In my last post, I wrote about the likelihood that the current recession will not end quickly or with any perceptible rebound. From the retailers that I've spoken to recently, there is a sense that the sales decreases may have stabilized for the moment, but there's no confidence that things will actually improve anytime soon.
Right now, many entrepreneurial retailers are financially stressed, and at best are anticipating a very challenging first half of the year. Their immediate focus is on improving their cash position. Many are struggling with difficult decisions about reducing payroll. They are liquidating seasonal inventories, while deferring second quarter commitments as long as they can. They are uncertain about how to proceed with their marketing plans, whether to aggressively pursue new customers or focus on reaching their current, proven customers.
In the end, it's about cash flow. With positive cash flow, there is the promise of tomorrow and beyond. Without positive cash flow, there's only an abyss.
In this moment, cash-flow planning is more important than ever. From my experience, even before this recession set in, only a small percentage of entrepreneurial retailers paid enough attention to cash-flow planning. For most, their attention didn't go beyond keeping a close eye on their bank balance. That wasn't enough when times were better, but it's certainly not enough now.
Like any other planning, being able to project your cash flow into the future enables you to set up benchmarks and spot potential trouble before it's on you. Projecting cash flow gives you the opportunity to develop the widest array of options to deal with cash shortfalls, whether it's reducing expenditures, seeking additional capital, or sitting down with your banker to discuss additional financing.
Right now, more than ever, you need a cash-flow plan that looks into the future on a rolling month-to-month basis. Such a plan projects all of the transactions that will impact cash each month, including cash-in from sales, and cash-out for product and expenses, as well as any financing in-flows or repayment obligations.
The projected ending cash balance for each month is the key, for that enables you to spot where the pinch points might be. This is what you're looking for. As you plan each month out, at least six to 12 months forward, also be sure that the planned cash balance at the end of each month is sufficient to give you enough of a cushion to cover any surprises.
Once you've built a cash flow plan, put it to work. As each month ends, when you post the actual results and calculate your variances, be prepared initially for a few surprises. You're likely to see some variances that make you stop and wonder. As you review the significant variances, there are any number things that you're likely to find. Maybe in hindsight the original plan didn't make a lot of sense. On the other hand, maybe too much was spent on repairs and maintenance, or payroll ran a little heavy. Perhaps something was posted into the wrong account in error.
After you've tracked down the causes of the significant variances, and closed the operational leaks and bookkeeping idiosyncrasies that you find, you also need to take what you've learned and adjust the plans for the future months. Then, take the actual ending cash balance and roll it forward into those future months, and review each future month's projected ending cash balance.
This is the critical step in spotting potential cash flow problems as early as possible. Your cash-flow plan is a living document and must be constantly revised to reflect the most current information. This month's variance between your planned and actual ending cash balance may not have an immediate impact on your cash flow, but when you roll it forward it may project your cash into the red (or dangerously close) several months from now! And the time to learn about it is now, not several months from now!
In this economic environment, there's very little margin for error. Sales are down, margins are eroding, and credit is tight. Cash, as they say, is king. I've written before that if you show me an entrepreneurial retailer that takes the time to plan, and who puts that plan to work, I'll show you a successful retailer. That's true now, more than ever.