Customer Footfall Analysis
February 12, 2025
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The retail business is inherently a cash flow positive business. This is generally because of the fact that retailers are generally able to procure their stock on credit. However, when it comes to liquidating their stock in the form of sales, retailers generally receive payments in the form of cash or credit cards.
Hence, receivables are received almost instantaneously whereas payments can be delayed. This is the reason that the retail business is considered to have a positive cash flow cycle. Certain successful retailers such as Amazon are able to run their business without any working capital due to this phenomenon.
However, a large number of small and medium retailers are struggling because of the cash flow issues. In fact, a large number of retailers have faced financial duress because of their inability to understand and manage the underlying cash flows related to their business.
In this article, we will explain why cash flow is of strategic importance in the retail business and how the absence of positive cash flows can literally wreak havoc on the retail business.
It is important to understand that cash flow is not the same thing as profitability. Profitability is an accounting construct which is calculated based on a certain agreed upon formula. However, that is not the case with cash flow. Cash flow is an undisputable fact. The retailer either has a certain amount of cash in their coffers on a certain date or they don’t!
Cash flow management refers to the management strategy which allows retailers to manage their funds in such a way that they always have the required cash to pay their current bills.
The importance of adequate cash flow from the point of view of retailers can be understood with the help of the below mentioned points.
Retailers with poor financial ratings generally have to pay a higher price to purchase the products. This can significantly impact the profitability of the company in the long run. On the other hand, if a retail company has a stellar track record of always making payments on time, then they can negotiate a better price with their suppliers.
There are several retail companies which have not been able to actually execute their plans since they ran out of cash before the execution could be completed. If the company is planning to raise finances to execute their plans, they may not be able to do so since the financier may view the plans as being risky and may not want to finance the same!
From the above points, it can be easily inferred that cash flow is very important as far as any retail business is concerned. The absence of adequate cash flow is one of the top reasons that retailers across the world end up falling in debt traps.
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