Fred Dunayer:
Welcome to the SCORE small business success podcast, Been There, Done That. To get free mentoring services as well as to see the wide variety of resources available for small businesses, visit our website at www.score.org or call 1-800-634-0245, and now, here’s your host, Dennis Zink.
Dennis Zink:
Episode number 42. Cash flow and inventory management. Fred Dunayer joins us today in our studio as co-host, score mentor, and our audio engineer. Good morning, Fred.
Fred Dunayer:
Good morning, Dennis.
Dennis Zink:
Our guests today are Jami Schwartz and Allison Boswell. Welcome to Been There, Done That.
Jami Schwartz:
Hi, guys. This is Jami. As a partner of SCORE, we’re very happy to be here.
Allison Boswell:
Thanks so much for having me.
Dennis Zink:
As the head of community programs at Kabbage, Jami Schwartz educates small businesses about financing options and the benefits of online lending. Before Kabbage, Jami worked for Intuit. Jami holds an undergrad degree in finance from the University of Pittsburgh and an MBA from Boston University in marketing and international finance. Kabbage is an online lender offering lines of credit up to $100,000 for companies that have been in business for at least one year. Since its inception, over 100,000 loans have been made in excess of 2 billion dollars to small businesses.
Allison Boswell started her retail consulting business in 1985. In 2010 she joined Management One, a part of the Reedy Consulting and analysis team. In addition to planning, Allison worked with her clients on employee compensation, training, social media, marketing, and vendor relations. She has been working with clients for as long as 27 years. Reedy Consulting has won a number of awards, including best client retention and highest annual sales. Let’s start with the most basic question. What is cash flow?
Jami Schwartz:
Cash flow is the actual amount of money coming in and out of the business, and here at Kabbage we actually use that information to determine the credit worthiness of our customers.
Dennis Zink:
What do you look for as far as credit worthiness?
Jami Schwartz:
We’re looking at positive inflows and outflows of cash, so obviously the more cash you have coming into the business that covers your overhead expenses, the better.
Dennis Zink:
Jami, when I run a business I look to have my cash flow at a ratio of about 2 to 1 where I had about twice as much revenue coming in as expenses. Does that number make any sense or does it depend on the business?
Jami Schwartz:
It definitely depends on the business. Obviously, the higher your ratio, the better, but here at Kabbage we’re looking for healthy cash flow, which is the consistent inflow of cash that is covering your day to day expenses.
Dennis Zink:
When a business grows, one of the things that stresses is cash. The more you grow, the more successful you are, the more it stresses your cash. How does Kabbage get involved with that?
Jami Schwartz:
If businesses grow, they sometimes outgrow their needs. Here at Kabbage, we provide a smaller credit line up to $100,000, so at that point if you’re needing more then there are other options available, but here at Kabbage if you’re growing into a new space, trying to cover your inventory costs, et cetera, then Kabbage could be a good fit.
Dennis Zink:
What’s the most common mistakes that you would say that small businesses make when it comes to cash flow?
Allison Boswell:
Hi, this is Allison Boswell. For new business owners, it’s being under-capitalized, because they don’t estimate their expenses accurately. If you’re in a new business, you give your best shot at your expenses and you usually start with a finite amount of money and sometimes it’s really not enough to do what you need to do. For established stores, it’s not having an accurate forecast. I hear all the time from clients, “Oh, I’ve only been in business one year, two years, three years. I can’t really predict what my sales are going to be,” but really if you have 12 months worth of sales, you do have a benchmark.
There are many different ways of planning. You can at least take a look at last year and decide, well, am I looking for an increase? You have to remember that hoping for an increase is not the same thing as planning for an increase, and you need to have a strategy for what you’re going to be doing differently than last year if you’re planning to grow. Is that for inventory, promotions, fresher merchandise? If you don’t have a plan, then you can’t, for one, estimate what your cash flow needs are going to be.
Dennis Zink:
Many businesses strive to have recurring revenue streams as opposed to selling onesies and twosies. I mean, when you can start your month and know you’ve got so much booked in the bank that should be coming in, does that help in the lending process? There’s a guaranteed cash flow that’s coming in as opposed to a business that’s just dependent upon people walking in and selling one thing here, two things there.
