So the holiday season is over, the hard work is done and it’s time to take a well earned break - and why not? You deserve it.
January can be the best time to take a break from your business - it is also the time when you can reap the most benefits. It’s a little like farming - you’ve got the hay in the barn, but you need to make sure it gets used wisely or it has a habit of disappearing by itself!
One of the biggest problems that many store owners have is their level of debt - they invariably spend most of the year owing money and most of the year seeing their debt levels rising. The exception to this is the New Year when business has been strong relative to the rest of the year. The average store will do 20-25% of their sales in December with only a limited increase in their overhead costs, mainly staff. It’s not hard to have more money in the bank at the end of December than you had at the start - it’s what you do with it that matters.
Given the significance of this period on overall performance it’s important to take time to assess how you will use these funds. Unfortunately we find most stores tend to loosen the purse strings and just reinvest in inventory until they run out of money again – the result? More inventory than they had in November.
An interesting exercise is to take your bank balance at the 1st of January and deduct the amount owing for your December creditors and see what you have left. Compare this to the same situation during a selection of normal months during the year (look back at February, March and April the previous year as an example and average the results).
What you should find is that you will have surplus cash compared to your normal months. Let’s give an example:
Jack has $150,000 cash in the bank on January 1st. He owes $70,000 for his December invoices. This means a cash surplus after paying December’s amounts of $80,000.
He compares this to the months of February, March and April the previous year:
|Cash balance 1st month||$30000||$10000||$20000|
|Previous months accounts owing||$40000||$25000||$35000|
|Cash left after paying accounts||-$10000||-$15000||-$15000|
Clearly from this example Jack is running short of cash in a typical month by an average of $13333 (-$10000-$15000-$15000 / 3 months). This is not accumulative as he has more cash arriving in before he has to pay his accounts - but he is effectively living hand to mouth and could do with a buffer.
So what about that surplus of $80000 after paying off December’s accounts? Jack knows that the previous year he averaged a deficit of around $13,000 for that time of year, so all things being equal he may need to try and allow for this rather than pay last months accounts from next months sales.
We’ll allow $20,000 to be safe. Removing the $20,000 buffer leaves $60,000 in surplus cash. Does Jack need to replenish his inventory? No, he is diligent at sending reorders and has largely replenished his December product as he has gone along, but will keep a further $20,000 to top up those things that he hasn’t reordered yet. (If Jack didn’t reorder religiously he would need to replace much of his December product, but then he would have considerably less in December invoices to pay, and much more cash, because he had made fewer December purchases).
After keeping his $20,000 safety net and allowing $20,000 to replenish product Jack is left with $40,000. The key question that will shape the balance of his year is how will he use this money?
Now I want to emphasize this exercise is very basic and I wouldn’t recommend using it in place of a full cash flow model, there are other factors affecting cash flow and we have oversimplified it for the purposes of the exercise - but as a quick calculation using fingers and thumbs it can be invaluable to helping you make a conscious decision – how will I use my December windfall before it disappears of it’s own free will?
You may choose to invest it in new product, repay debt, take a holiday or whatever – you may finish up making the same decisions as you do every other year when you haven’t really thought about it… but the difference this time is you will make a conscious choice.
If you are unconscious about money it will soon leave you like water from a sieve. Take the time to choose how you use your cash during the time when you have the most of it and it can help revolutionize your business.