Cash is king: Planning cashflow

Over the last few years we have been used to comments such as credit is necessary. And now we hear industry leaders talk about the two core disciplines of retail being control of working capital management and control of cash.

Cashflow management is essentially the difference between all the money that is spent by business (outflows or uses of funds) and all of the money that flows into the business (inflows or sources).

The principal benefit of good cashflow planning is that it helps you run your business on your own money. This can reduce the interest costs of short-term borrowing that eat into your profits.

Ideally your business will be in a cashflow positive (ie. more money coming in than going out) than a cashflow negative (more money going out than in) position over the course of the trading year, allowing for some seasonal trends that affect cashflow, such as inventory purchase peaks.

Calculating your cashflow plan has three basic parts: 1) cash coming in; 2) cash going out; 3) the difference.

How to project cashflow

• Start with the amount of cash on hand – your current bank account balance(s) plus actual currency and cash.
• Make a list of anticipated inflows – forms of income, collection on bad debts, interest or investment earnings, etc. List not only the amount, but also when it will be coming in.
• Make a similar list of anticipated outflows – payroll, monthly overhead, payments on accounts payable or other debt, taxes payable, equipment purchases, marketing expenses, etc.
• Track these movements on a simple cashflow spreadsheet that captures these first three points (cashflow budget).

A cashflow budget is the best tool for keeping a tight handle on the flow of funds into and out of your retail business. Unfortunately, many retailers don’t consider this budgeting a top priority for themselves.

Simply put, it doesn’t matter how much money is coming in the future if you don’t have enough money to get from here to there. Employees can’t wait on payments. Your landlord doesn’t generally like waiting to receive their rental payment, suppliers may not be willing to extend your credit any further and you may not be able to purchase the inventory you need in order to sell.

Making a cashflow plan is one of the less exciting parts of being a business manager. It takes time, effort, and discipline to create and follow your plan. But greater profits – and especially more peace of mind – will prove your efforts were well worth it.

One of the most important lessons retailers have to learn, sometimes painfully, is that cash really is king. Or another way to say this is that cashflow is king.

Brian Walker is Managing Director of Australasia’s leading retail consultancy, the Retail Doctor Group. For more on Retail Doctor Group’s Fit for Business program email businessfitness@retaildoctor.com.au or phone 02 9460 2882.