It is commonly believed that if your business is profitable, you are home free and fully inoculated against the business bogeyman known as bankruptcy. This is a great concept, but it just isn’t true.

Retailers universally agree that profit is the single most important commodity. Of equal importance however is positive cash flow. The only difference is that poor cash flow will shutter a business quicker than bad profits!

Cash flow is the amount of cash a retailer has at any point of time resulting from cash inflows (e.g., sales) versus cash outflows (e.g., payables).

Cash flow is not a measure of profitability; it only compares cash flowing in versus cash flowing out at any point in time.

Regarding profitability, you can lose money for a year or two but not go out of business. A loss year only reduces the net worth of a company. On the other hand, if you run out of cash and can’t make the payroll or your bank loan payment, then you will have to close your business or obtain additional paid in capital (cash).

Having sufficient cash allows the retailer to meet all cash expenditures. Profit on the other hand, is the profit or loss report card for a defined period of time such as a month or a year.

The typical sources of cash are paid in capital, profits and asset liquidation such as inventory. If there is insufficient cash to meet liquidity needs and if additional paid in capital is not available, then the retailer must borrow the needed cash from a bank or person.

For a retailer to keep the business liquid a cash flow analysis is needed much like an open-to-buy (OTB) budget is needed relative to inventory purchases. In the case of cash however, the budget becomes cash available to spend relative to anticipated needs.

The cash flow analysis is relatively straightforward. Typically, the plan is done in thirty-day increments and simply compares likely cash inputs such as sales relative to anticipated payables. Again, this pertains only to cash flow and not to profits.

As mentioned above, you can operate without profits for a year or two, but you cannot operate without sufficient cash.

To stay cash healthy, I recommend that retailers do the following:

  • Weekly post anticipated cash requirements versus cash inflows to a spreadsheet for a cash forecast. Automate the process preferably by using cash management software.
  • Have a plan in place to invigorate cash inflows whenever there is a cash shortfall looming. Assuming you have exhausted bank loans and additional capital, then you must liquidate slow moving inventory to generate cash.
  • Create a good banking relationship so that you can borrow on a short-term basis to meet your cash needs.
  • Strive to increase your inventory turns to four (4) turns, which theoretically represents a 90-day supply of all inventory.
  • Order less on large orders with extended payment terms in favor of ordering as needed with 30 days terms. This will increase your turn rate and therefore your cash flow.
  • Concentrate your purchases in the “A” item group (the 20% of items that produce 80% of the sales), the “B” items (the 40% of the items which produce 15% of the sales) and greatly reduce or drop the “C” items which typically consists of 40% of your items but only contributes 5% of sales.
  • Don’t use short term liquidity (cash) for long term capital purchases such as a new store, autos or computer systems. Take out a term loan for capital purchases.
  • Set up a progressive markdown plan for all items selling below expectations and whose “weeks of supply” is unduly elevated.

Remember that profits are great . . . but cash is king!