Resource Management 101: Part 1 – Cash

Phil - golf 004We’re now well into winter and there is a definite chill in the air. As a result, there are few golfers out on the course or more importantly, in the shop. So, is this the time to settle back and take a break? The answer is no. It’s the time to review this 2016’s successes and (more importantly) this 2016’s failures to plan for the future with consideration of any lessons learnt.

There are three scarce resources that all businesses, big or small, must get the best out of: cash, space and personnel. These are so important that I will be devoting a blog posting to each, starting with the management of cash which is the basic fuel of business. Without it, profitability is a nonstarter.

Much of your working cash will be locked up in stock. So, it is very important to know how well your buying decisions are working.

Most people will simply reach for their percentage gross margin report and make decisions on this alone. In these cases, they are failing to recognise the importance of another measure: stock turns. Put simply, a measure of how efficiently you are using your investment in stock. It is calculated by dividing, for a given period: a year or a month for example, the cost of goods sold by the average value of your stock investment during that period. In the example below the three lines represent buying enough stock for a year, six months and three months. Let’s also assume that the gross margin for this product is 25 percent, enabling us to work out a return on investment too.

Cost goods Sold Stock Value Stock Turn GM Value Return on investment
£10,000 £10,000 1 £2,500 25%
£10,000 £5,000 2 £2,500 50%
£10,000 £2,500 4 £2,500 100%

This examples clearly demonstrates the importance of maximising stock turns by buying where possible “little and often”. The benefits are twofold:

  • An improved return on investment
  • The ability to invest the cash saved by increasing the stock turns in a wider range creating greater choice, so important to today’s shoppers

The following examples also demonstrates in a slightly different way the dangers of being too gross margin orientated.

I would guess that most of us would say they would prefer to be selling higher gross margin items but as the following example shows it’s the profit pounds in the till that are most important.

Stock Investment Stock Turn Sales Value GM % GM Value Turn Earn
£10,000 4 £40,000 35% £14,000 140
£10,000 3 £30,000 45% £13,500 135
£10,000 2 £20,000 55% £11,000 110

It’s a basic principle used by supermarkets. If they can keep on selling out an item and replacing its stock, i.e. increase its stock turns, they can afford to reduce its price a little, thereby increasing their cash profitability.

In the above example I have added a column headed “Turn earn”. This is simply the stock turns multiplied by the gross margin and is a measure that clearly identifies star performing products. A good target for golf retailing would be 130 plus. Sadly, not achieved in the above example but would be by an item with a stock turn of 4 and a gross margin of 33%.

All too often when I visit shops it is noticeable that old stock has been moved to the back and is collecting dust. This brings me to my second point, the importance of clearing old stock at the first possible opportunity even if it results in heavy discounting. Old stock:

  • Usually gets even older and out of date making it of little interest to customers
  • Detracts from the shops overall appeal
  • Occupies valuable space that could be used for products that will sell!
  • Puts a drain on you cash
  • May cause you hassle with your bank manager!

Clearing it even at a loss should be seen as a lesson learnt. Why did I buy it? Why did it not sell? Will I make same mistake next year?

There are two other elements within cash management that need consideration. These are debtors and the allocation of cash for fixed capital project such as redecorations or new fittings and fixtures. Both will impinge on the cash available for stocking and will be dealt with in future blog articles.

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