Christmas is over, the hard work is done and it’s time to take a well-earned break, right? January and February might seem like the best time to take a break but it’s also the time when stores can reap the most benefits. It’s a little like farming; the hay might be in the barn but farmers still need to make sure it gets distributed properly or it has a habit of disappearing by itself!
One of the biggest problems that store owners have is their level of debt – they invariably spend most of the year owing money and most of the year seeing their debt levels rising with the hope of pegging it back in one giant Christmas trade period.
The average store will do 20–25 per cent of its sales in December with only a limited increase in overhead costs, mainly staff. It’s not hard to have more money in the bank at the end of December but it’s what comes next that matters. It’s important to spend time assessing how to use these new funds.
Unfortunately, the opposite happens; stores loosen the purse strings and reinvest in stock until they run out of money again, and the result is poor cash flow and more stock than they had leading into Christmas.
An interesting exercise is to take the bank balance as of 1 January and deduct the amount owing for December creditors to see what’s left. Apply this formula to a selection of normal trade months during the year and average the results – look at February, March and April perhaps.
Hopefully, stores will find that they have surplus cash in their 1 January balance compared to the average cash flow from normal trading. Here’s an example:
Jack has cash at bank of $150,000 on 1 January. He owes $70,000 for his December invoices, which means a cash surplus of $80,000 after paying those debts.
He then applies this formula to February, March and April from the previous year.
Clearly, this example, Jack is running short of cash in a typical month by an average of $13,333 (-$10,000-$15,000-$15,000/3 months). This is not accumulative as he has more cash arriving in before he has to pay his accounts but he is effectively living hand-to-mouth and could do with a buffer.
So what about that surplus he has of $80,000 after paying off December accounts? Jack knows that the previous year he averaged a deficit of around $13,000 for that time of year so, all things being equal, he may need to allow for this, rather than pay last month’s accounts from next month’s sales.
Jack allows himself $20,000 to be safe. He removes a $20,000 buffer to leave $60,000 in surplus cash. Does Jack need to replenish his stock? No. Jack is diligent at sending reorders and has largely replenished his December product throughout the year but he decides to keep a further $20,000 to top up those items he hasn’t reordered yet. This here is a lesson on the value of reordering stock regularly – if Jack didn’t reorder throughout the year, he’d need to replace his December product in one fell swoop, which would leave him with less of a surplus.
Jack now has $40,000 in surplus remaining. The key question that will shape the balance of his year is: how will he use this money?
It should be emphasised that this exercise is very basic, simplified for the purposes of this article. It’s not recommended in place of a full cash flow model as there are other factors that affect cash flow not mentioned here. Nevertheless, as a quick calculation, this model can be invaluable in helping jewellers to make a conscious decision about the use of their post-Christmas cash surplus.
Options for the cash surplus are vast – invest it in new product; repay debtors; take a holiday; start a new business. The point is that it will be a conscious decision to spend the money for the betterment of the business. Taking the time to choose how to spend excess cash can help revolutionise a business.