By Gene Siciliano
In today’s challenging economic environment, it’s more important than ever for retailers to have a firm grasp on financial management.
When all is said and done, there are a handful of financial management questions that every retail store owner should always know the answers to after the business financials have been put in the drawer for the month. Here are what I consider to be three of the most important retail financial management questions. Notice that I ask the questions but I don’t provide the answers, because none of these are “one answer fits all” questions.
1. How much does each product you sell really cost you? The fact is, if you lose money on every item you sell, it’s really hard to make it up on volume. I am amazed at how many retailers figure their all-important Gross Profit on a product by deducting from the selling price only the direct costs of manufacture or purchase. Often this is calculated for an entire department, or even entire factories, rather than for the individual product itself.
Unfortunately, this is rarely the true cost of a product you sell. Consider the costs to receive, package, warehouse and deliver the product. How about servicing the warranty on its performance, or the development cost if it’s your proprietary product?
2. How quickly does your inventory revolve, or turn over, during a year? Funny things happen to inventory that doesn’t move quickly. It disappears, breaks or becomes old, obsolete or generally unusable. Or it just gets misplaced or lost, to be found soon after you’ve bought more. Or the market price comes down and you have to mark it down to sell it. All of these results take money out of your pocket without giving you any benefit in return.
The first step in preventing all these things from hitting your bottom line is to know how quickly your inventory turns and to note any changes in that rate. This is step number one in preventing inventory losses, to be followed closely by step number two: refining the overall turnover rate to an item-specific turnover rate, at least for high-cost items. Why the detail? Because expensive items that don’t move may be hidden by fast moving commodity items on your floor that have much lower margins.
3. If your business does what you expect it to, when will your cash reach its highest and lowest points of the year, and roughly how much cash will that be? Everyone seems to agree they’d like to know these answers in order to better plan for short-term borrowing needs or explore investment opportunities in advance. And yet few retailers believe they can get the answer in any way that’s reasonably reliable or cost-effective.
Many track cash flow by following net income and the bank balance, neither of which is going to be very useful in predicting future cash needs for most retailers. Capital asset purchases; growth in inventory, receivables and payables; debt service; capacity expansion—these can all have a profound influence on future cash balances. The good news is that all can be reasonably predictable with a little work.
About the Author: Gene Siciliano, CMC, CPA, is an author, speaker and financial consultant who works with CEOs and managers to achieve greater financial success in a dramatically changing economy. As “Your CFO For Rent” and president of Western Management Associates, Gene has spent more than 20 years helping his clients build financial strength and shareholder value through applied knowledge and process improvement. Gene also helps non-financial CEOs and senior executives understand finance and apply it to their companies and careers. His best-selling book, “Finance for Non-Financial Managers” (McGraw-Hill, 2003), and his new book, “Financial Mastery for the Career Teacher” (Corbin, 2010), are both available in bookstores and online. More information and articles are available at http://www.GeneSiciliano.com.