March 2009 Newsletter

HOW TO BE PROFITABLE DURING BOTH GOOD AND BAD TIMES - PART 5
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In last month's newsletter I described the preparation of an annual budget, the third step in planning to be profitable. As a re-cap, the five steps to being profitable are:

1. Prepare an annual Gross Margin Plan
2. Use an Open-To-Buy
3. Prepare an annual pro-forma Income Statement (budget, done by month)
4. Prepare an annual Cash Flow Projection (done by month)
5. Track the productivity of their selling staff

In this, the fifth installment of this 6 part series, we will discuss putting together your annual Cash Flow Projection to make sure you have the cash needed to pay your bills and keep your business functioning.

Cash Flow Projection
After the Pro-forma Income Statement (Budget) is completed to your satisfaction, the next step is to prepare a Cash Flow Projection. You must always keep in mind that Profit does NOT equal Cash. And you must have cash to stay in business.

A retail store without cash is like a fish out of water -- it cannot exist very long. It can not pay for merchandise, nor can it pay its sales or office personnel or its overhead costs. A company can operate for a time without making a profit -- but it can not operate without enough cash to pays its bills.

Cash flow management is an essential business function for all retail operations yet very few actually prepare a formal written Cash Flow Budget. With a well-prepared Cash Flow Budget you will:

* Know ahead of time when extra operating funds will be needed so there will be time to search for and negotiate the most advantageous loans and terms.

* Be able to pay all bills on time -- not early and not late -- to take advantage of all cash discounts and improve your credit standing.

* Remain in business.
The method I use is to start with Net Profit and make adjustments as needed to convert it to cash. With the accrual method of accounting, the goal is to match sales and expenses monthly. This means that the month in which you pay for something and the month in which it is expensed are many times not the same. For example, store insurance for property and liability is many times paid semi-annually or even annually, but it is expensed monthly. Also, there are items that use cash that do not show up on the Income Statement. For example, any payments to loan principal do not show up on the Income Statement (only interest does). So, any payments of loan principal need to be deducted from Net Profit in the Cash Flow Projection.

A simplified way of thinking about this is that any increase in an Asset is a use of cash and any reduction in an Asset is an increase in cash. Conversely, any increase in Liabilities means that we have not used any cash but instead incurred a liability. Then, any decrease in a liability is a use of cash and reduces our cash reserves.

Below is a copy of the format of the Cash Flow section of the budget I prepare for retailers I work with, since I consider it important enough to ALWAYS be included with the budget.

CASH FLOW ADJUSTMENTS:
   Inventory Change (incr) decr
   A/R Trade-Adjustments
   Other Receivables-Adjustments
   Prepaid Expenses-Adjustments
   Fixed Assets-Adjustments
   Other Assets - Deposits
   A/P Trade-Adjustments
   Other Liabilities Adjustments
   Depreciation/Amortization
   Bad Debt Expense
   N/P-ST/Seasonal -Adjustments
   N/P-LT-Adjustments
      Total Cash Flow Adjustments
Monthly Cash Flow
   Seasonal Debt-Additions
   Seasonal Debt Payments
   Additional Pd In Cap.(Dividends)
BOY Cash Balance
CASH BALANCE - EOM

Now, lets go over each line of this form. You need to be aware of how each affects cash and how you adjust Net Profit to arrive at your monthly cash balance.

Inventory Change: If inventory increases, it is a use of cash and conversely, if inventory decreases it is an increase in cash. That is why on the Inventory Change line above it shows a negative for increase.

A/R Trade: When you sell merchandise on account you are not generating any cash, therefore, it is a reduction in cash. (You sold the merchandise but have not received any cash.) Conversely, when a customer makes a payment on account it is an increase in cash. The net effect of this is the A/R Trade Adjustment.

Other Receivables: This works the same as A/R Trade above. When it is created, it is a reduction in cash and when it is paid it is an increase in cash. Other Receivables are things such as Returned Checks or could be funds advanced to employees.

Prepaid Expenses: Prepaid Expenses are items you pay for immediately but show as expenses in the Income Statement later.   An example of this is your business property and casualty insurance. Normally you are paying for this either every 6 months or 12 months. However, the expense is recorded in the Income Statement by month. When this is paid, it is a use of cash. When the item is expensed it is not using cash so is added back to cash when adjusting the Net Profit figure.

Fixed Assets: The purchase of capital assets represents a use of cash-whether the cash is internally generated or obtained from a loan. Conversely, the total proceeds from the sale of a capital asset should be presented as a source of cash and added to earnings.

Other Assets - Deposits: This is generally used for deposits on such things as rent or utilities. As such, it is a use of cash and the original payment and any increases must be deducted from cash.

A/P Trade: An increase in the Accounts Payable balance is added back to earnings since we have received merchandise but not yet paid for it. A decrease in the Accounts Payable balance indicates a use of cash and is thus subtracted from the cash balance.

Other Liabilities: An increase in accrued liabilities, such as Accrued Property Taxes represents a charge against earnings not requiring cash and this must be added back to earnings. A decrease in liabilities reflects a use of cash greater than the expenses charged against earnings and thus must be subtracted from earnings. Also, items such as State Sales Taxes Payable does not affect the Income Statement but is an inflow of cash one month and a payment of cash the next month (for most states).

