Keep your business afloat with these simple strategies for improving cash flow.It’s no secret that 2025 has come with its share of surprises and challenges. So many retailers, and businesses in general, are trying to navigate tariffs, tax increases, neighborhood changes, inflation, reduced traffic, and many other obstacles that seem to diminish cash flow. Now, more than ever, finding the best tools and techniques to maximize cash flow has to be a priority.
Thankfully, small adjustments can have an enormous impact on a business. These tweaks are easy to implement, and if done properly, will bring about tremendous change.
More importantly, these tweaks are the way to ensure your retail business has good cash flow in this or any economy. You don’t just do this once, you can revisit these strategies from time.
Tweak #1: Adjusting your selling cost. Most retail businesses operate on some form of base plus commission. This is an area that I find to be implemented poorly in many businesses. Many stores pay commissions on the first dollar sold (they should not be, the sales people should be required to hit a goal) and are not planned in such a way as to keep the cost of sales in line. Let’s tweak that and see the results.
First, a definition. “Selling cost” is defined as the percentage of your sales that go to pay for your salespeople. The formula for this is Total Cost of Sales (which includes salaries plus commission) divided by Total Sales (without tax). As an example, if you have an employee whose payroll cost for last month is $1,700 and that employee sells $12,500, then the selling cost for that employee is $1,700/$12,500 = 13.6%.
Now, what if you put in a commission plan that keeps the sales at a good percentage, such as 9%? Try this — take the hourly wage for your employee and divide it by 0.09. That number is the employee’s hourly goal. For example, if you have an employee that is paid $10 per hour, divide $10 by 0.09 and you would get $111.00. That is what that employee has to sell each hour.
Now take that hourly goal and multiply it by the number of hours that person works in a week. If the employee works 30 hours, the goal is $3,330. As soon as they hit that goal in the week, you can pay them 9% of all sales above the $3,330. This gives them incentive to sell, helps them earn great commissions, and keeps your selling cost low.
We did that in a store where annual sales were $750,000. With this approach, we lowered their selling cost by 2%, resulting in an extra $15,000 in cash to the bottom line.
Tweak #2 – Lowering your purchases. We took a store and found ways to lower their inventory purchases by 2%. Look at the results in the chart on this page.
Yes, it’s another $15,000 improvement. This was not done by hacking 2% off of all orders unilaterally. It was done by determining which classes are “signature” classes for the store and which ones are carrying more inventory than they should.
This was done systematically, using all the tools of open-to-buy planning. Our overall goal was to cut purchases by 2%, but we had to figure out precisely how and where. If you aren’t using an open-to-buy plan to do this, investigate getting one.
Tweak #3 – Adjusting your Markdowns. Let me start this section by saying that there is no such thing as a “perfect buyer” and my retail customers have often heard me say that buying is the toughest job in the store. Having said that, there are some strategies we can use to reduce or limit the markdowns.
First, most independent retailers do not have a solid markdown strategy. Goods need to be given a sufficient time on the floor to sell, but after that they need to be identified as slow movers.
Markdowns are usually caused by the following: receipt of late goods, overbuying, inadequate department structure, bad forecasting, bad buying, overly broad assortment, bad performance on the sales floor and not reacting to early poor sellers.
We can develop strategies and measurements to reduce or control all of these. For example, if vendors ship late, we either get free shipping, markdown money, or we return the goods. Here’s the tweak for this one — let’s lower the markdowns by 2%. You can see the results.
ConclusionBy implementing all three tweaks, we get the following increase in cash:
- Lowered selling cost by 2%= $15,000
- Lowered purchases by 2% = $15,000
- Lowered markdowns by 2% = $7,500
We produced $37,500 on a $750,000 business. And it didn’t come from a crazy new marketing idea, a revolutionary new line, or a magical new salesperson. It came from watching the numbers, not only based upon what happened but what we planned to happen and working with the buyers, the vendors and the store managers.
What if this was applied to your store? It’s truly worth a shot.
Through Retail Smart Guys, Dan Jablons helps independent retailers in 18 countries create great cash flow through planning. He can be reached at dan@retailsmartguys.com. |
