Cash flow problems A cash flow problem can be defined as: When a business does not have enough cash to be able to pay its liabilities The main causes of cash flow problems are:
Low profits or (worse) losses Over-investment in capacity Too much stock Allowing customers too much credit Overtrading Unexpected changes Seasonal demand
Lets look at these in a little more detail. Issue Low profits or (worse) losses Why It Causes a Cash Flow Problem The profit a business makes from trading is the most important source of cash. There is a direct link between low profits or losses and cash flow problems Remember - most loss-making businesses eventually run out of cash
Over-investment in This happens when a business spends too much on fixed assets Problem is made worse if short-term finance is used (e.g. bank overdraft) capacity Fixed assets are hard to turn back into cash in the short-run Too much stock Holding too much stock ties up cash + Increased risk that stocks become obsolete On the other hand... There needs to be enough stock to meet demand Bulk buying may mean lower purchase prices Customers who buy on credit are called trade debtors Offer credit = good way of building sales On the other hand... Late payment is a common problem and slow-paying customers often put a strain on cash flow Worse still, the debt may go bad i.e. it is not paid at all Occurs where a business expands too quickly, putting pressure on shortterm finance
Overtrading
Keen to open new outlets Have to pay rent in advance, pay for shop-fitting, pay for stocks Large outlay before sales begin in new store
Businesses that rely on long-term contracts are also at high risk of overtrading Unexpected changes These are items or events that are not included in the cash flow forecast they are unforeseen. Examples include:
Internal change (e.g. machinery breakdown, loss of key staff) External change (e.g. economic downturn, accidents, change in legislation that requires a business to invest in new facilities)
Seasonal demand
Where there are predictable changes in demand & cash flow Production or purchasing usually in advance of seasonal peak in demand = cash outflows before inflows This can be managed cash flow forecast should allow for seasonal changes
Have a reliable cash flow forecasting system Actively manage working capital Choose the right sources of finance for the business needs
Good cash flow forecasting is at the heart of cash flow management. The key is having good information and using it! A good cash flow forecast:
Is updated regularly Makes sensible assumptions Allows for unexpected changes Is reviewed regularly by senior management
Striking the right balance between offering customers credit and ensuring that they pay on time
Holding an appropriate level of stocks in the business Managing relationships with suppliers so that the maximum amount of trade credit can be obtained without damaging supplies to the business
Managing Debtors (credit control) This isnt easy. Credit control covers areas such as
Policies on how much credit to give and repayment terms and conditions Measures to control doubtful debtors (chasing, threatening legal action etc) Credit checking (only allowing credit to customers who can afford to pay! Selling off debts to debt factors Cash discounts and other incentives for prompt payment Improved record keeping e.g. accurate and timely invoicing
One area you should be aware of is factoring. This involves the selling of debtors (money owned to the business) to a third party. This generates cash and it guarantees the firm a percentage of money owed to it. The downside to factoring is that it reduces income and profit margin made on sales. The costs involved in factoring can be high! Managing Suppliers (trade credit) Suppliers are important sources of finance for a business and key part of managing cash flow. Trade credit refers to amounts owed to suppliers for goods supplied on credit and not yet paid for. Delaying payment means that the business retains cash longer. However, by delaying payment, the business has to be careful not to damage its credit reputation and rating. Trade creditors are seen (wrongly) as a free source of capital. Some firms habitually delay payment to creditors in order to enhance their cash flow - a short sighted policy which also raises ethical issues. Managing Stocks (stock control) Stock refers to goods purchased and awaiting use or produced and awaiting sale. Stocks take the form of raw materials, work-in-progress and finished goods. Stockholding is costly and therefore it is sound business to:
keep smaller balances (just in time stocks) computerise ordering to improve efficiency improve stock control
This will cut down the spending on stock but may leave the business vulnerable to stock-out (i.e. no stocks available to meet demand which is bad news!)
Thom Imlay Solution Specialist Microsoft Retail and Hospitality May 2006 Applies to: Application Architecture Summary: This article provides an overview of the challenges facing the supermarket industry in the U.S. from a technological perspective, and it provides recommendations for how retailers can gain a competitive advantage through the effective use of current and emerging technologies. (7 printed pages)
Contents
"How Do We Differentiate Ourselves When Every Other Retailer Seems to Be a Grocer?" Grocers Are Stepping up to the Challenge Supermarkets Will Continue to Redefine the Ways They Do Business with Their Customers Existing Store Systems Technology Some Examples of Systems in Typical Supermarkets New Technologies Will Enable Innovation and Differentiation Customer Relationship Management Solutions Customer Service Kiosks and Digital Signage Self-Checkout Systems Using Customer Terminals and Phones The Point-of-Service Application Must Be Updated Mobile Terminals Will Put Employees out on the Sales Floor Traditional Supermarkets Will Survive but They Will Be Different Than Today
only how consumers shop, but also where they choose to shop and eat their meals. Traditional supermarkets have seen a decline in how much shoppers spend and how frequently they shop in a particular store. While some supermarket operators continue to attempt to cut costs so they can offer reduced everyday prices, they find this to be a tough approach when competing with low cost operators like Wal-Mart and Costco.
