Shop Talk: Practical answers for tough business questions
Question: My customers are clamoring for new merchandise but my credit cards and accounts payable do not really allow me room to take chances on new lines. Is there an ordering cycle or a way of managing inventory that will give me more cash flow?
Answer: Without actually knowing the age of your merchandise, I can’t be certain what the main problem is, so I’ll give you some possibilities.
First, you may have old, stale merchandise that hasn’t sold but is holding dollars on your shelves as it sits there. A general rule of thumb? If it hasn’t sold well in six to eight months (some lines take more time but they are rare), I’d put it on sale and use those dollars to purchase new product. If it doesn’t sell even on sale, get creative and donate it or offer it as a free gift when a customer makes a purchase of $30 or $40.
It could also be that your merchandise is selling well, but your prices aren’t high enough. If your mark-up doesn’t cover your operating expenses, then the dollars that should be allocated for reordering merchandise can be eaten up by payroll, rent, insurance, and so on. To determine your mark-up, take your inventory at retail and divide it by your cost. For instance, if you have $75,000 in inventory at cost, and your inventory at retail totals $180,000, then your mark-up is 2.4 ($180,000 divided by $75,000). This may or may not be enough mark-up for you to operate your store.
If you find that your merchandise is turning well (not old and stale), your gross profit is adequate to cover your expenses, and you have a profit on the bottom line, it may be time to seek some outside financing. Sometimes it takes extra cash to grow your business, or at least to do it in a reasonable time frame. Put your numbers together in an attractive packet that contains information about your business, your growth, and your owners and then go out and talk to banks. Determine what size line of credit you need and be ready to explain what you will do with it and how you will repay it (or at least pay the interest). If you are showing a profit, banks will probably respond well to you.
First published in Vol. 27 No. 1 of Retailing Insight. © 2013 Continuity Publishing Inc. All rights reserved.