Here are some practical ideas that will help you manage and improve the cash flow at your frame shop.
To keep good control of your cash flow—which is more important than ever to small businesses like frame shops—you need to watch your inventory, turnover, capital expenses, and day-to-day flow of money in and out of your store. Of course, maximizing your profitable projects always makes a direct contribution to maximizing your cash flow. But here are a number of factors that you should keep in mind as you try to improve your cash flow.
- The key to inventory optimization and, therefore, maximizing cash flow, is turnover. Product that sits is undesirable. You want product to be moving or turning. Once a product stops turning and becomes “dead” inventory, it no longer matters what the product costs you. The only thing that matters is how much cash you can get for it.
- On the front end, you can improve turnover by delaying as much as possible the acquisition of inventory. The Japanese automakers made the term “Just in Time” famous, and rightly so. In theory, you want replacement product arriving at the same moment that you are using the last one you have. In practice, this is hard to do. To be successful at this, you must understand usage, which is a variable number. December usage is a lot different from September usage. Understanding this optimizes inventory and minimizes painful out-of-stock situations.
- On the front end, you also want to continually balance between order size and transaction cost. In the absence of significant transaction (shipping, ordering) cost, you want small order sizes.
- Also on the front end, consignment is a terrific tool. The product is, in theory, never yours. It is the supplier’s one moment, the customer’s the next. There is no better deal than that – zero inventory. Consignment, particularly for new and/or high-priced product, is a great idea where it is appropriate.
- Once the product is in, the other side of turnover is moving it out. Framed product sitting in a warehouse or storeroom is a bad idea – you can’t sell it from there. Building up a huge stock of cut down frames doesn’t help either. They need to be where they can be sold.
- Dead inventory, wherever it is, must be moved out ASAP. If it can be returned to the supplier, great. If not, then you need to sell it off quickly for whatever you can get for it. You need to either aggressively reduce the price until it goes away or move it to another location where it can be quickly sold. And if you can’t return it and can’t sell it, then dispose of it and take it as a tax write-off. Continuing to hold onto dead inventory is a bad idea.
- Think of your inventory as potential buckets of cash. There are plenty of wall art in stores and galleries where it takes up permanent residence on the walls. The cost of this hurts a business badly. Wall space is very expensive and needs to effectively make money for you. Wall art inventory must turn faster.
- On custom jobs, a 100 percent deposit and no receivable is a better cash flow deal than a 50 percent deposit, 50 percent receivable deal. Don’t create any barriers to sales, but where you can painlessly get 100 percent up front, get it.
- Stay on top of your receivables. Don’t let any client stretch you out. You want cash when it is due, period. There is no need to apologize or speak softly. It’s your money. You want it, now.
- You don’t want to pay early for anything unless you receive a discount or some other financial benefit for doing so. You want to legitimately hold on to cash as long as you can.
- Payment terms are an important element of the purchasing equation. All other things being equal, the longer payment terms you can negotiate, the better.
- Be sure that any CapEx money provides you with a solid payback. The spending capacity of most shops is limited, so you must be sure you are funding the best ideas.
- Typically, a good measure for evaluating a CapEx project is to ask, “If we spend the money, will we earn the money back in a two-year period?” If so, it is probably a solid project. If not, how about a three-year period? If so, it’s still pretty good. If the payback is longer than three years, then think hard about funding the project.
- Calculate payback on a project that either reduces operating expense, such as a piece of equipment that reduces labor for cutting or fitting, or avoids an expense increase, such as when your truck dies. You can either buy a new truck or pay high monthly rental on one. If the project costs $3,000 and saves or avoids $100 per month, you have a 30-month (2.5 year) payback, which is pretty good.
- On the other hand, if you think a project will drive a sales increase, you need to do a few more calculations. If the project costs $20,000 and you think you’ll get a $3,000 per month sales increase, you cannot simply compare the $3,000 per month to the $20,000. You must compare the estimated profit on the $3,000 in sales to the $20,000. A good rule of thumb for many shops on such profit is 35 percent. So, first calculate 35 percent of the $3,000 per month in sales, which is $1,050 in estimated incremental profit. Now do a payback calculation of $1,050 versus $20,000. That represents a 19-month payoff period. If you feel very convinced of the sales impact, then the project will be a winner.
- Lastly, to the very best of your financial ability, always fund CapEx projects dealing with safety and security. You must keep your people safe and your facilities, equipment, and product secure. Payback is not the primary driver on these types of projects.
Mike Hulser, who does business as The Biz MD, is a Hawaii-based management and financial consultant and turnaround specialist. He is also the CFO at Pictures Plus. You can reach Mike at 808-672-0220 or email@example.com.