Jami Schwartz:
It’s always better to have an understanding, like Allison mentioned, of what your expected cash flows are going to be. With that being said, there are a lot of businesses that are seasonal, and no, they don’t do as well in certain months as others, and that’s a perfect example of when you could use a financing option, so if you know that the summer is your dry season then you want to plan ahead and make sure you have something that’ll cover your costs, so a lending option like Kabbage, and then when you’re expecting your revenues to occur in the fall or winter season, then you’re prepared to be able to pay back that loan.
Dennis Zink:
What kind of tools would you say are important when planning cash flow?
Allison Boswell:
Well, for one, having an up to date profit and loss statement so you know what your average expenses are, excluding merchandise. I’m speaking mainly of retail here, but this applies to a lot of businesses that carry inventory. You want to look at your income statement. Have your accountant set it up so you’re looking at your expenses as a percent of your sales. For instance, if your sales are $100,000 and your payroll is $20,000, then your payroll is 20 percent of your sales. This makes it easier to see the consistency of your business. High expenses jump off the page so you can say, “Wait a minute. I’m spending a lot of money on payroll. Is this really what I need to be doing?” When you look at just dollars, it’s very hard to make sense of it. When you look at the percentages, it makes it a lot clearer.
It also gives you the opportunity to compare yourself to like businesses. If you can get a hold of industry standards, you can say, “Okay, well the average rent should be under 10 percent. Then I know whether I’m high or low.”
Fred Dunayer:
One other thing, and this applies especially to very small businesses that are just getting started, is to actually plot your cash flow on a calendar to actually look and see what dates cash is coming in and what dates cash is going out and to get a real feel for what the ebbs and flows of your cash flow are all about.
Allison Boswell:
Absolutely. It’s also important to have your sales planned out 12 months so you know, and most businesses do have an ebb and flow. Some people have huge Decembers, but that’s not true for everybody. Often stores that have a big December business or businesses that have a big December business tend to have a really poor January, so that really can put a pressure on cash flow.
Dennis Zink:
What’s a common misconception about profit and cash flow?
Allison Boswell:
Well, that they are the same thing. I see a lot of businesses that show profit but are strapped for cash. Typically that profit is tied up in excess inventory. The calculations on your P&L do not necessarily reflect your bank balance. You can also have great cash flow and no profit. It just depends on your capital position that you start with. If your profit is tied up in inventory, you need to take a look at the value of that inventory. If it’s older merchandise, it’s probably not doing you any good. You’d be better off liquidating and taking the cash. Sometimes people stockpile inventory. They say, “Oh, gosh. We use this year round. We get a price break if we buy a lot ahead of time,” but it puts a lot of pressure on your cash flow then it’s not really best use of your money.
Getting inventory in smaller amounts more frequently is much better for your cash flow, and that also gives you the opportunity to change your inventory mix as you see trends in the marketplace.
Dennis Zink:
Would you be referring to Just In Time inventory, JIT?
Allison Boswell:
Not necessarily. It depends on the kind of business you have in retail, clients can spend money for immediate within the 30 day window all the way up to 6 to 9 months out, and the closer to the season you buy your merchandise generally speaking the better buy you’re going to make.
Dennis Zink:
What’s more important to a business? Should it be their cash flow or their profit?
Allison Boswell:
Again, it does depend on where you are, but cash flow is king, so the more cash flow you have, the more opportunity you have to grow your business.
Dennis Zink:
You know, I couldn’t agree more. I think a lot of businesses, they have their P&L, and they have their balance sheet and they really ignore their cash flow. When you’re out of cash, you’re dead, basically. You’re out of business, so I would agree. That’s incredibly important, but let me ask you, what should a business owner do if a business has trouble paying their bill seasonally?
Allison Boswell:
If a business has a lot of seasonality due to sales, I mean, some months are dramatically higher than others, chances are they will feel strapped at certain times of the year. This is the best reason to have a line of credit when you have a temporary dip in cash flow. I plan cash flow for many of my clients, and they often have a few months each year where they’re in the red, and that’s really okay as long as we’re not seeing a trend spiraling downward. If you typically pay your invoices within 30 days and two or three times a year, you’re in a 60 to 90 day range, you’re probably doing better than a lot of businesses, but this is a perfect reason to have a line of credit so you don’t even have to do that.
