Cash flow management for retailers: what you need to know

All businesses rely on effective cash flow management to stay solvent, but for retailers and e-commerce businesses, managing cash flow effectively can be particularly challenging. The core of selling products in retail, either in store or online is maintaining the right balance of inventory and sales. Every product you hold represents cash that you can’t use for something else, until you sell it. And with changing consumer demands, seasonal trends and variable prices, keeping on top of retail cash flow management requires careful attention.

What you need to know about cash flow management in retail

What is cash flow in retail? 

In retail, cash flow refers to the movement of money in and out of your business. Positive cash flow occurs when the inflows (sales, investments) exceed the outflows (expenses, salaries), while negative cash flow indicates the opposite.

In most businesses, money out of the business covers costs like salaries, materials, rent, machinery, advertising and more. As the old adage goes: you have to spend money to make money, and retailers have to buy or make products in order to sell them. The hard part for retailers and ecommerce stores is that you can’t always control the gap between when you spend money on inventory and when customers buy it – leaving capital tied up in stock. This leaves retailers with limited flexibility when it comes to free cash in the business to respond to changes in the market or new costs arising. 

That’s where effective retail cash flow management comes in.

Why is cash flow management important? 

Cash flow issues are one of the most common reasons for businesses failing, which is why retailers need to keep a close eye on money in and out of the business to meet financial commitments, invest in growth opportunities, and stay solvent. 

For retailers, that means maintaining a healthy cash flow to manage inventory, pay suppliers, and handle operational costs. Cash flow in retail focuses particularly on two key metrics – how fast you can turn inventory into revenue (linked to your working capital cycle) and the profit or margin you make on each sale.

What are the components of retail cash flow management?

In practice, cash flow management in retail covers a range of processes throughout your business that help maintain a clear and accurate picture of the available capital in your business.

1. Cash inflows

Cash inflows represent the money coming into the business. This includes:

• Sales revenue: The primary source of income for retailers, generated from the sale of goods. This can be through in-store purchases, online sales, or other distribution channels.
• Receivables: Money owed to the business by customers who have bought on credit. Efficient management and collection of receivables are crucial to maintaining healthy cash flow. For businesses selling online, payments are usually instant, but for others, especially in B2B, payment terms can vary widely.
• Loans and Investments: Funds received from business loans, investor contributions, or other financing sources. These inflows can help manage short-term cash needs or support growth initiatives.

2. Cash outflows

Cash outflows are the expenses and costs that your business must pay. These include:

• Inventory purchases: Retailers and ecommerce businesses need to regularly purchase stock to keep up with sales demand. The challenge is maintaining the right level of availability without tying up too much capital in inventory –that’s where effective inventory management comes in (more on that below).
• Operating expenses: These are the day-to-day expenses such as rent, utilities, salaries, marketing, and administrative costs. These can be both fixed costs and variable costs, so they require careful attention to ensure you have enough cash on hand to meet them.
• Debt repayments: Any loans of debt you’re holding have to be serviced, either as fixed repayments, say on a short term loan, or a percentage of sales on a merchant cash advance.

3. Inventory management

As mentioned, retailers need inventory to sell, but being overstocked can create cash flow bottlenecks.

• Stock levels: Maintaining the right stock levels ensures that capital doesn’t end up tied up in inventory. Just-in-time (JIT) inventory systems and regular stock takes can help in achieving this balance.
• Turnover rate: The rate at which inventory is sold and replaced. Higher turnover rates generally indicate efficient inventory management and better cash flow (less time waiting for goods to sell).

4. Accounts receivable management

Managing accounts receivable – ie when you get paid – is the core of managing cash inflows to your business. While most retailers will be paid on the spot, if you’re making bulk sales or working in B2B, you may need to align your collection policies with your outflows.

• Credit policies: Setting clear credit terms and conditions for customers to minimise the risk of late payments or defaults.
• Collection processes: Implementing efficient invoicing and follow-up procedures to ensure timely collection of receivables.

5. Accounts payable management

Retailers and e-commerce face a range of costs – from staff to inventory – and the timing and credit terms on these outgoings have a major effect on your cash flow. 

