A Lesson in Money Management for Retailers

Ever wonder why American retailers began referring to the day after Thanksgiving as “Black Friday”? It’s the traditional start of the lucrative Christmas shopping season, when spiking sales push the annual bottom line of many stores into “the black,” reflecting a net gain, compared with “in the red,” where they operate for the rest of the year.

While the numbers for the season are staggering — shoppers spent $658.3 billion during the period in 2016, according to the National Retail Federation — think about how much of the year businesses have to get through while spending more than they make in order to reach profitability.

That so many of them survive, and even thrive, is an object lesson in money management. The successful players are the ones that manage their budgets to ensure sufficient cash flow in the lean periods.

Of course, many of the best-known retailers have access to financial reserves, investors and credit lines that make the task less daunting than it is for small businesses, 22 percent of which reported cash flow as their top challenge in a study released this year by the Federal Reserve Bank of New York and six of its regional peers.

Uneven cash flow was deemed a bigger problem than business costs and a far more challenging one than either government regulations or taxes, according to the study. Indeed, of the small businesses that reported seeking financing within the past 12 months, 37 percent said they did so to cover operating expenses.

“If you’re going to succeed in business, mastering basic cash flow projections is a must,” Caron Beesley, a small business owner, wrote in a blog post for the U.S. Small Business Administration updated in September. “After all, you can be a profitable business yet still have poor cash flow, simply because the cycle of cash in and out of your business isn’t synchronized.”

That helps explain why even though the 28 million small businesses in the U.S account for 54 percent of all sales in the country, more than half of such firms fail within the first five years, according to the Small Business Administration.

“Small businesses are hugely dependent on their cash flow, and must either cut costs or scramble to find alternative funding when they're not being paid on time,” Beesley wrote.

However, while cash flow is a common reason small businesses seek debt financing, it’s also one of three key pieces of financial data examined by lenders evaluating whether loan applicants will be able to keep up with their payments. They expect borrowers to have already achieved some degree of success with managing money before they’re willing to extend credit.

However, there are several ways entrepreneurs can help themselves, explains Nafees Chaudhry, founder of accounting firm Chaudhry Nafees & Co., in a post on the website of Small Business BC, a Canadian advocacy organization supported by the governments of Canada and the province of British Columbia.

Chaudhry recommends maintaining cash-flow projections for at least three months to six months, submitting invoices to clients promptly to avoid payment delays and offering discounts to those who pay their bills promptly.

“One reason that small businesses can face a cash crunch is that they don't issue invoices soon enough after a job is complete,” Chaudhry wrote. “You must remember, if you wait two weeks to three weeks to issue an invoice, then it will take another three weeks to four weeks before that cash arrives.”

Careful evaluation of how much inventory is needed and when in order to meet customer demand can help prevent overstocks, and taking advantage of any favorable payment terms from suppliers will curb expenses, Chaudhry added.

“Small businesses are hugely dependent on their cash flow, and must either cut costs or scramble to find alternative funding when they're not being paid on time,” Beesley wrote. “With money tight and bank loans hard to get, a cash-strapped company can easily be pushed to the brink.”

Sam Novick is the social media manager at Bond Street, a company focused on transforming small business lending through technology, data and design.