Last updated on July 20th, 2026 at 06:29 pm
Cash Flow Management | #1 Way to Positive Inflows In Retail
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- Cash Flow Management | #1 Way to Positive Inflows In Retail
Cash flow management…sigh…
As a Small business Owner, operating your busy retail store, you dread those constant discussions your Accountant always wants to have about cash flow management.
We all know that cash flow is about the amount of money flowing into your business (revenue/sales) and flowing out (expenses) each month.
And if you have more money coming in than going out, your cash flow is positive and you’re happy. If it’s the other way around, it’s negative and you feel discouraged and stressed.
So why is cash flow management even more important when you’re in retail?
Well, in retail, inventory is the life blood of your business. And inventory ties up cash.
It follows then, if you can manage key aspect of your inventory, you will improve your cash inflows.
To really understand this, let’s pause a bit and look at some examples of the inevitable marriage between inventory and cash management.
- Overbuying inventory – This is one of the most common ways retail businesses strangle their own cash flow. Every dollar sitting on a shelf as unsold stock is a dollar you can’t use to pay rent or restock a hot seller.
- Fixed obligations don’t wait – Rent, payroll, and loan payments are due on specific dates regardless of how sales are going that week. A slow month doesn’t mean the landlord waits.
- Seasonality – Many of you make a huge share of your annual revenue in a short window (holidays, back-to-school, etc.). To survive the lean months, while still being able to stock up for the busy ones, cash management must be at the forefront of your efforts.
- Growth can drain cash, not just cost it – Conversely, growing sales can worsen your cash flow in the short term, since you need to buy more inventory upfront before that growth turns into cash you can collect.
The best way to keep cash flows positive
It follows then, that one of the best ways, if not the best way to maintain a positive cash flow, is to effectively manage your inventory.
And that’s where I want to focus your attention with this post.
So, I will show you 7 ways to manage your inventory such that it keeps your cash inflows positive.
They represents the best combination of the practical knowledge I gain from setting up and running 2 retail stores, my experience as an Accountant both in the NFP arena and in the business world and as a small business consultant.
And best of all for you, you don’t even have to put out any extra money.
So if you’re ready…
1. Understand the relationship between inventory and cash flow
Inventory or stock is usually the largest purchase you will make. Therefore, you want to sell it off as fast as you can. If you don’t do this, you are actually tying up cash you need to spend in other areas of the business.
And if that’s not enough, even in retail, you will meet the 80-20 rule or pareto analysis.
This means that 80% of your sales is generated by 20% of your stock. At first you could find yourself celebrating this. Until you realise, that the remaining 80% of your stock is generating only 20% of the sales!
Let’s really understand this.
It means that 80% of your inventory is remaining much too long on shelves in your store or in your storerooms. Even more concerning, that 80% of stock on hand also represents 80% of the cash you invested in stock.
In other words, if you spend $100,000 in stock and $20,000 (20%) is used to generate sales, then $80,000 worth (80%) is now hanging around, waiting to generate $20,000 in sales.
And if you borrowed for that inventory, the longer it stays on the shelf, the more likely to you are to default on the debt. And the more likely you are to feel like a loser.
The important question then, is how did this happen in the first place?
The answer to this is in my next tip…
2. Avoid assortment creep
A significant cause of the problem of having large amount of slow moving stock on hand, is something called assortment creep.
According to business know-how, assortment creep is the slow, steady, almost imperceptible addition of items and categories to existing merchandise and product assortments, which adds to inventory levels, but not significantly to sales, thus tying up valuable cash and diluting overall inventory productivity.
In other (simple) words, assortment creep, is really your own desire to be everything to everybody or trying to offer every possible product that your customer might want.
At the foundation of this is a feeling, born out of your insecurity, that because you’re small, you must sell a little of everything to attract and keep more customers.
At this point, you completely forget that you could unlock more of your revenue with great customer service and by rewarding your staff for exceptional performance.
A better approach would be to…
3. Develop a sound inventory purchasing plan
A solid approach to cash flow management is to have a sound inventory purchasing plan.
A good place to start your purchasing plan is to ensure that inventory purchases do not exceed what you can convert to cash within your payment terms to suppliers.
In other words, if your supplier gives you 30 days to pay (net 30), you want to be reasonably confident you can sell enough of that inventory within those 30 days to cover the bill. If you can’t, it means you’ll be funding the gap from existing cash reserves, out of your pocket or by credit.
Other things you can implement for your inventory cash flow management include:
1. Sales forecasting – Start with historical sales data (if you have it) broken down by SKU, category, and season. Look at trends, growth rate, and seasonality. If you’re new, use industry benchmarks or comparable store data as a starting point.
2. Reorder points and safety stock – Reorder points are how you determine the inventory levels that trigger a new order, while safety stock is the extra amounts you add to certain orders as a cushion for demand spikes or supplier delays.
3. Budget allocation – Set a purchasing budget tied to cash flow, not just projected sales. In this way you can avoid running out of cash before inventory is sold.
4. Purchasing calendar – Set up an inventory purchasing calendar mapping out things like regular buying cycles, seasonal buying windows and supplier order deadlines and lead times.
5. Vendor management – Reduce stock outs and improve cash flow management by having multiple suppliers for key products. Also negotiate favourable terms with suppliers: volume discounts, minimum order quantities.
When you have a practical inventory purchasing plan, when you buy inventory, you spend more on those items which are more closely aligned with the need of your customers, and will move faster.
4. Leverage the 6 types of items which every retail business must sell
A little-known way to use your inventory to manage your cash flow is to categorise your inventory into the the 6 categories of items which every retail business must sell.
If this sounds crazy to you, stick with me because it did to me too, when I accidentally stumble into a retail seminar and heard the presenter discussing them.
