Retail surgery: Sales volumes at the expense of margins - is this the right thing to do?

Dan Murphy, retail director at AlixPartners, says the question indicates a lack of basic knowledge about cash flow and what it means.

He explains that cash flow management is about how money flows into and out of your business over time. There are three types of cash flow – operational, investment, and financing – and the one of interest here is operational cash flow. Cash flows in from sales, and out in payment of bills, including supplier invoices, wages and rents.

Retail margins need to be high enough to leave sufficient cash to pay all these and the timing of inflows and outflows needs to be managed to make sure enough cash is there at the right time.

By discounting margins to drive sales, you risk not having enough cash left to pay all these bills. This is a common problem with retailers at the moment, with everyone discounting like mad to try and maintain sales, resulting in insufficient cash to pay salaries and rents.

Murphy says: “When we work with a retailer, we often start by looking at cash flows and build a detailed weekly forecast so they can see precisely where the pinch points occur and manage these – perhaps by asking their bank to fund them through these periods.”

If a retailer loses control of cash flow and runs out of cash, this is when the key stakeholders such as lenders and suppliers start to get nervous. Discounting margins to drive sales is not the same as managing cash flow. Murphy says: “As Alan Sugar once observed: ‘Anyone can sell a tenner for a fiver’.”