Reinvesting in the co-op is a tangible way to delight customers and improve in-store experiences. Staff, vendors and lenders also want to see this type of stewardship. Deferring reinvestment leaves you vulnerable to higher repair costs, competitors, missed sales opportunities and reduced staff efficiency. Reinvestment opportunities come large and small; investing even a few thousand dollars in equipment can improve sales growth.
Obviously, reinvestment requires cash. Here are three New Year’s cash management resolutions that will help you finance reinvestment out of cash flow from operations.
1. Have vendors finance your inventory. The easiest and quickest way to increase your cash balance is to diligently manage the relationship between your inventory and accounts payable. This means reducing days of inventory on-hand (without increasing out-of-stocks!) and increasing days payable outstanding (DPO). Aim for the sweet spot where your DPO is equal to or greater than your days of inventory on hand. In so doing, your vendors are financing your inventory. Freeing up your cash to invest in your operations creates more opportunities for your vendors in the future.
To increase your DPO while continuing to pay vendors on time, do the following:
- Confirm payment terms in your accounting system are accurate.
- Pay vendors on time — not early.
- Review vendor payment terms that are inconsistent with how quickly the vendor’s product turns. Non-perishable vendors whose products turn slowly should have payment terms as close as possible to 30 days.
- With a history of on-time payments, vendors will be amenable to adjusting payment terms.
2. Convert sales to cash. The number one way that most staff can capitalize the co-op is through improved EBITDAP (Earnings Before Interest Taxes, Depreciation, Amortization and Patronage). EBITDAP is a critical metric to monitor, as it informally measures cash flow generated from operations. NCG’s EBITDAP goal of 6% of sales is based on the level of earnings necessary to support strong annual investment in the co-op. The starting point for a strong EBITDAP is achieving a Margin Minus Labor (MML) of at least 15%. Next, consider that your co-op is spending somewhere between $0.08-0.16 of every sales dollar on expenses other than product and personnel. Use CoMetrics to compare your expense profile to other co-ops. Utilize NCG resources such as energy efficiency measures and NCG Retail Goods & Service contracts to reduce expenses. Get multiple bids when renewing major supplier contracts such as waste/recycling hauling, telephone, internet, etc.
3. Protect your cash. Be sure your co-op has documented and implemented basic internal controls to reduce opportunities for fraud. Co-ops’ highest priority control areas are segregation of duties in the finance office, receiving controls at the back door, and cashier monitoring and safe access in the front end. Regardless of your co-op’s size, it is unacceptable for one person to have too much control over financial transactions (e.g., creating new vendors, posting invoices, cutting checks, signing checks and reconciling bank accounts). Every GM should also have a tracking system that verifies the co-op is up-to-date on all tax payments.
Don’t forget to measure your progress. One of the key benefits of complying with NCG operating standards is monthly financial statements within 30 days of the end of each fiscal period. Use these statements to track your progress toward inventory, payables, MML and EBITDAP goals. To avoid period-end surprises, be sure you have one good weekly sales report (WSR) tool that helps you manage toward your desired outcomes. [Note: If you do not have a WSR you are happy with, NCG has a WSR template that many co-ops are using with success.]
NCG is here for support. Be in touch with your corridor team if you need resources to support achievement of any of these resolutions or want examples of proven reinvestment opportunities.
Original author: David Waisman, Finance Services Manager
