As they say, cash is king
You need enough moolah (especially in the first year or two) to cover your expenses, even when things get tight on the revenue side. In retail, there’s often a huge cash crunch as you head into your busy season (for my gift store it was around October as I stocked up on holiday merchandise).
If you have more coming in than going out, you’re probably doing well, right? Not necessarily. You also need to watch the timing of money going out and coming in. It doesn’t help to have $100,000 in revenue coming next month if you can’t pay your employees until then.
In basic terms, it’s a good idea to track what you expect to spend each week and track how much money you expect to come in each week. If you need to spend more than your current bank balance plus what’s coming in, you know you’re about to have a cash flow problem.
In terms of how to track these flows, the accounting software you have chosen will help a lot. Otherwise, Shopify offers a free template for tracking cash. or you can easily create your own in excel if you prefer.
My recommendation is to enter all the future cash flows you are aware of (even if they’re just estimates) into your bank account ledger in Quickbooks (or whichever software you’re using) so it gives a future projection of your cash situation. There are also a bunch of great cash flow reports you can use, but looking at the bank account and seeing where it was headed was my favorite tool and helped me avoid unnecessary overdraft fees (well, most of the time).
Cash inflows come from generating revenue and can be harder to predict. Are your customers solely brick & mortar or are you generating revenue doing online sales? Keep in mind that some payment gateways place a hold on the money. Is there a five-day delay from the time a customer pays to the time the money is in your bank? You need to know this when in order to figure out when you’ll have money to spend. My biggest delay was often weekend sales that didn’t clear until Monday or Tuesday via my merchant service provider (a fancy name for the company that lives behind your credit card machine).
Side Note: If you don’t have a separate bank account for your business yet, you should set one up asap. Commingling your business and personal spending makes it tricky to see how your business is
actually doing. Plus this will drive most bookkeepers bananas (although not me, because I’m guilty of
the same and can help you post entries against your Owner’s Draw to clear up any confusion in your
books. hint hint).
Tracking cash flows is only one piece of the puzzle, however. You also want to be extra careful about
how you spend cash to avoid crunches. Follow these tips to help improve your cash flow:
- Don’t pay anything earlier than you have to. If it’s due in 30 days, pay it in 30 days. Even CFOs of huge corporations follow this simple rule.
- Consider offering monthly payment plans or subscriptions to customers to guarantee money coming in.
- Keep a reserve in your business bank account just in case. Ideally, you can monitor this and top it up occasionally if necessary (loaning money to your business from your personal account can be a
temporary measure to avoid overdraft fees or finance charges but shouldn’t become a habit). - Only spend on credit cards if you can pay them off in full within the month (or longer if you are
being offered a zero percent offer). This can help with timing issues but be extra careful because if you miss the deadline the finance charges can be exorbitant. I often ran up credit cards in October knowing I’d be able to pay them down as soon as cash started flowing in November (extra bonus points since I also racked up United miles for free). - Don’t overcomplicate your projections. You don’t need huge technical cash flow statements just
simple estimates.
This is Part Three of a longer blog post: Top Ten Bookkeeping Basics for Retailers
Part Four of this series coming soon…
Justine Reed has an undergraduate accounting degree and a Masters in Business Administration. She owned and operated two brick & mortar retail stores in Colorado for 16 years before attempting (and failing) to retire in 2020. She continues to work part-time as a bookkeeper and consultant for other small businesses.
