Do you have great sales, but little free cash? Welcome to the world of cash flow.

Cash flow is critical to your success as a retail operation. Whether you are a one-store operation or a multi-store chain, without proper cash flow, you cannot buy the everyday merchandise you need. You cannot expand. You cannot add new lines and services to stay competitive. You may have trouble meeting your payroll. You may have to borrow money. Cash flow is a critical management component to your success.

Causes and Solutions
Here are some possible hindrances to cash flow:

• Your overhead expenses such as rent and salary may be too high in relationship to your sales. It’s hard to have an adequate cash flow, much less profit, if you have a 20 percent rent factor and a 25 percent salary cost.
  
• You buy to fill a peg instead of a rate of sale. Twelve-inch pegs are cash flow destroyers!
  
• You buy to an unrealistic rate of sale. If you sell two pieces a week, don’t buy to support six sales a week. This only builds up excess inventory.
  
• Your merchandise is incorrectly priced. Too high pricing will keep the goods on the counter. Too low a price may mean you are not maximizing your profit potential or sales. Selling too many low-margin items could possibly affect your overall profitability. Practice margin management.
  Three of the examples above are merchandise-related. The single highest expense any retail company has is merchandise. This is the first place you want to start to increase your cash flow.
  Here are a couple of hints:
  
• Don’t assume you are getting the best price from your vendors. Confirm and re-negotiate if needed, either on your own or by joining a party related buying club. A 5 percent decrease in your costs goes directly to the bottom line.
  
• If you do not have an open to buy (OTB) plan, get one.
  

A Simple Plan
Here is an outline of an OTB program I put together for a multi-store chain. This program saved over $1 million in cost of goods. This company also had more than a 10 percent sales increase the year we implemented this program. A side benefit of this OTB program was that it helped to make the company better buyers, and not just peg fillers.

This paper-and-hand-based plan is simple, but requires discipline to implement and sustain. If you have more than one store, than each store should have its own OTB plan.

The first step in establishing an OTB plan is to review the last several year’s historical data. Look at your actual cost of goods each year, sales gains or losses and current sales trend. The next step is to create a realistic, achievable sales estimate by month for your company for the plan year. Then develop your target cost of goods you want to achieve, preferably a cost of goods that is less than last year. The final step is to develop a rebuy program

Developing a rebuy program is critical to the success of your OTB plan. Basically, each month by week you buy from certain vendors. A buying schedule that you stick to has many benefits.

These include: less top stock or merchandise in the warehouse, fewer outs on the floor, smaller invoices to pay, less freight to handle at one time and finally, no more over buying because you misplaced your last order in a warehouse full of merchandise. In other words, you will receive smoother overall operations, more sales, and increased cash flow.

Forms to Remember
Here are essential planning tools to help with this process.

• OTB planning sheet
  
• Rebuy schedule
  
• Check Book balance sheet
  

OTB Planning Sheet
This example OTB planning sheet (shown below) is based on a 40 percent cost of goods. This sheet includes all the historical data you used to come up with your OTB plan. Monitoring your progress is a key function of management, and should be done monthly.

OTB dollars are figured on the next month’s estimate. The basic assumption is that what you are buying in the current month will support the next month’s sale.

For example, orders placed in March will actually support April’s sales estimate. March’s OTB dollars are based on 40 percent of April’s sales estimate.
For seasonal or future buys, take these dollars from the month you expect to receive them or invoiced. For example, in March, you place a $1,500 order for costumes. Charge those dollars to September, NOT March. Use current OTB for reorders.

Adjustments to the OTB plan are an important management function. If sales are going up, you must adjust how much you will be buying to maintain the upward trend. If sales are going down, you cannot keep buying at a higher level to support fewer sales. Make adjustments in three-month increments only. Keep reviewing and adjusting monthly as needed.

For example, if your sales are trending up at a 15 percent rate, only take future sales estimates up by 1/2 of the trend. In this case, take future estimates up by 7 percent.

If sales are trending down by more than 5 percent, then take the whole percent down in future estimates. In the case of an 8 percent trend down, you would take it down by 8 percent. If they down 5 percent or less, do not change your sales estimate. You can always adjust again.

Rebuy Schedule
The purpose of the rebuy schedule (shown above) is to have a set program to review all vendors on a regular basis during EACH month. This will insure that no vendor is overlooked, and all items are checked at least monthly to determine if a rebuy action if needed.

Base your schedule on the retail calendar approach. Each quarter is broken down by a 4, 4, 5 week schedule. During week 5, this is a free week or you can adjust your buying to reflect a major event when you do not have time to make buys. As with an OTB program, consistency is the key to success here.

Your rebuy schedule provides the MINIMUM amount of time you should wait before reviewing a vendor or line. If you are out or low on goods and don’t have it on order, don’t wait until the next count schedule, buy it immediately.

Other considerations when you make your rebuy schedule are:

• Minimum order for free freight
  
• Turn around time: how long merchandise takes to reach you.
  
• Breadth of vendor line: For larger lines, consider splitting buys in two instead of one massive buy.
  
• Rate of sale of the items: Consider buying weekly key items to stay in stock.
  

Instructions - set up a monthly count schedule by vendor. Base how often you buy a vendor on how important and extensive their line is in your store and meeting free freight requirements. You may buy a vendor one a month, twice or weekly. Goal of the rebuy program is to meet minimum shipments, keep a flow of goods into the store and always be in stock - particularly key items.To buy merchandise you can use the “eyeball method”or develop a RP & RQ for each item. On the back tag ofeach item put a re order point (RP) - the number of itemsleft on a peg before you reorder and reorder quantity (RQ) the amount of merchandise you will buy. IMPORTANT - as you write orders deduct the amount of money you spend from the OTB monthly allocated dollars.


Check Book Balance Sheet
Your checkbook balance sheet (shown below) shows how much money you have at the start of the month and how much you spend each month. Deduct each vendor’s order from the balance. If you are getting tight on OTB dollars toward the end of the month, cut your order down. If you are over-bought on your budget at the end of the month, then deduct those dollars from the next month. However, if you don’t use all your dollars in a given month, do not carry them over to the next month.

This is a very simplistic OTB plan. It doesn’t specifically take into consideration seasonal variations, special orders, main office buying, new items or seasonal buys (but these factors can be adjusted as needed). You will probably need to tweak this plan to fit your situation. There are other approaches, but all are based on the same basic premises. If you develop a realistic plan, follow it and monitor it consistently to increase you cash flow and profits.

This is your check book for your open to buy dollars by month. Each order you write goes on this sheet. You must monitor this process.


Frank Hull is a retail consultant who has managed big box stores as well as his own retail chain. He also spent six years as the director of marketing and buyer for a 30-store party goods chain in Texas, and is currently the vice president of Internet retailer bridestuff.com.