If you ask retailers, "What's the best way to improve cash flow?", almost every one of them will answer, "Raise sales!"
Consider this retailer, who contacted us a few weeks ahead of his largest vendor putting him into bankruptcy:
"There's something wrong here. My sales are up in all three stores, and we had our best profit in years. But, I can't pay my bills on time."That owner suffered from not knowing that profits and cash flow are NOT the same.
Plus, raising sales in an attempt to solve a cash flow problem may actually worsen cash flow! (Sadly, that's exactly what happened to that now ex-retailer.)
How to avoid this fateful - and potentially fatal - fallacy? Follow these 4 steps.
- Understand the cause-effect connections of the financial levers in your business.
- Focus on the controllable variables in your retail business, especially inventory.
- "Turn on your financial headlights!" Use The ROI's online 3-in-1 INTEGRATED Cash Flow Calculator.
Use it to play"what if...?" with different sales plans, margin assumptions, and turn rates.
See in advance which combinations will get you the outcome you want. - And remember, in a crisis, if you have to choose between profits or cash, always choose cash! see more
