise in order to move excess stock, your margins will likewise erode.

Declining margins reduce your cash flow. The cost of each sale remains the same while the profit made from each is lower.

Inventory remains the most costly asset on a small retailer's books, and it causes more going out of business sales than any other cost. While it's true that merchandise on hand is the driving force of sales and profit, it is equally true that most independent retailers have too much on hand.

This problem develops over time. Often, the store owner is unaware that her inventory is growing to the point of consuming the majority of her cash flow. By the time the problem becomes clear, there is too little cash to survive. The result is aggressive markdowns, which erode margins (as described earlier).

Keep a lean inventory, and avoid wasting cash on merchandise that may not sell through. This requires good planning.

A surprising number of independent retailers operate their stores without a clear plan for sales, expenditures, and inventory needs. Without proper forecasting, there's no way to know how much cash is needed for any given period, nor how much will be available throughout the period. The retailer is essentially operating blind, even though the day-to-day sales volume remains static.

A lack of planning exposes you to unnecessary volatility with regard to cash flow. The longer (and more accurate) your forecasts, the fewer bumps you'll encounter along the way. Do you know how much stock you'll need during the month? Do you know how much you'll need to spend on payroll, insurance, lease payments, and utilities for the month? Are you planning for seasonal sales, when volume tends to be heavier than during other times of the year? Review past sales and cost data, and plan as much as possible.

Investing in your retail business is important. Whether you're implementing a new point of sale system, renovating your floor space, or making upgrades to your store's website, it is important to avoid falling behind competitors. However, it is doubly important to know that your investments will yield a positive return. After all, they require cash flow, which is your most valuable resource. Before making each investment, ask how it will contribute to your retail shop's sales and profitability.

Cash flow leaks have a devastating effect on small retailers. The problem is, they are often difficult to identify. Consider the five areas above, and look for ways to conserve the most important asset you have at your disposal.