Is your cash tied up in unsold inventory? If so, the following questions should be addressed: How did it get there? What can be done to get it out? How can you prevent the same thing from happening again? Clearly you are purchasing more than you are capable of selling. The extra inventory is carried on the books as an asset and added to the net profit, and therefore taxable. The harsh reality, however, is that the store sold a million and spent a million-fifty on inventory and expenses, and is now fifty grand in the red.
Cash is King, Move Excess Inventory
A retailer in this situation needs to take immediate action. The old saying that, “Cash is King,” couldn’t be truer than it is today. The first step in the process is to generate cash by reviewing all expenses. Examples might include renegotiating rents and reviewing payroll, typically a retailer’s two most significant expenses. Secondly, contact vendors to see if payments can be pushed back an extra 30 to 60 days wherever possible. Thirdly, using your POS system, run reports showing which vendors and models are not performing up to par, and take action. The action could include returning goods for other merchandise in the future, returning goods for credit, marking slow movers down, or offering spiffs to employees. With the dollars that will be freed up by these actions, reorder proven hot sellers, especially in key sizes so sales don’t get missed, and look for off-price goods to build traffic and margin.
In order to keep this scenario from reoccurring, it is important for the merchant to discover what caused the cash crunch in the first place. Fewer customers buying less obviously translates into lower sales volume, but the real problem stems from the store’s approach to sales and inventory forecasting. Your answers to the following questions might uncover some flaws in the planning process:
1) Are sales and stock levels planned at the classification level by store, from the bottom up, or are they planned from the top down beginning at the total company level?
2)Are sales plans retrended at least monthly, and adjusted up or down based on rate of sale?
3) Is there a markdown strategy in place, or are markdowns taken on an “as needed” basis, when slow sellers become apparent or cash is needed?
4) Are slow movers recognized and dealt with in season?
5) Are deliveries actually scheduled based on when goods are needed, or are shipments allowed to come in at the whim of the vendor?
6)Do the shipping instructions read more like ship “as ready, complete whenever”?
7) Are hot sellers identified and reordered in a timely manner? Are open orders reviewed on a regular basis?
8)Are there open-to-buy dollars left in season to take advantage of promotional goods, or do these purchases get placed anyway and you hope for the best?
Perhaps you recognize patterns in the above that describe you from time to time. If this does happen to you, the key is to recognize it, identify the problem, and be proactive about finding a solution.
Ritchie Sayner is Vice President of Business Development for RMSA Retail Solutions. Contact Mr. Sayner at email@example.com.