As usual, given the time of year, it’s timely right now to regroup and get ready for the next 12 months.
The perennial problem in this retail industry is cash flow.
Of all retail industries, this industry has multiple complications in managing the operation financially from the following aspects:
Cash flow is the key for business survival. There have been countless books and articles written about business success and failure, yet the real key is the cash cycle.
The calculation should take just a minute to complete and the information should be available from your Point of Sale system.
(If your Point of Sale system is not calculating stock turn per product I would suggest you should look at obtaining a new one. Stock turn per product should be on top of the shopping list in the selection process.)
Let’s use a theoretical case study to demonstrate. (Please note right now that it is important to use averages over the last 12 months.)
First we need to calculate Stock Turn:
($ Cost of Sales last 12 months ÷ $ Average Stock)
$10,000,000 ÷ $5,000,000 = 2 xpa (times per annum)
It is hard to visualise Stock Turn so the easiest way to interpret the result is to do another simple calculation.
Days Stock On Hand:
(365 Days ÷ Stock turn)
365 ÷ 2 = 183 Days
Now you will know as well as I do that, unlike nearly all the other retail operations in your town, you do not necessarily receive cash on the day of the sale.
No other retail industry to my knowledge, particularly in the trade area, has a higher percentage of account sales.
You could look on it from the perspective of, having finally sold the product, now the challenge starts – that is, collecting the “cash” from trade and commercial customers.
The calculation which covers this is as follows:
Days Debtors Outstanding:
($ Debtors Outstanding ÷ Account Sales x 365 Days)
$500,000 ÷ $4,000,000 x 365 = 46 Days
Given this store takes 183 Days to turn over the stock (Days Stock On Hand) and takes another 46 Days to collect the account (Days Debtors Outstanding), its Operating Cycle is therefore 229 Days – well over half the year!
From this result, to calculate the Cash Cycle you need to consider how quickly you pay your suppliers.
Days Creditors Outstanding:
($ Creditors Outstanding ÷ $ Purchases x 365 Days)
$800,000 ÷ $7,000,000 x 365 = 42 days
The Cash Cycle for this hardware retail and trade operation is the Operating Cycle of 229 Days minus the Days Creditors Outstanding of 42 Days = 187 Days.
I have always worked on a Cash Cycle benchmark of 50 Days…
With this case study, like all retail hardware and trade stores, the simple fact is, the longer your Cash Cycle is, the less chance you have of staying in business!
When was the last time you calculated the Cash Cycle for your business?
Even if you do this calculation just once a year, it is a good guide to how you are really performing.
Fortunately, in Australasia we have had a continuance of low interest rates.
However, as sure as the sun follows the moon, I can assure you that this will not continue.
So, it is important at the start of your new financial year that you are in the right position from a cash flow perspective.
Peter Cox has spent over a decade training and consulting in the retail hardware industry. He has conducted key-note addresses, and management and sales workshops, which are aimed at improving profitability and liquidity in one of Australasia’s most competitive retail environments. Visit www.petermcox.com.au