Working Capital for an Indie Retailer
Most of a retailer's working capital goes to pay for inventory. Therefore, it makes sense to look at working capital requirements over a 4-month period. That reflects a 3-time turnover for inventory. Over a 4-month period an indie retailer should be able to cash out of inventory and have enough funds to reinvest in new goods and pay all operating and other balance sheet expenses for that period of time. This is the reason Management One shows on its reports the last 4 months of cash created from inventory along with a comparison of the exact same period from last year.
The formulaic definition of working capital is:
Working capital = current assets - current liabilities
Current assets:
Cash on hand
Current investments (liquid)
Cash value of current inventory
Current receivables
Current liabilities:
Accounts payables for inventory
Accrued expenses due in the current period
Current debt and current portion of long-term debt, including payments for loans to shareholders
Dividends
This is all information that is available on your balance sheet and reflects the importance of keeping your financial data accurate and up to date.
A healthy retailer will have higher current assets over current liabilities. The advantage for a retailer is that they receive cash immediately from revenue and therefore always have a stream of cash flow, and (in many cases) have at least 30 days to pay for that inventory. A good rule of thumb is to keep purchases as a % of revenue at or below 53% over the period of a year or even better for 4-month increments. Seasonal classes and seasonal locations could adjust depending on when you are auditing the 4-month period cycle. The closer to 50% of purchases to revenue the more working capital is created. Lower is even better and can be created through effective IMU and a steady flow of inventory management.
Looking for detailed explanations of other critical metrics in retail? Review our growing "Retail Definitions" section.
Comment below and feel free to make an appointment with me if you want to discuss your own situation or you can discuss with your Management One Retail Expert.
Onwards, and Upwards,
Marc Weiss - Co-founder, Management One