As an entrepreneurial CFO I am able to share real life experiences on managing cash flow.
In the late 1980’s I owned a chain of retail ski stores in the Greater Boston area. You might think that due to the seasonality of that type of business that the cash flow would be terrible in the summer time, but I never needed to use my line of credit.
Other than tight expense control and cash conservation strategies throughout the year there were two main reasons why we never needed to use our line of credit:
• First, we closed the stores in the off season. Our specialty was ski equipment, ski clothing and ski accessories. Those were the areas we were experts in. Those were the areas the consumer knew we were experts in. If we were to sell summer goods like all of our competitors did, we not only would have slow inventory turns, but we would also have carryover of these unproductive non-ski inventories preventing us from investing in what we did best and preventing us from investing in what the consumer was conditioned to know we did best. The sale of ski equipment, ski clothing and ski accessories. Tying cash up in unproductive inventory creates cash flow problems, unplanned markdowns and lost profits. Investing only in inventory that is productive with high inventory turns and lower unplanned markdowns creates cash flow and profits.
• Second, I ran my inventory down so that I had very little merchandise on December 31. I worked with suppliers so that I could purchase close out merchandise in January, February and March and pay for it in October. As a result I was able to take my sales from January, February and March which are still strong periods in the ski business (especially if there is local snow) finance the summer. In August and September which is the real start to the winter buying season I would have a grand opening (because my stores were closed in the summer I could have a grand opening every year) as well as a major tent sale. These sales would easily cover the October close out bills.
Understand that when you own a seasonal business or if your business simply has periods of low sales activity that you need to identify your business cycle. I am defining the business cycle as the time you receive the inventory or raw material until you get paid for the final product. The objective is to receive payment for the final product before paying for the inventory and/or expenses of production and/or the expenses of selling the inventory. If you understand the business cycle you can create strategies and work with suppliers to most productively meet your needs.
The CFO can help you identify the business cycle, put together operating strategies and work with suppliers to manage cash during slow periods.