The retail business is inherently a cash flow positive business. This is generally because of the fact that retailers are generally able to procure their stock on credit. However, when it comes to liquidating their stock in the form of sales, retailers generally receive payments in the form of cash or credit cards.

Hence, receivables are received almost instantaneously whereas payments can be delayed. This is the reason that the retail business is considered to have a positive cash flow cycle. Certain successful retailers such as Amazon are able to run their business without any working capital due to this phenomenon.

However, a large number of small and medium retailers are struggling because of the cash flow issues. In fact, a large number of retailers have faced financial duress because of their inability to understand and manage the underlying cash flows related to their business.

In this article, we will explain why cash flow is of strategic importance in the retail business and how the absence of positive cash flows can literally wreak havoc on the retail business.

Difference Between Cash Flow Vs Profitability

It is important to understand that cash flow is not the same thing as profitability. Profitability is an accounting construct which is calculated based on a certain agreed upon formula. However, that is not the case with cash flow. Cash flow is an undisputable fact. The retailer either has a certain amount of cash in their coffers on a certain date or they don’t!

Cash flow management refers to the management strategy which allows retailers to manage their funds in such a way that they always have the required cash to pay their current bills.

Importance of Adequate Cash Flow in the Retail Sector

The importance of adequate cash flow from the point of view of retailers can be understood with the help of the below mentioned points.

1. Expensive Debt: Working capital finance is available to retailers at a relatively high rate of interest. This is the case since a large number of recent bankruptcies in the retail sector have created a situation where in the business is now considered to be quite risky. As a result, retailers have to pay a high marginal cost of taking on financing. This additional cost can lead to an increase in their costs which affects their competitiveness. It can also lead to a decrease in their profitability.

2. Unable to Manage Expenses: If a retailer is not able to make payments to its vendors or make payroll on the promised date, their reputation might take a severe beating. It is possible that going forward, the company may find it difficult to recruit employees and vendors going forward. Proper cashflow management is essential to build an impeccable reputation.

3. Expensive Purchases: If the company is unable to build a reputation for making timely payments, suppliers are likely to build in interest costs in the price of the products that they offer to the retailer.

   Retailers with poor financial ratings generally have to pay a higher price to purchase the products. This can significantly impact the profitability of the company in the long run. On the other hand, if a retail company has a stellar track record of always making payments on time, then they can negotiate a better price with their suppliers.

4. More Resilience: Better cash flow planning allows retail businesses across the globe to become more resilient. This is because when companies have emergency funds in their cash flow, they can manage contingency situations better. For examples, retailers who were effectively managing their cashflow were able to navigate the coronavirus downturn in a more effective manner as compared to other retailers.

5. Better Planning and Execution: Companies which can effectively predict their cash flow are better poised to make predictable plans and then execute them at a later date. It is important to realize that the ability to plan may not be dependent upon predictable cashflow. However, the ability to actually execute a plan is highly dependent upon the cash flow.

   There are several retail companies which have not been able to actually execute their plans since they ran out of cash before the execution could be completed. If the company is planning to raise finances to execute their plans, they may not be able to do so since the financier may view the plans as being risky and may not want to finance the same!

6. High Fixed Expenses: Retail businesses tend to have a lot of monthly fixed expenses. For instance, expenses such as rent, payroll etc need to be paid regardless of the volume of sales. This is the reason that retailers have a higher need for effective cash flow management as compared to other sectors.

7. Security Issues: No matter how much retailers try to digitize their business, there is a certain percentage of transactions which always happen in cash. As a result, a certain amount of cash is always present at the retail store. Lack of proper management of this cash can lead to a large amount of cash accumulating which could create a higher chance of robberies or similar security issues.

From the above points, it can be easily inferred that cash flow is very important as far as any retail business is concerned. The absence of adequate cash flow is one of the top reasons that retailers across the world end up falling in debt traps.