Ebbs and flows are a natural part of running a retail business, and it’s not uncommon for your cash flow —or encounter a downturn–at certain times of the year.
Managing these dips and upswings can be a challenge: making sure there is enough cash available to maintain operations while also satisfying customer needs. However, keeping tabs on your cash is crucial for the success of your small business.
Preparing for increases in business
Not holding enough cash for a strong uptick in sales can mean inadequate inventory to support customer needs or too few employees to provide services. Both result in a poor experience that may deter customers from doing business with you in the future.
Consider the busy holiday retail season. For many retailers, November and December bring a large increase in sales volume, which can either make or break a business’s yearly revenue expectations. If you don’t increase inventory for this time, or fail to maintain enough hourly workers, you may not be able to meet the uptick in demand. Here are some hypothetical scenarios:
Not enough inventory
A toy storeowner doesn’t budget enough money for inventory during the holidays, so instead of purchasing enough stock to meet his sales forecasts he decides to allocate a large portion of cash to hiring extra employees. When Black Friday comes around, his store only has 30 units of the latest toy craze, a modern take on the Furby. Upon open, customers rush the store, clearing out stock almost instantly. Additional customers later inquire about the toy, only to be informed that all stock has been sold out for hours.
The owner estimates that, had there been enough stock, the store would’ve sold around 300 units. That 270 unit difference between what was sold and what could’ve been sold represents lost revenue. Furthermore, customers who traveled to the store expecting to purchase the toy were disappointed. Next year, they’ll shop elsewhere.
Not enough help
Imagine the same store in a situation where the owner decides to purchase much more inventory of the popular toy at the cost of two extra employees for the Black Friday rush. Now, down two employees, the store can’t stock its shelves fast enough to meet customer demand. The same employees responsible for checking people out are meant to restock shelves, clean the bathrooms, answer the phone, and keep things running. The busy store descends into chaos with long lines of customers and empty shelves.
You can see from each scenario how poor cash-flow planning negatively impacts operations when business increases dramatically. In lies the importance of stowing extra cash when business is not as hectic.
Preparing for dips in business
The dangers of not budgeting for a downturn are a bit clearer. Say you own an ice cream shop in New York that does most of its business from June to August. Come September and October, you’ll probably start to see a gradual dip in sales as the weather cools and when December and January hit, you may see sales come to a near halt.
A lack of cash flow may result in not being able to pay employees, rent or heating and electricity bills, and in a worse case scenario, may even require shutting down operations. Storing extra cash during the summer months, in this example, when business is booming, should provide the ice cream shop with enough liquidity to get through the slow winter.
Seasonal changes aren’t a problem if you’re prepared for them. Here are some tips to help you manage fluctuations in cash flow:
- Perform a cash flow analysis: A cash flow analysis is a means of looking at how cash is moving around in your business over time. One of the most important numbers to observe during a cash flow analysis is working capital, or, the money used to conduct day-to-day business operations. If your working capital is too low, you may be forced to shut down operations.
- Project your cash flow: Projecting how your cash flow is going to change in the near future allows you to prepare for sudden changes such as a large decrease or halt in incoming cash.
- Build a budget: Building a budget helps curb excess or unnecessary cash outflows. Monitoring spending through a budget is the best way to meet savings goals and create an emergency fund for your business
- Put any non-essential spending on pause: When cash flow stalls, you’ll need to decide which spending is absolutely essential to the life of the business. Determine these avenues and cut off all extra non-essential spending.
In the event your business doesn’t have enough cash on hand for either situation, applying for a form of cash flow finance is a common recourse that offers a bridge to a more regular sales cycle.
You can dig deeper into the financing options available to your retail business here.