It is a fresh new way to look at your existing inventory and when you get it right, it changes the way you lay out your inventory, the way you do marketing and even the way your Customer Service Reps interact with customers. And of course it increases your cash flows.
So here they are:
- Destination Products – These are retail products which people come to your store specifically to buy – your signature products. They can be products which you make in-house, some which are better than those of your competitors or some that your competitors simply neglect to carry.
- Image Enhancers – They are a cut above the rest of your regular inventory and are intended to wow your customers and get them talking about your store. The good thing is, creating an image enhancer could be as simple as the way you repackage existing items.
- Transaction Builders – A transaction builder is a retail product which drives the add-on sale. E.G., A sheet can lead to add-ons such as pillowcases, a comforter and even throw cushions for your bed.
- Traffic Builders – The definition of these retail products is in the name. There are the items that encourage customers to come to your store again and again. Analysing your sales data can help you identify these.
- Profit Generators – Those items which have high profit margins. Store owners usually rely on buying closeouts from their vendors to satisfy this need and this is alright. But a great source of profit generators are those retail products which also serve as transaction builders. (#3 above)
- Turf Protectors – They are those retail products which if you don’t sell them, it reduces the number of customers who will shop with you. Retailers typically don’t enjoy carrying this type of merchandise because it does not make them money directly. However, including them in the inventory mix helps to increase the sale of many other products.
You can begin by looking at your existing products and see how many easily fit into these categories. Then, think about the kinds of items you can include in your future inventory mix under these product types.
It really is a great way to improve your cash flow management using your existing inventory!
5. Reduce the level of inventory on hand
Some store owners hold on to slow or “non-moving” stock like some of us hold on to bad relationships.
Mind you, I totally get it. You probably bought some of those items with lots of love in your little heart or because your partner liked them. Or, 2 out of your 200 customers asked if you carry them.
If you’re guilty of assortment creep, however you acquired the inventory, you end up with quite a bit of old, outdated, unpopular or dust-gathering stock. And you’ve just got to get rid of it.
The best way to do this is to hold a sale and send these items packing.
Not a “joke” sale but a real “ring-down” (Bajan word) sale with prices slashed low enough to entice customers to buy. Not only does this increase your cash flow quickly, it’s a great way to keep your regular customers.
Because nothing drives your customers into the the hands of your ecstatic competition like regularly coming into your store and seeing the same old stock.
You also need to…
6. Layout your merchandise to assist your cash flow management
Yeah…I mean that.
Many of you do not readily make the connection between how you layout the products in your stores and the impact on cash flowmanagement.
Walmart founder Sam Walton firmly believed that your store’s physical environment affects the ways in which shoppers interact with your merchandise, and that this ultimately affects how much money your customers spend.
Admittedly, a discussion on this would require a post on its own but here are two examples to get you thinking.
Research shows there’s a natural inclination in which most customers physically move through a store as they shop.
They are inclined to move counter clockwise or to their left, when they come through the door. This means that an area on the customer’s left as they enter the store is always premium “sales estate.”
The size of the area depends on the size of your store but this is the place where you should display your fast-moving, high-profit items. If you’re in hardware for example, this space will be WASTED on paper rolls and kitchen towels!
On the other hand, you want to place your essentials as far from the door as possible. Ideally in the back of the store.
You want to use this approach to do 2 things. (1) Increase the time customers spend in the store and (2) encourage them to cover as much ground as possible.
The more ground they have to cover to reach their desired items, the more time they will spend in store. Aso, in a carefully laid out store, there will be select items place in their path, to tempt them into spending more.
And don’t forget to…
7. Practice good inventory management
Managing your inventory does include monitoring and controlling the movement of items through your system. This is mostly achieved through the point-of-sale, annual stock counts and all the other obvious thing that you do.
But an important aspect of effective inventory management, that really impacts your cash flow management, is to improve your stock turn.
Your stock turn or inventory turnover is the rate at which inventory is sold and replaced in a particular time period, mostly a year.
Explaining it for you:
The stock/inventory turn ratio is the cost of good sold (COGS) or cost of sales (COS) divided by average inventory. Average inventory is the inventory at the beginning of your financial period added to the inventory at the end of the same period, divided by 2.
A worked example:
Cost of sales = $150,000
Opening stock = $30,000
Closing stock = $20,000
Average stock = (30,000+20,000)/2 = $25,000
Stock turn = 150,000/25,000 = 6 times in a year
The above ration means you’re replacing your inventory every 2 months. All things being equal, this could mean that the stock is financing itself without any additional cash injection.
You also want to be reviewing your monthly stock movement reports to understand the buying trends of your customers. Being able to read evolving changes in your niches improves your buying decisions and of course, your cash flow.
Another inventory challenge you will face which you should plan for is pilfering which is petty stealing, mostly done by your employees. A close cousin to this is shoplifting by customers.
Your next “cash flow management” step…
Now you have them…7 easy ways you can boost your cash flow management by managing your inventory.
You do not need to put complex structures in place to take advantage of any of the 7 inventory management strategies I share with you. Once you understand them a simple spreadsheet can work for you or even some blank sheets of paper and a pen. Be sure to keep them safely afterwards.
So, it’s now entirely up to you to implement them and keep more money in your bank account. Or ignore them, and have to hide from your bank manager when she calls about your overdraft.
Just remember that understanding and managing your inventory is very important to having a positive cash flow most of the time.
To success with your positive cash flow management…
Lorna Barrow
Lorna Barrow excels at leading small business owners to get the breakthrough they are looking for in their businesses! She unleashes her 25+ years of small business experience and knowledge on your business, which was developed from working with small business across the Caribbean and beyond. This ensures you get the solutions that are right for you and your business...
