It’s no secret that the retail sector has had a tough year. From a host of high-profile CVAs, to reports of weakening consumer confidence in the run up to Brexit, it is clear that retailers are finding trading conditions more challenging than ever. Cash visibility and accurate cash-flow forecasting will be key to their survival in 2019.
According to research conducted by Menzies LLP in 2018, cash-flow forecasting was identified as a key risk factor and findings from a Retail Week report also indicate that retailers are acutely aware of the dangers of poor cash-flow management. In a bid to protect their cash position, 52 per cent of UK retailers said they were either planning to make no investment in new shops or to reduce their property portfolios in the year ahead. This shouldn’t be a surprise – with Brexit on the horizon and no certainty about what it might look like, the tough trading conditions are likely to linger.
The Government has appointed a panel of experts to advise on issues affecting the high street as a whole. However, retailers cannot afford to wait for interventions and should focus closely on working capital management and monitor cash flow closely. Taking this approach, they will be better placed to take preventative action and mitigate their risks.
Financial health and understanding are key, and it is important to look beyond headline sales data and footfall. For example, if high overheads are eroding profits at a flagship store, it may be necessary to take action by cutting volumes of less profitable items to boost profit margins. Making such decisions requires robust cash management and access to reliable data-based insights.
Three-way, cash-flow forecasting is an integrated method of financial modelling that combines real-time data from a trio of sources – profit and loss accounts, balance sheets and cash-flow records. Forecasting in this way gives retailers a more accurate view of its trading performance and enables them to pin point activities that might benefit from closer supervision.
For three-way forecasting to be properly implemented, the business must have a clear idea of its strategic objectives. This will inform the timescale and scope of the forecasts. Generally speaking, it is best to keep forecasts as short term as possible, whilst being sure to cover the entire trade cycle – from receiving an order, to fulfilment and taking payment. Factors such as seasonality and changes affecting market conditions should also be taken into account. In this way, decision makers can be confident that resources exist to react quickly to market changes, without experiencing cash-flow difficulties.
When cash-flow modelling in this way, businesses should consider a number of potential scenarios. For example, it should be possible to predict how the business would perform if a particular product line proves successful, or if sales volumes increase or dip suddenly. The information gleaned can then be used to help guide decision making and can also help businesses to avoid unexpected costs.
Gaining access to real-time, data-based insights is one thing, but decision makers must then be prepared to act on them to improve the cash position of the business or boost profitability. For example, accurate cash-flow modelling could be used to shed light on where value exists by identifying stores with higher overheads that could be undermining profits. The same data-driven approach could be used to analyse individual product ranges; identifying those that could be delivering more value to the bottom line.
As well as informing business decisions, accurate cash-flow forecasts can help to boost lender confidence. With a robust financial model and plan in place, potential backers can be assured of the strength of the management team and its ability to navigate the business successfully even when trading conditions become ‘choppy’ or changeable. This approach could also make it easier for managers to secure the funding needed for a strategic transformation programme; investing in the technologies and the structural or operational changes needed to meet customers’ expectations now and in the future.
In the current climate, retailers should take nothing for granted and keep all activities under close review. With three-way cash-flow forecasting in place, managers will be better equipped to optimise trading performances and implement plans to transform the business with confidence.
Roberto Lobue is a partner and retail and wholesale sector specialist at accountancy firm, Menzies LLP.