Sell what they need and have it in stock when they want it. Make it easy for them to shop and find what they are looking for. Provide all the information they need in order to quickly decide what to buy. Have friendly helpful people available to make the shopping experience a pleasant one.
Controlling operational costs is certainly one of the biggest challenges that any retailer faces. Since supermarkets typically run on extremely low profit margins, the need for a lean and efficient operation is critical. Labor costs are the single greatest controllable expense. Some supermarket operators have a tendency to cut labor during tough times. If labor cost reduction is
not managed properly, customer service and store conditions may suffer. This, of course, results in lost customers and sales. Retailers that do not properly budget for necessary training programs will most likely see both increased employee turnover, which becomes very costly over time, as well as reduced customer service, due to a lack of training.
Supermarkets Will Continue to Redefine the Ways They Do Business with Their Customers
Competition has raised the bar for supermarket retailers. Perhaps some have simply lost sight of what the customers needed and wanted. Regardless, today's customers have less time, and are more intelligent, than ever before. Supermarket retailers will continue to face increasing survival pressures. Consolidation in the market space will continue to affect existing supermarket chains, both large and small. The top-tier supermarket chains that have increased the size of their store base through recent acquisitions are struggling to absorb what they have bought while trying to defend market share against the low-cost operators. Those chains that remain standing will be the ones that learn how to reinvent themselves. Successful supermarket chains will become experts at targeting specific consumer segments. Some are proving that being willing to target and settle for a smaller piece of the pie can be a winning formula. This becomes an iterative process that takes time, effort, resources, andperhaps most the most difficult thing of alla change in culture. Each retailer must search for its own winning formula to compete. To succeed, supermarket retailers must take advantage of new innovations, to create customer experiences that deliver true differentiation. Technology will play a major role in enabling these new innovations.
deployed over the years. According to several studies of IT leaders, as much as 70 percent of a retailer's information technology resources are devoted to sustaining and running existing capability, leaving only 30 percent for exploring and implementing new capabilities.
POS Checkout (including electronic payments)System that records sales and financial information, and that collects detailed customer and product related data. Self CheckoutSelf-service POS station where customers ring up and pay for their purchases. Cash ManagementSystem that controls the cash handling processes from POS to the back office, and to the bank. PharmacySystem that manages a customer database for prescription drug verification, dispensing, inventory, third-party insurance billing processing, and accounts receivable. DSD (direct store delivery)System that supports the receiving of product distributed directly from manufacturers or suppliers on their own trucks, by-passing retail warehouse facilities. Labor SchedulingApplication that creates work schedules for employees and departments, based on defined parameters. Time & AttendanceSystem that is used to plan, monitor, and report employee's work hours. Scale ManagementSystem that links different weigh scales and labelers throughout the perishable departments in the store. Order Entry/Inventory ManagementSystem that supports the process of inventory replenishment; an approach that combines perpetual inventory and reorder point calculations. Item Price VerificationWireless handheld devices that are connected to POS and used to audit prices on the shelf. Shelf Space ManagementSystem that helps manage the amount of shelf space allocated to each category, and to each product within the category. Loss PreventionAuditing tool that analyzes data to identify irregular and fraudulent activities, in an effort to reduce lost profits. ESL (electronic shelf labels)LCD shelf tags that are linked to a backroom computer and POS, and that automatically display price changes. Video RentalSystem that tracks video rental inventory and customer historical information. Learning Management (LMS)Computer-based training course software that delivers local or online content for new and existing employees. Forecasting SystemsSystems that projecs expected sales of products for given time periods. Shelf Tags/SignsSoftware that is used for printing in-store tags and signs. KiosksFreestanding, interactive terminals that display products and information on a video screen; they typically use a touch-screen for customers to make selections.
Self-Checkout Systems
The number of self-checkout systems will continue to grow in supermarkets. Retailers who develop a balanced customer service strategy around their conventional lanes and self-checkout stations will drive the perception of "fast checkout." Upon entering a store, customers gauge how much time they will spend by a glance at the front-end traffic. Retailers who master the balance of maximizing customer throughput while minimizing the appearance of long lines will succeed over their competitors who simply add self-checkouts and cut back on cashiers. Workforce Management applications can be helpful in achieving this balance based on the retailer's customer service philosophy and labor budget. From a front-end layout point of view, the proper ratio of conventional lanes to self-checkout stations is also a major consideration in maintaining the customer's perception of "great service."
Traditional Supermarkets Will Survive but They Will Be Different Than Today
To survive, traditional supermarket retailers will reinvent themselves over a period of time, in order to attract and maintain a loyal customer base. New concepts, neighborhood marketing, and innovation will be the key to success over the next decade. Some will make it work. Others will fail. There will be more consolidation in the marketplace. Successful players will capitalize on the strengths of the value proposition they choose to drive, and they will learn to do it well. In the customers' eyes, it's all about how well a retailer can satisfy what they are looking for in their shopping experience, and how well the retailer does at creating the perception of value in their minds. Technology and innovation will serve as the fuel in enabling the customer's shopping experience. Retailers cannot implement technology because of industry hype, or simply because the competitor "down the street" has it. Prudent decisions on the retailer's part must govern what technology is right for the business needs, in order to allow them to grow and prosper.