Convert Bottom-line Profitability and Inventory into Cash Flow
Cash flow is king, and that’s no secret. While you strive for profit, having the right amount of cash in your pocket at the right time is critical in running a healthy operation.
Retail stores that pay owners fairly and are most profitable are diligent about measuring two key metrics for home furnishings retailers: net profit percentage of sales and inventory percentage of sales. Why? Because these metrics help you ensure you are moving inventory fast enough and achieving sales goals at reasonable margins. In turn, you avoid cash shortage and an extension of debt, which will cost you profit in the long run.
Net Profit Percent of Sales
(Gross Margin Dollars – Business Expenses) / Sales
This key performance indicator is critical in building wealth. It reveals profit after all costs and measures the overall results of your organization.
Inventory Percent of Sales
Average Inventory / Annual Sales
Efficiently maintaining your inventory is one of the most important aspects of running a small to mid-size business. If you keep too much stock, you risk having it go unsold. You want to keep this ratio low, while ensuring you have the appropriate amount of best-sellers in stock so that you don’t lose sales.
In his recent RetailerNOW article “Forget Profit, Cash Flow is King”, PROFITsystems industry expert David McMahon provides a five-step action plan you can follow to increase cash flow. He explains why having the right selection of best sellers, an aggressive markdown schedule that maximizes margins, and appropriate sales goals that take into account your fixed and variable costs, inventory turnover ratio and reorder lead times, is key to achieving double-digit profitability.
Walk away with a solid understanding of which factors are affecting your cash flow in a negative way and why, as well as where the opportunities lie to make changes in order significantly improve your profitability.