If you’re increasing your debt every month, then you have a problem that you need to address immediately. It’s not going to resolve itself, and you need to change what you’re doing and be realistic about the future.
Dennis Zink:
Jami, does Kabbage set up a line of credit when let’s say a business needs $75,000, is the money available and have to take it all at once or is it available as a line of credit where they are charged interest when they draw it down?
Jami Schwartz:
It is a traditional line of credit, so just because you have an amount available to you doesn’t mean you have to take all of it. You’ll only have to pay for what you take out. It’s a monthly payment based on what you take out. It’s either a 6 month term or a 12 month term, and it’s also a revolving line. Something unique about Kabbage is we’re looking at your business data in real time, and so we’re able to see those ebbs and flows in your cash flow and perhaps extend your line of credit or lower your rate depending on what’s going on in your business.
Dennis Zink:
How do you do that real time?
Jami Schwartz:
It’s all connected through your online accounts, so when you sign up for Kabbage, we’re actually sending a direct API directly into your online bank account, any other online bank account that you have associated with your business, so your payments account, your Quickbooks account, anything that you have online, and we’re able to look at that data in real time.
Dennis Zink:
Allison, how does turnover impact cash flow?
Allison Boswell:
It’s very important. As I was talking before about businesses that stockpile inventory, the more often you turn your merchandise, the better your cash flow is. If you’re buying inventory twice a year, turning your inventory twice a year, that means you’ve got six months worth of inventory that you’re hanging onto. If you turn our merchandise four times a year, then you only have merchandise for three months. In retail businesses, the faster the turn, it usually translates into higher sales as well, because fresher merchandise is more exciting to the customer and sells faster. The older the goods are the less attractive they become.
Dennis Zink:
Is there an ideal number of turns or does it depend on the industry? I mean, is there a range that if I’m selling gifts merchandise, is there an x amount of turns I should be looking to have per year?
Allison Boswell:
It’s actually got quite a wide range. In some businesses a two turn is an acceptable ratio. When we plan our clients’ businesses, we don’t plan it on the store level. We actually plan it on the classification level, so we would plan gifts differently than we would plan shoes differently than we would plan apparel. It really does change dramatically within the industry.
Dennis Zink:
What do you think about using credit cards to fund inventory? Small business owners has got to use every method they can to do whatever they have to succeed, and certainly I know I’ve done that over the years. What do you think about using credit cards?
Allison Boswell:
Well, it’s not something that we recommend. The most common reason I hear for doing it is miles, and when you use credit cards to fund inventory, you lose control over the transaction. The vendor can charge you whenever they want and it limits your ability to cancel goods or turn goods, negotiate markdown money, and refuse late deliveries. Line of credit is a much better way of handling inventory purchases and will help you establish credit with vendors, which credit cards will not do.
Dennis Zink:
I have to tell you that I absolutely agree with your answer, but my dentist was very, very successful and he never paid to fly anywhere. He had more miles. He bought all his dental equipment and fillings and whatever he bought using a credit card, miles card.
Allison Boswell:
We have clients like that. I have a client who does $12 million in sales. They get free everything.
Fred Dunayer:
Of course you might be paying 18 to 24 percent interest on those things that you’ve bought, as well.
Dennis Zink:
Well, he paid it off right away.
Allison Boswell:
Yeah, if you’re not paying your bills, then you’re really in trouble.
Dennis Zink:
Does discounting merchandise hurt cash flow?
Allison Boswell:
Not really. It depends. You have to start with a healthy markup to begin with, but markdowns or discounting is a normal part of business and sometimes it can actually improve your cash flow. When people are holding onto merchandise that really isn’t saleable anymore, it’s been sitting there for 6 months and you’re just hoping somebody’s going to come in and want it, chances are, they’re not, but if you mark it down you can get the cash out of it. Then use that money to buy merchandise that will maybe be more appealing to your client and turn faster.
Dennis Zink:
What do you think about businesses that offer buy one, get one free? How do they do that?
