I wouldn’t necessarily call myself a shopaholic (ahem), but a few years ago while living in San Francisco, my favorite activity was to spend Saturday mornings strolling down Sacramento Street, a popular boutique-shopping thoroughfare on the western side of the city.
I’d walk into clothing shops and soap shops and furniture shops, often leaving with little bags of goodies. During each visit, I would chat up store owners. Pretty soon, I knew the names of their kids and heard stories about their pets. It was a ritual I relished.
In early 2008 when the economy took a dive, several of my beloved stores shut their doors—they were cash starved. I was crushed. Others stayed open and weathered the storm, which got me thinking: why do some retailers tank while others thrive?
The answer is simple… cash flow.
“The reason people call us is because they are running out of money,” says Tom S. Paccioretti, principal at Broadway Advisors, LLC, a crisis management and turnaround consultancy in Santa Monica, California.
Let's say you are a shop owner contemplating closing your doors because cash is low. First, don’t panic. Sit down and put together a cash flow forecast. Paccioretti recommends making it a 13-week forecast detailing where you are right now and how much money you need to run your business. Then, write down where your peaks and valleys are, he suggests.
“Your valleys may be when you make payroll and peaks may be when you don’t,” he says.
From there, try to forecast your revenue, but don’t overestimate—it can lead to misinformed expense decisions. This may be a little easier said than done, but one way to forecast is by sticking to the 80/20 rule: 80 percent of your margins will come from 20 percent of your product.
“This is called the Pareto Principle, after Italian economist Vilfredo Pareto,” says Paccioretti. “He did an analysis on the wealth of individuals and realized that 20 percent of the population owns 80 percent of the assets."
“Identifying the items in your store that are under-performing will most likely bring you to an ‘aha moment.’”
After figuring out what products make you the most money, put the under-performers on sale to generate quick cash, he recommends. Then keep buying high-performing products. This alone can temporarily solve your cash flow problem, but if six months down the road you see yourself in the same situation, there may be something else going on.
If things aren’t getting any better, Paccioretti recommends looking at your product mix and your level of customer service. “Figure out where you fit within all the retailers out there, what reason your business has to exist,” he says. “Then, be strategic about your inventory purchasing.”
Another good idea is to talk to your sales staff. They are the ones on the floor and most likely know what is moving and what is staying put. “Ask your employees for feedback on how to make the business more profitable,” Paccioretti says. “Also, sit down with your buyers and discuss inventory management tactics. Get everyone in one room to discuss what is happening.”