Managing cash flow and inventory is part art, part science. For small businesses that derive a significant chunk of their profits during the holiday season, not keeping enough inventory can result in loss of sales to competitors, while keeping too much leads to fire sales of merchandise at the end of the season. Smaller retailers and wholesalers need to walk that tightrope between meeting increased holiday demand and keeping inventory costs low to maximize profits that will help sustain them through the next high season.
According to ShopperTrak, modest gains in 2012 holiday sales and foot traffic are expected, but that doesn’t mean entrepreneurs can afford to be complacent. “Small retail businesses need to start preparing for the holiday season at the beginning of the year,” notes Scott Berger, tax and entrepreneurial services principal at South Florida-based Kaufman Rossin & Co. “Start by projecting cash flow to be sure you have the means when it’s time to place orders.”
For smaller retailers and wholesalers, a line of credit can help manage the lag in cash flow from accounts receivables or payables. But, as Berger points out, “it’s a lot easier to get credit when you don’t need it.” Vendors, just like banks, are reluctant to extend credit if your business is not profitable. But having a line of credit when you don’t necessarily need it also gives your business more purchasing power.
“How far in advance you can begin stocking for those seasonal sales will largely depend on cash flow availability and terms worked out with vendors,” explains Berger. Ordering early and in bulk often garners discounts and more favorable terms, like being to wait until after the season to pay for inventory or the ability to return a certain percentage of unsold items. However, buying early does run the risk of tying up cash in unprofitable or obsolete inventory.
But how to know when and what to buy is a particular challenge for small retailers, who don’t want to hold too much inventory since carrying costs can quickly eat into their margins. “History is a good indicator of what you can expect for sales,” notes Berger. “But these have been challenging economic times, so it’s important to keep your finger on the pulse of what’s happening.” Berger recommends attending trade shows, talking with “friendly” competitors, and meeting with your vendors to gauge demand and trends.
While keeping on top of industry and market trends will help you figure out what’s selling this season, past sales results can also be a good indicator how much inventory you should keep. “Small retailers often have repeat customers, so they know what the demands are,” Berger points out. “If you properly forecast sales, you should be able to properly forecast purchasing.” The best way to minimize inventory costs is to keep inventory levels at their lowest during slow sales times. Berger advises any inventory-driven business to have computerized, perpetual inventory systems tied to their point of sales system or register. “The better the internal controls, the better the profitability when it comes to inventory,” notes Berger.
When to start stocking up for the season also depends on the terms you’ve negotiated with your vendors. “You must understand the turnaround time from your suppliers to know how fast orders can be filled and refilled,” notes Berger. Running out of “hot” items during the peak season translates to empty shelves and missed sales opportunities. But keeping too much inventory can tie up cash. “In retail, there’s an adage that your first markdown is your best markdown,” explains Berger. “Retailers discount inventory early and often to reduce carrying costs and make room for new, hopefully more profitable, inventory.”
An inventory-driven business should identify their top-selling items to make sure they never reach ‘out of stock’ condition, cautions Berger. In addition, he recommends writing down or disposing of items that have not sold in the last few quarters. It’s also critical for small retailers to monitor their financials throughout the year, particularly when business is brisk. As Berger points out, “cash flow and inventory go hand in hand.” So how you manage one affects the other. “Owners of small retail and wholesale businesses know their merchandise and know how to sell,” says Berger, “but they need to focus as much on managing back office as the front.”
Berger’s Holiday Budgeting Tips:
Keeping on top of cash flow: Begin budgeting cash flow for next holiday shopping season at the beginning of the calendar year and track cash balances closely during the run-up, particularly during the busy months when opportunities for error or theft are higher. Last year’s holiday profits should carry you through the slower months. Bill and collect as quickly as possible if you don’t operate a cash business. Secure a line of credit from bank or vendors.
Inventory management: Review inventory on a regular basis. Move out items that aren’t selling to make room for the upcoming holiday season’s hot-selling items. Manage purchasing so your business can meet higher demand for popular items during holidays. Have staff and systems in place for more precise inventory management.
Vendor relationships: Work out the best terms you can with vendors. Renegotiate deals, if necessary, to meet your cash flow and inventory needs. Small wholesalers need to push for timely collection on any outstanding receivables to have cash available to pay their vendors. And small retailers need to look for discounts where they can get them (e.g. purchasing early or in bulk) and ask for the most favorable purchasing and payment terms to keep cash liquid.