• Payment terms: Negotiating favourable payment terms with suppliers to extend the time available to pay bills without incurring penalties. Tools like trade credit or inventory finance provide extra flexibility on when and how you pay for stock.
• Prioritising payments: Strategically scheduling payments to prioritise critical expenses and take advantage of early payment discounts when possible. This can include scenarios where a small business loan can help you settle debts early and save in the long term.

6. Cash flow monitoring and forecasting

The sum of all the above is a range of data points and processes that combine to help you understand cash flow in and out of your business on a regular basis, from cash flow statements to management accounts. This enables you to monitor cash flow and forecast future conditions (download a free cash flow forecasting template here). 

• Short-term forecasting: Monitoring cash flow on a weekly or monthly basis to manage day-to-day operations.
• Long-term forecasting: Planning for future spending and investments considering seasonal fluctuations and market trends.

Key strategies for managing retail cash flow

Cash flow can be highly variable – especially in retail where trends change, products come and go and seasonal variations drive sales up or down. Managing your cash flow is an ongoing responsibility.

Targeted inventory management

Retail and ecommerce require a careful balance of maintaining the right level or inventory to satisfy demand without ending up with too much product.

Overstocking ties up cash that could be used elsewhere, while understocking can result in lost sales. Balancing inventory levels to meet customer demand without overextending resources requires a focus on what customers actually want (demand planning), timing and sizing orders correctly (supply chain planning) and then moving the products through marketing and sales. There are a few strategies that can help with this:

1. Just-in-time (JIT) inventory: JIT inventory systems reduce the amount of inventory held by ordering stock only as needed. This approach can significantly reduce holding costs and free up cash, but it also requires good relationships with suppliers to ensure quick turnaround times and reliable deliveries.
2. Regular inventory audits: Check on your stock with regular audits to assess inventory turnover rates and identify slow-moving items to help guide future purchasing, including order quantities and schedules.
3. Seasonal inventory planning: Use historical sales data to forecast demand for seasonal products and plan inventory purchases accordingly to avoid overstocking or stockouts. 
4. Off-season sales: Even if you plan carefully, it’s likely that you’ll end up with some stock that you just need to shift. In this case, clearing seasonal stock, even if it means discounts or bundled offers, can be more valuable than hanging on to products with a hope of selling at full price.

Retail finance

Having cash on hand is essential not only for meeting your day-to-day costs, but also for dealing with unexpected events. These could be challenges such as delays in deliveries or opportunities like seeing a run on a particular product. 

In these moments, retail finance options like short term loans or inventory finance can provide the working capital you need to act fast and adapt. These benefit retailers and ecommerce stores by:

• Unlocking cash: Accessing funds tied up in inventory to cover operational expenses or invest in growth opportunities.
• Smoothing cash flow: Covering short term costs and embracing opportunities without waiting for sales.
• Expanding inventory: Increase inventory levels during peak seasons without straining cash reserves, ensuring you can meet customer demand.

Updating your technology

Having the right data on hand can make the difference between having the right visibility and control, or planning in the dark,

• Point of sale (POS) systems: Invest in a robust POS system that integrates with your accounting software. This helps in accurate tracking of sales, inventory, and expenses, providing a clear picture of your cash flow.
• Cash flow management tools: Use specialised cash flow management tools that offer features like automated invoicing, expense tracking, and cash flow forecasting.

Seasonal planning

Don’t get caught out by the rhythms of the year – the further in advance you can project your cash flow needs, the more you can manage the peaks and troughs of seasonality.

• Holiday preparations: Plan your cash flow needs well in advance of peak seasons. Ensure you have enough capital to cover increased inventory purchases and marketing expenses.
• Off-Season strategies: Develop strategies to maintain cash flow during off-peak periods, such as running promotions or focusing on online sales.

Maintain a cash reserve

Given the volatility of retail and ecommerce, it pays to have a cushion against unexpected changes. Set aside a portion of your profits as a cash reserve to handle sudden expenses or downturns. This can provide a safety net and prevent cash flow crises before they arise.

Enhancing your cash flow management with retail finance 

Retail and ecommerce move fast, so you need finance options that can keep up with your needs.

With an iwoca Flexi-Loan, you can borrow up to £500,000, with no lengthy paperwork or approval processes, and use the money for whatever you need.

• Apply in minutes and get approved within 24 hours
• Borrow funds from 1 day to 2 years and repay any time, with no penalties
• No collateral required