It is hard to open a newspaper today without reading about another famous retailer experiencing serious financial difficulties.
Soaring inflation and wide spread pay freezes have shrunk household disposable incomes by nearly 3 % from a year ago, putting a squeeze on consumer spending. Top end and cut price retailers seem to be fairing better than the mid tier, many of whom are scaling down their operations, if it is not too late. As people’s budgets tighten, the key word in retail is value, and customers will continue to benefit from the intense price competition between retailers.
What can retailers do to mitigate economic uncertainty?
If the Government loses its nerve and fails to stick to its austerity measures, the money markets may lose confidence in Sterling and we may be forced into an unexpected rise in interest rates, something retailers and consumers could certainly do without right now.
So what can retailers do to mitigate the impact?
- For established businesses, the preparation of annual cash flow forecasts linked to profit and loss forecasts are essential. These should be monitored against actual results on a regular basis to ensure the business is on track.
- Build a strong relationship with your bank and ensure that they are aware of your financial needs arising from these forecasts, and if you see an unexpected downward trend in cash flow, warn them as soon as possible. Banks do not like surprises. If you feel you current bank do not understand your business, consider changing. Cash is still King!
- For retail businesses, rent is a significant overhead. In many instances the landlord may be amenable to renegotiate the lease and possibly even to provide rent free periods. In these circumstances, landlords are keen to prevent void periods and to ensure that someone is paying at least their service charge/rates. Anther point to consider is to pay rent monthly rather than quarterly.
- Ensure that your accounting systems are robust and up to date in the processing of the businesses transactions. Management should be reviewing actual results against budgets/prior year on no less than a monthly basis and drilling down on any significant variances to establish the cause. Where a lack of cost control or drop in turnover / GP is identified, ensure action is taken where possible to address these as soon as possible.
- Use retail VAT scheme to minimise your VAT exposure.
- Know your key statistics: Gross profit margin, break even point, the fixed overheads, the headroom on the overdraft, stock levels, staff costs as % of sales etc.
- Learn to embrace change. Retail businesses that do not move with the times will succumb, no matter how big the brand name or the history. “Woolworths” is a lesson to everyone.
- For new businesses coming into the market place, ensure that you have a structured and robust business plan to present to lenders or investors to maximise the likelihood of cash injection where required. Even if third party lending is not required, such a business plan is a crucial starting point in any business.
- Consider offering online sales. The internet poses the biggest threat to retail outlets.
- Some businesses will have their own internal financial resource capable of producing the above information and assisting management with the interpretation thereof. Where this is not possible, then external accountants should be brought in to assist.
What are the main financial factors that cause retail businesses to fail?
- Inadequate capital to start a new business
- Inadequate capital to expand the existing business
- Poor inventory control
- Poor cash/treasury management
- Poor internal management of the business
Any business plan or forecasting needs to be realistic but not overly pessimistic, and owners need to be aware that the current predicament that this country finds itself in is unlikely to improve for a number of years. In order to succeed, or at least survive, businesses therefore need to be sure they have enough financial backing to see them through these difficult times.
Did you know that retail businesses qualify for Enterprise Investment Scheme tax relief?
Retail is a hard market to break into. A new start-up needs to finance the deposit on the rent, the cost of fit out, the cost of stocking up, the cost of initial marketing, and all of these costs have to be paid before a single penny in sales is taken in the cash till. Getting bank finance for a new independent retail outlet is nigh on impossible. So many small retailers look to their friends and family. The good news is that retail businesses qualify for Enterprise Investment Scheme tax relief. The better news is that since April 6th 2011 this means that investors get 30% tax relief on share investment in new retail businesses (subject to the usual raft of terms and conditions). And if the business is a success, the final sale of the business may be tax free.
You don’t have to go it alone…
Being a business owner can be very lonely and having a trusted adviser, someone with a wide range of experience whom you can chew things over with (often your accountant) helps with the isolation. It also helps put things into perspective, as well as finding out how other businesses are managing.
This blog was written by Colin Farmer. Colin is a partner at Alliotts, a London based Chartered Accountants and Business Advisors. Colin is their retail sector expert and has been with Alliots for over 35 years.
If you would like to contact Colin then you can email him on Colin.Farmer@alliotts.com or call 020 7240 9971.
We’re very grateful to both Colin and Alliotts for taking the time to provide us with this feature. If you’d like to know more about their services for retail visit www.alliotts.com/sectors/retail