7 Tips for Managing Cash Flow

SEMA News—January 2020

RETAILER BEST PRACTICES

By Mike Imlay

7 Tips for Managing Cash Flow

(And Why It’s So Important)

  Retailer
For a retail operation, maintaining a positive cash flow and reserves can make the difference between success and failure. Avoid the pitfalls by following the seven basics of cash-flow management.
   

Remember the old adage? “The first three rules of business are location, location and location.” That may be true, but there’s something else just as basic to a retailer’s success: cash flow, cash flow and cash flow. Yet far too many retailers fail in that area, typically because they either confuse cash flow with revenue, rely on future sales that may or may not materialize, improperly track bills, allocate resources that they don’t really have, or succumb to a lethal combination of all the above.

Managing financials can be the least exciting aspect of an aftermarket retail business. After all, most shops or retail startups in this space result from the owner’s passion for vehicles, not numbers and spreadsheets. Still, understanding and maintaining a positive cash flow, creating a realistic budget and keeping track of every nickel spent are all crucial to success. The retail environment is tougher than ever, with big-box stores and online goliaths squeezing the margins for smaller outlets.

A positive cash flow pays salaries, stocks shelves, finances store improvements and keeps the lights on even when margins are tight. The right level of cash flow is also critical for to securing additional capital and credit. Most important of all, a healthy cash flow helps insulate a business against off-season sales slumps or unexpected economic downturns.

“The bottom line is that we don’t know when the next recession is going to come,” said Gene Marks, president of The Marks Group and a noted small-business consultant. “It could be in six months. It could be in a couple of years. But it’s going to come. And if there’s anything that I learned from the last recession, it’s that the companies that have cash in the bank survive
these things.

“They can leverage that cash to get financing. They can leverage that cash to make purchases or go into partnerships or buy inventory or property that other people just aren’t able to do because they don’t have the cash. I know it’s a simple concept, but a lot of people don’t seem to really take to heart that the more cash you have, the better financial shape you’re in. That’s why managing your cash flow is
so important.”

Thankfully, there are seven easy steps you can take to maximize cash flow and set your business on a firm path to sustainability and growth.

1. Separate Revenue From Cash Flow

Marks has presented a number of small-business seminars at recent SEMA Shows and gotten to know many aftermarket retailers. He noted that they differ from many retailers in that they’re primarily motorsports enthusiasts as opposed to business-management or accounting majors who settle into a specific retail category after graduation. But it’s never too late to learn the basics, starting with the difference between revenue and cash flow.

“Revenue is what you’re billing, and cash flow is what you’re collecting. It’s as simple as that,” he explained. “So for a typical retailer, revenue and cash flow are generally the same because people come into your store, swipe a credit card, give you the money, and that’s it. But if you’re the type of business that works on a little bit of credit—where you’re doing project work, some other services, or you have maintenance contracts or things where you are billing a client—there’s where your cash flow and your revenue break off. You’re billing and you’re showing revenue, but you don’t have the cash in the bank yet.”

And that, Marks said, is precisely where many small-business owners go astray.

“You get this very common question of, ‘Hey, my tax return is showing a profit, but I don’t have any cash in the bank to pay my taxes.’ That’s because they’ve probably recorded the revenue from the job but not collected the cash yet.”

  Gene Marks
Gene Marks is president of The Marks Group.
   

2. Create a Cash Reserve

Just like every household needs a “rainy day” fund, every business needs a cash reserve. That requires a commitment to setting aside a specified percentage of the real money coming in to build up that reserve.

“The rule of thumb in this business is to have at least six months of operating cash on hand in the bank or someplace liquid,” Marks explained. “That way, you would still be able to pay the bills for the next six months even if all of your work dried up tomorrow. So the first step is having that objective and working toward it.

“That takes some discipline, and it takes commitment, but it’s a crucial thing that you have to do. It basically means sometimes you have to say no to some purchases, jobs or potential opportunities that could suck up some of that cash when you might need it the most.”

