By Peter Sheppard
Senior Deployment Consultant, Retail Doctor Group
Wow, who would have thought that the beginning of 2022 could be worse for retailers than the last two years? It turns out that with reduced retail traffic, which equates to unofficial lockdowns, supply issues abound in many categories and no government assistance packages are available.
In the most uncertain time in retail for many decades, it is tough to know what the future will bring, even in the short term. By that I mean, what will supply lines be like in one month, three months or more? What stocks will I have on my shelves? How do I plan my future stock holdings? What will consumer sentiment be and what will their willingness and ability be to spend? Will this unofficial lockdown/ slowdown continue and for how long?
These and more questions make planning for the future of a retail business more uncertain. Many small to medium-sized businesses are almost reaching the situation that they just do not know what to do.
For those that have longer product lead times like fashion and homewares, it becomes even more compounding.
So how should you progress into 2022?
The following is a logical and simple path to some sort of predicted future, with regards to the cash flow of your business.
- Forecast sales by week and month
The starting point is to predict your future sales by week and month: Apply your current data (is last year’s a guide?) and latest industry’s benchmarks, and general knowledge in intelligently ‘guessing’ at least the next 3 month’s forecast sales. Enter these weekly predictive figures onto a spreadsheet, at the top of a column for each week.
- Record your expenses
You then list your weekly and monthly expenses in priority order, such as wages, rent power etc.: Enter these below the sales on the spreadsheet as they are due to be paid.
- Calculate COGS (Cost of Goods Sold)
Enter your cost of goods sold during each period. This will be a figure calculated at the inverse of your gross profit achieved. I.e., The sales of $10,000 at a gross profit of 55% equates to cost of goods sold of 45% or $4,500: Enter this figure onto your spreadsheet. (This is an important number to know as it will provide you with a budget to maintain stocks. The worst thing that can happen to a business in tough times is to run out of best-selling or ‘core’ items.)
- Update inventory cost
Actively go to the market to secure fast-moving, must have stock items first. Wherever possible, negotiate extended trading terms. This is like the oxygen needed for your business to live!
- Calculate Gross Profit
Subtract items 2, 3 and 4 above from your sales figure. If there is a positive number at the bottom, you will then have the peace of mind that for that period, week or month, your business is sustainable. If that figure is negative, some action will be required in the short term to either realistically increase the sales forecast (implement actions to increase sales) or decrease the outgoings.
- Plan ahead
Therein lies your management skills and plan of attack to get you through. One of the most common actions is to reduce stockholdings, which is a source of cash. However, be aware that if you do not replenish your best sellers, the business will suffocate and deteriorate further.
While this simple plan will not solve the issues we face, it will at least provide you with a picture of your likely cash position in the short term. Your cash position will either provide some comfort or indicate that action is required to improve the short-term liquidity issues.
Not knowing the future is a huge cause of the concern and anxiety we all experience. By doing this simple cash flow exercise, we will start to realise the extent of trouble that the current circumstances have placed us in. In many cases, the outcomes can be managed by knowing in advance what needs to be done to navigate through these uncertain times.
Do not get blinded and stagnate, the tough get going in times like this.
Should you wish to have a chat and get some assistance with this process, please do not hesitate to give our Deployment experts a call and let us help you identify and rectify your business concerns. RDG Deployment division is well versed in maximising cash flow opportunities during tough trading times.