Why is cash king? Just ask Dick Smith

By Peter Cox May 10, 2016 Money Matters

Hardware and trade stores are retailers – you get a product in, mark it up and sell it hopefully for cash but, for trade stores, generally on account.

From a liquidity point of view, the generation of cash in the trade industry in particular is a lot harder than other retail stores. I will explain why later in this article.

Cash is king in retail and the cash crisis in Dick Smith’s stores earlier this year shows what can go wrong when retailers allow inventory levels to explode and working capital (current assets less current liabilities) gets out of control.

A good measure to check your liquidity position in a hardware /trade store is the Cash Cycle. The calculation towards establishing your Cash Cycle involves three key components:

Days stock on hand + Days debtors outstanding – Days creditors outstanding = Cash Cycle

Take this case study from a typical hardware or trade store:

  2014 2015
Sales $6,000,000 $6,500,000
Cost of sales $4,000,000 $4,550,000
Purchases $3,900,000 $4,400,000
Average Stock $1,000,000 $1,300,000
Average Debtors $450,000 $540,000
Average Creditors $520,000 $600,000

First we calculate Stockturn:

  2014 2015
Cost of sales          $4,000,000 $4,550,000
÷ ÷ ÷
Average Stock $1,000,000 $1,300,000


4 xpa

3.5 xpa

Now we move on to calculate the three components needed to establish this store’s Cash Cycle.



  2014 2015
365 days per year 365 days         365 days        
÷ ÷ ÷
Stockturn 4 xpa 3.5 xpa

Days Stock on Hand

91 days

104 days



  2014 2015
Average Debtors $450,000 $540,000
÷ ÷   ÷
Account Sales* (*50% of total sales) $3,000,000                $3,250,000               
x 365 x 365 x 365

Days Debtor Outstanding

55 days

61 days



  2014 2015
Average Creditors $520,000 $600,000
÷ ÷ ÷
Purchases $3,900,000         $4,400,000      
x 365 x 365 x 365

Days Creditor Outstanding

49 days

50 days



Now to calculate the Cash Cycle for this hardware / trade store:

  2014 2015
Days Stock on Hand 91 days 104 days
+ + +
Days Debtor Outstanding 55 days 61 days
Operational Cycle 146 days      165 days       
Days Creditor Outstanding 49 days 50 days

Cash Cycle

97 days

115 days


What this shows is that in 12 months the cash cycle of this store deteriorated by 18 days.

For me, the Cash Cycle is the best indication of the underlying health of a store because it shows how well management is managing cash flow on a day by day basis.

For a hardware or trade store I would aim for less than 90 days, so obviously, using this rule of thumb, our example store has problems.

An accountant can always tell you where the problems are, based on past results. But a good business advisor or owner/manager should have the strategies to look ahead and improve into the future.

Hardware and trade stores get into trouble because they run out of cash. There have been many companies who report profits but have cash flow problems, because they have an issue with working capital.

If you do not manage this sort of problem (which will be the subject of my article in future issues), you will have liquidity problems and in this respect we can all be thankful of the low interest rates at present.

Businesses that are making sales and profit probably think that everything is OK.

But, if these sales and profits are not being converted to cash, then any business may well need to borrow to pay suppliers and overheads.

Remember – working capital is not directly linked to profitability and “cash is king”.



Peter Cox is a senior consultant for Macquarie Advisory Partnership based in Sydney. He has over a decade of experience training and consulting in the retail hardware industry. He conducts 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. Phone 0061 438 712 200 or visit www.petermcox.com.au

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