Allison Boswell:
Well, that’s a promotion, and it’s one that it’s usually done on things that are moving slowly. It’s not something you would do on a hot item, but if you’re overstocked and you’re trying to reduce your inventory and get out of the problem, it’s a good way. You could mark things down at half off, but often a buy one, get one free, which is basically the same thing, you’re getting rid of more units, so it can be a good strategy.
Dennis Zink:
What’s the most important thing a business can do to improve their cash flow?
Allison Boswell:
For most businesses, it’s controlling their inventory and controlling their buying. When I ask new clients how they decide what to buy, many say, “Well, I just bought what I bought last year,” but how do you know if you bought correctly last year? What if you want to grow your sales? You can’t do the same thing and expect a different result. I encourage you to look at your business again by classification, not by SKU, vendor, or department but really drill down. If you’re a clothing store, what’s your top business? What’s your pant business? What’s your jacket business? What’s your dress business? Vendors and SKUs change dramatically from season to season, so there’s not that much you can learn from that.
Your customer buys by classification based on need, so you’re buying — it should reflect that need. Those things will stay fairly consistent year over year when you look at the classes and vendors and styles will change. You might have the appropriate amount of inventory in your store, but if it’s not allocated correctly, it’s still going to be a problem, and carrying too much inventory is probably the number one reason why stores have poor cash flow.
Dennis Zink:
There’s a show you may have seen on CNBC called The Profit, and it’s a fellow, Marcus Lemonis goes into various businesses and he wants to invest in the businesses if they’re successful. About. it seems like 50 percent of the time he goes into their back room and he finds tons and tons of stuff back there that has never sold, never will sell, and it seems like that’s his first occupation in there is to get rid of that stuff. It seems like inventory control is a real serious problem in the retail industry. Can you elaborate a little bit about how that happens and what the best strategies are to deal with it?
Allison Boswell:
Yes. First of all, we love Marcus and it is a big problem. Mainly, people don’t really know that your POS system is supposed to be telling you where you are with your numbers, but there’s a lot of POS systems out there, and quite frankly a lot of them aren’t very good. I say that’s usually because they’re designed by IT people instead of retailers.
Dennis Zink:
POS being point of sale, right?
Allison Boswell:
Point of sale systems, which connects your cash register to your inventory. Having a good POS system is really important and also being properly trained on your POS system, which is a step a lot of people don’t bother to go through, but if you have that data, then you have the tools to understand where you are. What we do at Management One is take that information from your POS system and create a plan for the future. We do that by looking at your history but also by looking at your current trend and where we see opportunity to grow business and also where we see maybe some liabilities. If you have a good plan for your inventory then you won’t be overstocked like that.
Dennis Zink:
Maybe I’m dating myself here, like old inventory, but my first job was an inventory control manager for Sperry Remington Office Machine Division in New York. We used a Cardex system it was called, where you had these cards. Then each card had a piece of the inventory number of the serial number and what it was, and we’d move these cards around all day as inventory moved out to dealers and stuff, but boy how things change. Just a point of information. What are some other ways businesses can save money to improve their cash flow?
Allison Boswell:
Well, many businesses overpay for their credit card processing. Often it’s because they think it’s easier because it’s linked to their POS system or they have a relationship with the bank, but you shouldn’t have to pay more than about 2 percent for processing. It can be challenging to vet that, because a lot of companies have teaser rates, but there are some good ones out there that really do provide a good value. Not having your own UPS or FedEx account. Many vendors overcharge for shipping, because they don’t actually weight the packages. If you ask them to use your account, you’ll be charged directly by the shipper and we’ve seen stores save a significant amount of money by using their own accounts.
Another way you can improve your cash flow is really be wary of ordering merchandise you don’t really need just to qualify for price breaks. Again, the max I think any business that has an inventory business should ever order is six month supply. Any more than that’s really going to hurt your cash flow, but for most businesses, you don’t even want that amount. Another thing that hurts cash flow is ordering merchandise you don’t really need, because you’re getting dating. If you’re taking in merchandise that is not appropriate for your season, dating isn’t going to help you. If you feel like it’s — what you should be getting is a discount, not dating.
Fred Dunayer:
Dennis Zink:
Can you explain that? I don’t know your use of that word, dating.
