The 13 Week Cash Flow: Essential for Retailers

Steve Katz  00:16

Hi, everybody, and thanks for taking time out of your busy schedule to listen into our Hilco Global Smarter Perspective podcasts. I’m your host, Steve Katz. And we’re really glad that you could tune in today. We have a great discussion for you. And that discussion is gonna be centered around the importance of developing and utilizing 13 week cash flows properly in retail businesses. And with us for that discussion are Michael Appel, Charvi Gupta and Jake Ringelstein from Getzler Henrich, guys, it’s great to have you on the podcast.

Michael Appel  00:45

Great to be here, Steve, again, and looking forward to great discussion.

Charvi Gupta  00:49

Thanks for having us.

Jake Ringelstein  00:50

Looking forward to being on the podcast. Thank you for having us.

Steve Katz  00:53

Okay. Yeah. Well, really glad to have you here. Michael, to get us started today, I’m hoping that you could touch on why you feel that this topic is such an important one to cover with those in retail?

Michael Appel  01:06

Well, I think that, that, looking back on my career, and that of my colleague, Mark Sampson, who are the managing directors in our retail practice, over the past 25 years, there has not been one engagement, where a 13 week cash flow was not required. And of course, people come to us, because their businesses are patient challenges, they’re stressed, etc. controllers and CFOs in most cases, make statements. We don’t need a 13 week cash flow as we reconcile our cash down. Well, that’s because they’re in a Piper drill. And it is the first time that they are running out of cash, delaying payments, and unfortunately, also using trust funds like payroll taxes, sales taxes and pension contributions to keep their businesses afloat. And Charvi and Jake can take us through the importance and stuff and and other examples of things that they have seen in that regard. And I can’t stress enough, the critical need to embed a rolling 13 Cash Flow discipline into every company’s operations. And, you know, if you look at well run companies, it’s a matter of course, that they’re doing rolling 13 week cash flows, and they’re also they’re also projecting their cash needs out, usually two weeks or so. But 13 weeks if we have that, you know, that’s a great start. Whether a company is essentially healthy, as I said, growing or stressed. This tool enables management to forecast cash needs, and stay ahead of potential problems, whether it’s tight liquidity, or the need to fund growth.

Steve Katz  02:44

All right, Michael? Well, you know, you certainly do make a really compelling case right out of the gates. So let’s turn next to Charvi for a bit of a drill down on 13 week cash flows and what exactly they measure. Charvi?

Charvi Gupta  02:55

Sure, a 13 week cash flow forecast is a short term financial planning tool that helps companies manage and anticipate their cash position over a specific period. It typically covers a quarter of a year and provides a very detailed projection of cash inflows and outflows for each week. And also it helps companies make informed decisions about their financial strategy. So it’s a great tool to have. And to develop one there are a few steps. Firstly, you need to estimate your weekly cash receipts, which are based on your outstanding accounts receivable, weekly sales projection, people should know that this is not an income statement, and it’s done on a cash basis. So think of which week, how much cash comes in how much cash goes out. Some nuances for retailers to factor in while projecting sales can be seasonality current trends, upcoming promotions events. Second, you need to project the weekly cost of producing or purchasing inventory. Again, given this is cash basis, think about supplier terms, and slander cash bins accordingly. And think about all the operating expenses that are there such as rent, utilities, salaries, sales and marketing and slot them in, then you should account for any loan or credit pre payments. There are two during the 13 week period. Now while developing a cash flow, retailers need to think about a few things. First is working capital. One issue that we see a lot with retailers is overstocking or understocking. So use the 13 may cash flow as a tool to optimize inventory. And on the payable side, managing payment terms with suppliers to align with cash needs is also important. And with respect to receivables, it’s also critical to monitor the collection and adjust payment terms to to accelerate the cash flows. Then second is contingency planning. We always recommend the company set aside a portion of the cash as a buffer for unexpected expenses or emergencies. And we also run different scenarios for our clients to assess the impact of changing sales projections or unexpected events and the cash flow. So basically, you’re all set for success in case there are any hiccups later. And finally, comparing actual actual cash flows against what you forecasted to identify discrepancies. And then adjusting your future projections accordingly, is also important to make your cash flow relevant and up to date.

Steve Katz  05:33

Okay, great. So that’s, that’s terrific background. What about you know, a real world example, that perhaps one of you can share it because, you know, we’d love to learn about those. Something perhaps where a client did use that there to make cash flow, and it really paid off. Jake, do you have anything like that?

