I decided to share this article in follow up to my earlier article on end of season clearance…
The reason why most retailers are keen to clear old stock it to get the cash back into the business. We all know that cash flow is critical…
“I own and run a very seasonal business and have to invest in stock well in advance of sales to merchandise my store. Have you got any advice how I can better manage cash flow when buying in advance of the demand?”
The answer is that tt is very difficult for a seasonal business to manage cash flow in the pre-season buying period. There are a few strategies you can adopt to help.
1. Place a commitment order and then manage stock flow and therefore cash flow by call-off
Agree a total quantity with the supplier for the season, as a commitment, but only place the orders you need when you need them – so in the first instance just enough to cover your merchandise display quantities and a little extra to cover for early sales (the sales you would make between merchandising the product and the next order quantity arriving). You may still be committed to the whole season quantity, meaning you have to purchase the stock at some point, but at least the phasing is less loaded to the start of the season and the cash is spread a little more throughout the on-sale period
2. Agree an approximate requirement with a supplier and then order based on forecast demand
Better still, agree a flexible commitment with the supplier – such that you can cancel out of a proportion of the estimated requirement, or indeed increase on your pre-season estimates, to enable you to reduce any risk of high end of season stocks if a line doesn’t perform as well as you’d expect or conversely if a line does very well you can keep it stocked throughout the season and ensure you don’t lose sales.
3. Secure a proportion of your range on sale or return agreements
Possibly the best approach is to find some suppliers who will offer a sale or return – completely reducing your risk – it is highly unlikely you’ll be able to get a sale or return agreement across the majority of your assortment, but anything you can get it on of course is well worth having!
4. Negotiate extended payment terms with the supplier, or, put forward a good business plan to the bank
One alternative approach, if none of the above work for you, is to agree extended payment terms with suppliers. It is often difficult to put such terms in place for a smaller retailer. Even if you can the supplier may increase the overall buying price they quote you, after all, the suppliers have to cash flow their businesses too, but the benefit to your cash flow may make this worthwhile. If suppliers won’t support with extended payment terms you can always seek support from the banks… In spite of what you may hear in the press, the banks are still lending where a business has a good enough case.
Your financial Supply Chain!
One of the most important aspects of trading for a small retailer is to manage the fine balance between up front stock commitment and when the sales come through. The major multiples often manage this process on spreadsheets – so Excel is as good a place as any to start!
Give me a call if you need any help!
If you have not come across the process of WSSI (weekly sales, stock and intake planning) or OTB management (open to buy) give me a shout – I can either take you through that off line, 1-2-1, or, if enough people seem to want some more details then I can always do a follow up article on WSSI & OTB as important planning and control processes for a small retailer’s financial supply chain!