Managing finances and cash flow within the UK retail and hospitality sectors

The number of UK businesses that collapsed into bankruptcy hit a four year high earlier this year, and some of the worst affected companies are often in the retail and hospitality sectors. The hospitality and retail sector lies in third place in UK liquidator listings, just behind administration and support, and construction business.

Good financial management is, therefore, critical for ongoing success and profitability within retail and hospitality. Any major expenditure, expansion or growth planning should really only take place after a good deal of detailed financial scrutiny and in situations of optimised cash flow.

Managing finance and cash flow within the retail and hospitality sector

Cash flow is the cornerstone of good financial management in retail and hospitality. Where your business has more cash coming in than going out it’s classed as a situation of positive cash flow. Negative cash flow situations are times when there’s more money due out for expenses than cash coming through the business. Cash flow is the total sum of money through the business on a daily, weekly or monthly basis. Most accountants use monthly figures for measurement purposes, but when a business is in a critical cash-poor situation it’s often necessary to maintain a grip on daily cash flow before any external payments can be made.

Although the cash flow concept is fairly easy to understand, it is the prime reason for retailers and hospitality businesses to fail.

Cash flow management tips

Many business owners need to take out loans of credit at slow times of year to cover cash flow shortages, but great cash flow management can prevent this from happening.

Rent and utility bills are fixed, so it’s easy to plan for these regular payments, however, inventory can be unpredictable and form a real drain on cash flow at times. This is particularly the case for retailers as they need to keep a substantial number of products in stock, although hoteliers also need to commit to a good deal of regular upfront expenditure before taking in any guests. In the very simplest terms, if your business commits to buying 100 products and only 20 of these sell each month, your cash flow is negatively impacted at the end of the first month when you make payment for these items. This would mean that you have paid for 80 of these products before selling them, and in worst case scenarios you might have to consider sales reductions in order to achieve any return.

One of the most important financial management strategies for savvy managers is to negotiate dating terms for invoices to help cash flow. Dating terms give greater payment flexibility. Most invoices are due within 30 days, but negotiating 45, 60 or 90 day terms can help cash flow immensely. Ideally, invoice dating should be matched to inventory turnover to maximise inflow of cash to the fullest extent.

Keeping a handle on all inventory is also important for good financial management. It can be very tempting to bulk buy stock and take advantage of bigger discounts. However, although this may save money on margins it does impact negatively on cash flow. Where possible, retailers should take advantage of drop shipping, so that products are shipped direct from vendors and only need to be paid for on order. The alternative is to keep a strict eye on your inventory levels and make every attempt to sell it on prior to bills falling due.

The tips above are more likely to ensure you stay in a positive cash flow position at all times and can ride out slow times of the year, while also having the ability to manage demand when it peaks.

Reliance on profit and loss accounts

Many finance executives and business leaders rely too much on tracking their profit and loss statements for business operations. Your P&L statement is a historic document, though, and ideally should not be used for future planning. This is due to the fact that great sales results for one month will result in a fantastic P&L statement, making it tempting to stock up on inventory and invest in large purchases. If sales slow the following month your business is stuck with bills falling due within 30 days and insufficient cash to pay them.

Partner P&L tracking with cash flow analysis to work out just what profits your business is making, prior to making major financial decisions. Very positive cash flow does not always translate to high-profit levels, so ensuring the accuracy of your monthly management accounting can be key to the success of your retail or hospitality business.

Virgate Accounts provide the professional outsourced finance service needed by growing retail and hospitality businesses. Get in touch today for more information.