Depreciation/Amortization and Bad Debt Expense: These are non-cash items which have been charged against earnings and so must be added back to earnings.

N/P-ST, N/P-LT and Seasonal Debt: For all loans, when you receive the loan proceeds, it is an increase in cash and when you make a payment of principal on the loan it is a use of cash and reduces cash. For example, if your loan payment is $750 but $467 is interest the principal payment of $283 is a reduction of cash. The $467 interest is already included in the Net Profit figure since interest is an expense.

Additional Pd In Cap.(Dividends): When you invest more into your business, it is an increase in cash. Conversely, when you take money out of the business by paying a Dividend it is a use of cash.

IN CONCLUSION
All our planning is now in place. We have completed the Gross Margin Plan, Open-To-Buy, Budgeted Income Statement, and Cash Flow Projection. However, our ultimate goal is not to plan - but to use the plans as a yardstick against which to measure our performance during the course of the year. Therefore, it is critical to compare your actual results every month to the plans and make adjustments whenever the need is seen, either by adjusting your way of doing business or changing your plan to match reality. For example, if your electric rates have been increased and you are already doing everything you can to reduce your use of electricity in your store, it is best to go ahead and enter the new, higher expense into your budget. That way, you can review all the other expenses in your budget to see if you are able to reduce some other expense to make up for this increase. The budget and cash flow projection should be dynamic tools to be reviewed every month and adjusted as needed to keep them realistic.

Next month we will move on to our Salespeople, specifically tracking their productivity. It is only by tracking how they are doing that we can gain the knowledge we need to help them improve their performance.

QUOTE OF THE MONTH
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"If you don't have a written plan, you are having a dream...
and it could turn into a nightmare."

Author Unknown

OPEN-TO-BUY SERVICE
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Control your inventory and increase profit with TRMA's Open-To-Buy Service starting at just $300 a month.

It is critical for the retail store that inventory be controlled so there is not too much or too little. We have been providing this service to retailers for many years, and at a price even the smallest retailers can afford.

For more information, call us toll free at 1-877-206-1299, visit us on the web at http://www.the-retail-advisor.com/open-to-buy.html, or send an email to LC@the-retail-advisor.com.

TELE-SWAP GROUPS
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Join a Tele-SWAP Group to talk to other retailers like yourself!

There are so many retailers around the country who are isolated because they are a small independent retailer. This service gives you an opportunity to talk with others in a similar situation without having to worry about giving away any information to your competition. Get the help and advice you need to be more successful without having to leave your store.

If you would like to discuss issues with retailers who are similar to you, but far enough away they are not competitors, visit us on the web at http://www.the-retail-advisor.com/peer_groups_tele-swap.html. Send an email requesting an application. Once I get your application I will contact you about joining a group to take part in a monthly one-hour teleconference call. The biggest commitment will be the one-hour a month for the call. The cost is minor at just $180 for a 6 month commitment (just $30 a month).

RETAIL JOB DESCRIPTIONS
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Well thought out and developed job descriptions should be the documents you use as a basis for interviewing and hiring new employees and also for making sure your employees are doing their job as it should be done. To help you with this time-consuming project, TRMA has developed very detailed job descriptions for almost all positions in a retail store in WORD so you can easily copy them to your computer and personalize them to your unique situation. The job descriptions are available on CD for only $25, including shipping. For a detailed list of jobs, visit us on the web at http://www.the-retail-advisor.com/job.html.

INTERNAL CONTROL MANUAL
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Studies have shown that almost half of all your store's shrinkage is due to employee dishonesty!

If you can reduce shrinkage by 1% that is an additional 1% of profit for you. As the owner it is your job to provide the procedures, checks and balances to keep your employees honest. Also, consider that as our country plunges into this recession, normally honest people may become desperate. Financial need is one of the main reasons given for attempting theft from an employer. Make sure you are doing all you can to help avoid temptation before it strikes.

As a former controller for a 5-store chain of family apparel stores and with my experience working with retailers around the country as a retail management consultant I have developed a manual to help you with this. It is our "Internal Control Manual" that covers all aspects of a retail store's operations. It is set up in an easy question and answer format where a Yes answer means things are OK and a NO answer means you may have a problem that needs further checking.

To get a copy for your store, for just $95 shipped Priority Mail, visit our website at http://www.the-retail-advisor.com/internal_controls.html.

Do not wait until you discover that a trusted employee has stolen $70,000 from you (like a retailer I know had happen to him last year). Take steps now to make sure your merchandise and cash are as safe as you can make them. Do not delay

WHAT WE DO . . .
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o Monthly Open-To-Buy Service
o  Open-To-Buy Implementation on Your System (if available)
o  Merchandise Performance Evaluation
o  Shrinkage Control
o  Development of Incentive Plans
o  Development of Job Descriptions
o  Seminars On Retail Subjects
o  Financial Analysis
o  Financial Budgeting and Cash Flow Projections
o  Computer/POS System Evaluation, Selection, Usage
o  Policy and Procedure Development
o  Lead Tele-SWAP Groups (Share With A Peer)