3. Get Daily Flash Reports

Still, setting aside a percentage of cash isn’t enough. You have to keep a watchful eye on it—consistently and constantly.

“In other words, you can’t ignore what’s going on in your business, which means that you should be looking every day at what I call a flash report,” Marks advised. “A flash report comes right out of your accounting system. It could be something that an administrator can compile. But it should give you the key metrics about your business—what your cash is, what your receivables are, what your tables are, and what your revenues to date are.”

Keeping your eye on those numbers every single day keeps you focused on the financial necessities and can provide immediate alerts if anything is amiss or off track. Using the beginning of each year as a benchmark, these daily snapshots help chart cash-flow health and progress, especially toward that goal of keeping six months of operating cash
on hand.

4. Review Your General Ledger Monthly

While watching your daily flash reports, Marks also strongly advises a deep dive into the money going out of your business on a monthly basis at the very least.

“The best way to do that is to read your general ledger,” he said.

A tool of business accountants, a general ledger is something that every owner should also familiarize themselves with.

“It’s basically a diary of all the transactions going through your business, whatever system you’re using,” he explained. “I know business owners who print out that diary every month, and they read through it, and they circle the items that they might not be familiar with, and they ask questions. They investigate things that seem unusual, but they know the numbers backward and forward. It’s important to go through their business like that, because in the end, it all turns into cash.”

5. Accept Multiple Forms of Payment

Since your goal is to maximize cash reserves, it only makes sense to make it easy for your customers to get it to you any way they can. Credit cards and payment apps are just two of the tried-and-true ways to make payments easy and immediate for purchasers. Encouraging deposits on products or services is another time-honored strategy.

“People can give you that deposit and then pay off the total amount over a period of time,” Marks noted. “So at least you can get some money up front for the work that you’re doing.”

Executive Summary  

In today’s highly competitive retail climate, a key factor in survivability is maximizing and properly managing cash flow. According to small-business expert Gene Marks, president of The Marks Group, the seven steps that can put your retail operation on the right footing are:

  • Differentiating revenue and cash flow.
  • Creating a cash reserve.
  • Checking daily flash reports.
  • Reviewing your general ledger monthly.
  • Accepting multiple forms of customer payments.
  • Anticipating expenses 90–120 days out.
  • Hiring a bookkeeper or accountant.

Doing the above will help you avoid some of the most common pitfalls that doom far too many retail businesses.

 

6. Anticipate What Lies Ahead

Just because you have money in the bank doesn’t mean it’s there to spend freely. Businesses have fixed expenses with fixed dates. (Tax payments and supplier orders are just two examples.) Your job is to anticipate such things and set aside the appropriate monies ahead of time.

“You shouldn’t have any surprises,” Marks said. “If you’re a good business person, you should always be looking ahead 90–120 days. That will smooth out how you’re spending your money and how you’re managing your cash flow, and you won’t find yourself in any predicaments. That’s the number-one thing I see retailers do wrong when it comes to managing
their businesses.”

7. Invest in a Competent Bookkeeper

Running a business can stretch a person thin, and often the best thing an owner can do to manage cash flow is to hire someone to help them do it. While the business owner remains responsible for reviewing flash reports and the general ledger—as well as all the other above steps—a good bookkeeper or CPA can help prepare the reports and explain anything that needs attention.

Further Information
A popular presenter at business events, including the SEMA Show, Gene Marks is president of The Marks Group, a small- to medium-business consulting firm. His columns can also be found in The Guardian, The Hill, and Forbes. For more information, visit his website at www.genemarks.com.

“I’m a CPA, and even I have a bookkeeper and an outside accountant that I talk to regularly to evaluate where the cash flow is,” Marks said. “If you spend a few hundred or a couple thousand bucks a year on an outside financial person to help you, you will be grateful and make money many times over. Not only that, but if you have the right accountant working with you—somebody who might be familiar with the industry or have other clients who are in similar businesses as yours—that person can point stuff out and say, ‘Hey, you know what? Your margins are a little bit lower than normal. Or you’re spending more on compensation costs than most of my clients.’”

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