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Is Your Cash Flow Under Control?

Tuesday, April 15, 2014

(GIFTBEAT)Do you have a large percentage of your personal finances tied up in your store? Do you wish you had a better handle on its cash flow so you could foresee budget problems before they become a crisis? Philip Campbell, an accountant with nearly three decades of experience in the retail world, helps business owners understand the importance of managing cash flow. His book, Never Run Out of Cash, offers 10 Rules that help owners stay on top of their money and spot cash flow crises before they happen.

Q. Why is it important to understand the cash flow of your store?

A. Many business owners are risk takers, and they have a good chunk of their wealth or their financial plans for retirement tied up in their business. They are counting on the success of the business to create funds or funding for the future and retirement. Many business owners have made a big investment in their store and may carry a lot of debt in the business and stand to lose a lot if it doesnít do well.

The definition of failure in business is running out of cash. So taking control of the cash flow and understanding whatís going on with it is not about greed or making money the highest priority. It is about being successful so that you protect the dream you have for your business and protect your own financial future.

Q. How does a store owner know if his or her cash flow is under control?

A. What I attempt to do in my book is take the concept of financial management and boil it down into common sense. We all know it takes cash to run the business, to keep inventory, to make the payroll and to pay the vendors, but people get caught up in having to do the books, having an accounting system and figuring out how to bring it all together.

So what I do is to simplify the process into two questions: "What is my cash balance right now?" and "What do I expect my cash balance to be six months from now?" Everything comes down to that. If you can answer those two questions, you have it under control. If you wake up in the middle of the night worried about the finance side of your business, I can guarantee you canít answer those two questions, and you donít have your cash flow under control.

Q. What are common mistakes that business owners make when it comes to managing cash?

A. One mistake people run into is believing profits equal cash flow. I really try to ram that point home when I am talking to owners. People have a tendency to look at their income or P&L statement and say, "Did we make money last month? If thereís a profit there, if I made $10,000 I must have $10,000 more than I had before." They equate that amount with cash. But profits do not equal cash.

There are a number of different drivers of cash flow that affect cash in addition to profit. Profit is important and that should be the goal. One of the exercises I get people to do is go back to the last month and take a look at their profit or loss and then also look at the change in their cash. Those two numbers will be different. Itís an eye opener for people because they realize thereís more going on there than what is on their P&L statement. They realize they need to look at it a little differently.

Q. What other mistakes do you see happen that are specific to the gift industry?

A. One of the challenges is that a lot of gift store owners didnít get into the business because they were experienced in all the things that go into running a business. They had other dreams they wanted to fulfill by opening a store. Quickly they found out, though, that the owner is in charge of everything. They serve as the CEO, the president, the chief operating officer and the person in charge of sales and finances. Even if they came out of corporate America, these owners probably soon realized there were aspects of the business they werenít as familiar with.

Accounting is oftentimes an area where they arenít experts. Some people feel their talents are really artistic, and they want to be on the sales floor interacting with people and showing product. Because of this they think, "I am going to get a bookkeeper or CPA and let them take care of the financial side of the business." Itís almost as if they try to stay away or not be involved in the financial management of the business. That is a huge mistake. Itís kind of like what you hear with athletes who had millions but are broke because they had no clue what was going on. They had people managing the money but they didnít really understand what was happening with their money. It is a bad idea to avoid this side of the business because you need to be able to participate and understand your storeís finances.

Q. What do you tell owners who thought the best plan was to let someone with an accounting background handle their finances?

A. You donít have to do the grunt work of the cash flow, but you have to be able to evaluate if it is working to help you meet your goals for the business. You have to be able to plan and see what you need in terms of a budget. When the month is over you want to be able to see how you did. Did we get the margins we were expecting? Did our expenses come in the way we were expecting? By keeping track of this and how it affects your cash flow, you are doing the basics of achieving your financial goals. If you are not achieving these objectives each month, you need to be able to see it as it happens so you can make good decisions about your business and make changes if needed.

Q. You talk about the ďPeace of Mind ScheduleĒ in your book. What is it and how can it help store owners feel better about their cash flow?

A. The name came from creating a schedule that takes into account all the changes and influencers on your cash flow. It helps you begin to understand what happened during each month. Iíve found that people everywhere have a tendency to focus on profitability. But itís the understanding behind the numbers that makes all the difference.

The schedule lets you project what your cash balance will likely be over the next six months. If it shows you are going to be in the hole, you now have an opportunity to change things and try to influence that outcome. Maybe itís time to do additional marketing. Do you need to hold off on bringing in a new line thatís too risky right now? Do you need to put off hiring two extra people? It gives owners a heads-up so they donít have to wait until the problem arrives at their doorstep. Thatís how it creates peace of mind.

Even if it shows a problem, at least you can see in advance. I liken it to a tsunami warning system. The worst scenario is when an earthquake happens out in the ocean and no one knows about it ó they canít evacuate and plan for it. With a warning system, the outcome is much better because people arenít caught off guard and can take steps to get to safety. The Peace of Mind Schedule gives you that warning.

Q. How do retailers plan for the slow months when they know the cash won't be coming in and they have no reserves?

A. This is one of the steps you take after you complete the ďPeace of Mind ScheduleĒ and have a good solid view of your cash flow. Then you need to understand what I call the ďpeakĒ and ďtroughĒ cash months.

In the retail business I was in with 300 franchise locations, the sales were always very seasonal. At the end of January we were sitting on our peak month. Thatís when we had the largest bank balance we were going to see all year. The trough month was June and the month when we were going to see the lowest balance all year, which was a big drop from January.

What I taught management there, and what I teach in the book, is that when you are making decisions about spending money in the peak months ó bringing in a new product line, doing a remodel or expanding into a new location ó you canít make those decisions based on the cash balance during the peak month. You have to either spend or save based on the cash balance you are going to experience in the trough month.

The problem is people have all kinds of cash in the bank after a strong sales season and feel like they can spend it. But the low month is going to arrive and you are going to need that extra cash to run the business. You have to make decisions based on the low month and after you cover expenses. This is another reason you need the cash flow projections for six months out. You are able to predict what the low month will be and you can plan for it.

Q. What stumbling blocks have you seen store owners hit as they try to make changes?

A. The first stumbling block is thinking, "Our business seems so unpredictable that I canít possibly know what will happen tomorrow." There can be a mental block because of this. There is a saying that "It is better to be approximately right than precisely wrong." I set the process up so owners begin to understand there is some predictability to what happens.

I have them lay out the last six months in this format so they can see what has been happening. Principle No. 1 in doing projections is that the near future almost always looks a lot like the recent past. Principle No. 2 is that you can look at whatís changing and making business seem unpredictable ó like adding a store or coming into the peak selling seasons ó and take those factors into account when making projections. You just have to start with baby steps. Make a prediction for one month and then go back and look at how things actually turned out so you can understand the process. That will move you in the right direction.

Note: For more information on Campbellís book, consulting and speaking services, visit his website He also offers a Web-based seminar on his site called ďHow To Take Control of Your Cash FlowĒ that walks business owners through the steps needed to gain a handle on their cash projections. Campbell can be reached at

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