Dating is like, “Would you like to go out on a Friday night to a movie with me?”
Allison Boswell:
You swipe right or left. I don’t know.
Ordering merchandise you don’t really need because you’re getting a dating or extra time to pay the bill. There’s no reason to order merchandise you don’t need just because they’re giving you three or six months to pay it. If you’re negotiating with vendors on something, negotiate on a discount instead. The other thing that most businesses don’t look at very carefully is their pricing structure. There’s some old fashioned formulas for what a margin should be, but those things have changed, because the market has changed dramatically. It’s so much more promotional now than it ever used to be. It means you need to get a couple extra points on the front end.
Another thing that hurts cash flow is not having a separate account for your sales tax. Some business owners end up dipping into their sales tax money and then get short when it comes time to pay it. It’s not your money. Don’t use it. If it’s in a separate account, it moves the temptation as well as the stress of scrambling to pay that bill.
Dennis Zink:
You talked about dating. We called it terms, getting favorable terms. Taking discounts, are you suggesting, for example, that 2 percent 10 net 30?, So you take 2 percent off if you pay the bill within 10 days. Is that what you’re referring to?
Allison Boswell:
Yeah. That kind of thing. It’s less commonly offered than it used to be, so you have to ask.
Dennis Zink:
Why do you think that’s so?
Allison Boswell:
Vendors want to keep that 2 percent.
Dennis Zink:
All right. You know, pricing is interesting, and you mentioned there are formulas. Are you talking about a keystone markup where you?
Allison Boswell:
Yeah. A keystone markup in at least in the apparel industry. They did that when they had a cash register that had a bell on it. That’s not how we mark things anymore. A retail store should be a minimum of 55 percent, but we like to see stores closer to 60.
Fred Dunayer:
Allison, is there anything that we have talked about that you would like to stress so that our listeners walk away with a particular point in their mind?
Allison Boswell:
I think the main point is that planning is really important and you should never be surprised by your cash flow. You might miss your goals, but you should always know what you’re expecting to … Separating your monthly expenses, which are probably a little bit more consistent, then from your inventory looking at those separately, looking at your sales goals, and tracking it, projecting it out for at least six months so you can see where you’re going to be and you’ll know if you’re going to have a time when you’re going to be a little bit more squeezed than other times and know that you’re going to come out of it and be able to pay the bills.
Fred Dunayer:
I would suggest, as I’m thinking about it myself, that you also need to make a real effort to separate your variable costs from your fixed costs.
Allison Boswell:
Absolutely.
Fred Dunayer:
Knowing the difference will incredibly help your planning, and not knowing the difference will cause your plans to probably not work.
Allison Boswell:
Right.
Fred Dunayer:
What about you, Jami, is there anything that you’d like to share with us that we haven’t talked about?
Jami Schwartz:
Yeah, absolutely. Here at Kabbage, about a third of our customers are actually in the retail space, so I completely agree with Allison’s point that a line of credit is usually the best option. That way you can access those funds when you need it and understanding that the structure of any borrowing you do is extremely important, so whether there it’s an origination fee or early payment fees and things like that is also very important, so not just what the money you need is but also what any fees associated with any borrowing you do, and here at Kabbage we really pride ourself on no fees other than what you take out and transparency about those fees.
Fred Dunayer:
Is there anything else that, as you listen to the conversation, was there anything that struck you as an important point that our listeners should remember?
Jami Schwartz:
I think planning is the number one key that we also tell our customers. If you really understand when you’re going to experience those highs and lows of your business, then you’re ready to take out funds.
Dennis Zink:
Well, thank you both for enlightening our listeners on cash flow and inventory management. It’s been a pleasure having you on Been There, Done That.
Jami Schwartz:
Thank you so much for having us.
Fred Dunayer:
You’ve been listening to the SCORE small business success podcast, Been There, Done That. The opinions of the hosts and guests are theirs and do not necessarily reflect those of SCORE. If you would like to hear more podcasts, get a free mentor, view a transcript of this podcast or would like more information about the services we provide, you can call SCORE at 800-634-0245 or visit our website at www.Score.org. Again, that’s 800-634-0245 or visit the website at www.Score.org.