Every company depends on cash to survive. Whether you borrow it or earn it, you need cash to pay your employees and your suppliers, cover overhead and buy inventory. Often companies have a limited amount of cash, so they need to make some critical decisions on how they use it. Every business owner knows that cash is THE critical element for success in any business. The challenge is figuring out where to employ your cash to the greatest advantage.
Many business owners are concerned about having enough cash to satisfy the regular overhead expenses that sustain their company. Two critical needs of any business operation are employees to do the work and a place for the business to operate. But, in addition to employees and offices, companies need product to sell. Some companies end up being inventory rich and cash poor because they have either overstocked their warehouses or stocked the wrong items. Inventory turns provide a measuring stick to manage inventory levels.
The hardware store was located in an industrial park. Its business depended on the manufacturing businesses near the store. The owner had finished his MBA, and acquired the business using a government loan. Performance of the store had declined prior to his purchase, and the new owner decided to reduce inventory as a means of increasing inventory turns and improving cash flow – his operational interpretation of what he learned while in school. Unfortunately, this resulted in less inventory to sell, and traffic in the store continued to drop over time as the shelves became more barren. His decision to retain cash rather than serving his customer base laid bare the true course of his business. In a retail environment, even where the consumer appetite has waned, a retailer needs to put his money visibly on the shelves, rather than hiding his cash in his mattress.
Being inexperienced in a retail environment, the owner felt he would supply out of stock items within 24 hours from a nearby distributor. But this eliminated the primary reason why customers came to the store, which was to buy items to fill an immediate need. Although some customers started placing orders over the phone, this dramatically reduced complementary purchases, further reducing sales, and eliminating the high margin impulse buys at the counter.
With years of declining sales, the existing staff had lost their enthusiasm for maintaining the store and serving customers. The result was that changes to the store layout weren’t implemented, and even staffing was erratic with workers coming and going at all times during the day.
Even though it is important to have cash in a business to cover ongoing expenses, nothing happens unless and until customers buy something. It is the exchange of cash for merchandise –sales – that grows a business. This obvious tenet is sometimes lost if the business owner is focused on one narrow aspect of their business – in this case, conserving cash. Many businesses hold onto old inventory, because it cost too much to discard, actually lose money by keeping it on the shelf. Selling it – at any price – provides working capital for the business by enabling the purchase of new, vibrant product.
If employees aren’t interested in serving their customers, and the store shelves are empty, there is little reason for customers to return. Every business needs to understand their unique value proposition. Why do customers come to them? Serving an immediate need and getting customers in and out quickly would keep customers coming back. The store needed readily available inventory; with employees whose sole purpose was to put it in the hands of time pressured customers. Convenience and customer service are sometimes more important than competitive pricing. Understand your customer and revise your business practices to meet their needs. In the end, they will make sure that you have sufficient cash to pay your bills.
Our people are unique CFOs. They are all operationally
based financial executives.
Created Custom For Your Company By an Experienced CFO