Money in the Bank
Separate your money as it comes in.
Published in the December 2011 issue.
“So if I’m making money, how come there’s none in the bank?” Bet you’ve asked yourself this question more than once! Especially when told you owe more money to the IRS than you have available.
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In retail you tend to receive sale proceeds straight away and not have to pay expenses until later. This can be dangerous.
LET’S LOOK AT IT IN TERM OF THE BIGGER PICTURE FOR A TYPICAL STORE FOR ONE MONTH:
GROSS SALES: $80,000
COST OF SALES: $40,000
GROSS PROFIT: $40,000
EXPENSES: $37,800
NET PROFIT: $ 2,200
THE FOUR MAIN FACTORS THAT AFFECT YOUR CASH FLOW ARE:
How you get paid — cash, credit cards, layaway or on account
How you pay — in advance (you own the stock), memo (the vendor owns the stock)
How you manage your purchases or reorders
Unexpected/unbudgeted expenses
See how quickly your cash flow can be affected using the example above. Even though the sales and expenses may happen as listed the cash flow can be totally different:
cash in: $60,000 (as some large items sold on layaway)
purchases : $40,000 ($25,000 cash paid for memo goods sold last month and $15,000 for other items purchased last month that are due for payment this month)
cash left: $20,000
expenses : $37,800
net cash flow: -$13,800
Even though you made a small $2,200 profit, your line of credit has gone up by $13,800 … and that’s assuming your expenses didn’t increase and you didn’t purchase any more than you sold at cost.
This highlights how many businesses run into cash flow problems because they forget about their future cash-flow requirements.
The best way to understand this and manage it better is to separate the money (cash) into two piles as it comes in. One pile is the cost of goods sold, which is the money you need to pay for the goods you have sold (or the replacement ones). The other pile is the gross profit, which is the money you need to pay wages and rent.
If you don’t separate them, you will inevitably use some of your gross profit to buy additional, unbudgeted stock, thereby robbing yourself of net profit for your retirement and lifestyle needs.
The COGS pile can be managed using an open-to-buy budget, and the gross profit pile is managed using an expense budget tool such as QuickBooks.
Cash flow and profit is a doubleedged sword that must be managed carefully if you want to avoid creating financial problems. Seek advice from a financial pro before making major decisions in this area.
About the Author
David Brown is President of the Edge Retail Academy, an organization devoted to the ongoing measurement and growth of jewelry store performance and profitability. For further information about the Academy’s management mentoring and industry benchmarking reports contact Carol Druan at carol@edgeretailacademy.com orpPhone toll free (877) 5698657
Edge Retail Academy, 1983 Oliver Springs Street Henderson NV 89052-8502, USA