Jake Ringelstein  05:51

Yeah, sure. Absolutely. So we recently worked with an activewear retailer following the pandemic that had seen aggressive growth in the years prior to the pandemic, they started with one store. And then right before the pandemic, we’re doing close to $40 million, in omni channel revenue. And, you know, one issue that they faced that Charvi mentioned was this company would, you know, buy seasonal inventory, and then anticipate increasing revenues as they had seen, you know, but as happens, the pandemic hit this obviously affected their sales margin suffer. And this this inventory that they had stocked up on became obsolete. This led to a, you know, liquidity crisis with their lender. And the first thing that they tried to do was to throw money at the problem. And that’s when Getzler Henrich was called in as these relationships between the lender and the company deteriorated. And that’s where we stepped in, created a 13 week cash flow to try and identify the problem. So why was this ultimately beneficial for them to bring us in? The first thing that we like to say is that sometimes the 13 week cashflow, we’re able to check the pulse of the business. And that’s what we were able to do here, we were able to accurately identify how much funding this company would need to proceed and smooth relationships with their lender before helping the company back on their feet, securing the funding and then removing ourselves from the situation.

Steve Katz  07:12

Yeah, I mean, it sounds like without a step like that, you could really be headed down a bad path. So it’s becoming, I think, more clear why it’s such an important element, you know, for a business. And, you know, I think when we talk about retailers, specifically, I guess maybe I would turn back to Charvi to ask, why is it perhaps even more critical for retailers to focus on on those 13 week cash flows?

Charvi Gupta  07:39

Sure. So with retail, you have the whole holiday shopping frenzy, all the Black Friday sales, and while summer might be slow season for some, if you’re dealing with each bear, this is the center stage. So managing seasonality is so critical, and a 13 week cash flow, which is great for that. And piggybacking on what Jake said, there’s also the issue was with overstocking, and under stocking and this tool really helps to optimize inventory levels. And I’ll give you an example. So if no one is buying bags with huge logos and quiet luxury is trending all our inventory that you overbought it screams that this is no good. Or if this is the season for oversized blazers, and when you just ran out of them, you’re giving up your revenue that you should have made to your competitors, then there’s always the sudden expenses that people forget to account for you have equipment repairs, or maintenance, sudden regulatory changes. And these can really put a strain on your cash reserves. But if you have a sense of which weeks you have surplus versus low cash, and you have a buffer of cash filled up, you can really prepare well in advance for these. Now, if you are at the stage where you’re looking to go to market to secure financing or investments, or trying to have discussions with your lender regarding any sort of debt restructuring, it’s an excellent tool to have in your pocket lenders and investors love companies with a clear well documented cash flow forecast. It shows them how much cash is available to service the debt actions that you’re taking to improve cash flow. It also shows them that you have a clear understanding of the cash conversion cycle and enables you as well as the bank to closely monitor the cash and covenants. And finally, if it’s retail, given you have so many promotional activities going on at the same time. This tool really helps in aligning your marketing and sales efforts and ensuring that promotional activities are not only driving sales, but also aligning with cash flow productions. Overall, I’d say it’s a great tool for fostering long term growth and sustainability of any business. And Jake, you have another great example. Do you want to share that?

Jake Ringelstein  09:47

Sure, so unlike the first client, where they kind of had us do a liquidation analysis, we actually worked recently with a company that had already decided that they were going to wind down and so understanding their cash flow, and understanding if they were going to have enough money to actually fund this wind down, was the reason that they had brought us in. Because as Charvi mentioned, it’s a 13 week cash flow can also be used as a financial planning tool. And so that’s what this company was looking to do was understand how much money they have, would they be able to fund their wind down of their business, that’s when we were brought in, the client did not realize they actually did not have enough money for the wind down, they thought they, you know, had budgeted correctly close to $3 million to fund the wind down. And it turned out after we had done our analysis of the business and created our cashflow, that there was actually close to a $2 million deficit, you know, that’s a pretty big swing in cash. And that’s really troubling for a business that is winding down. So how does how does this happen that they were they were so wrong? Similarly, the financial department wasn’t recording all invoices, and operating expenses that they had to pay for their wind down. And the biggest problem with this company was that they didn’t want to go into an involuntary bankruptcy. So securing funding for them was tough. The point here being that the cash flow is really able to discover troubles that a business might recognize that they’re facing. Fortunately for this company, they did have a good bit of real estate that they were able to possess. And so they were able to leverage down on their real estate, secure their funding and proceed with their wind down.

Steve Katz  11:23

Yeah so fortuitous for them. But it sounds like these sorts of things occur more often than you might think. Right?

Jake Ringelstein  11:28

Absolutely.

Steve Katz  11:29

All right. So that’s terrific detail. We’re almost at a time so to wrap us up. I’m hoping that each of you could provide what do you consider your top tips on how to best utilize their to be cashflows properly in retail? Who wants to go first?

Jake Ringelstein  11:46

Sure, I can field that one. First things first, I’d certainly say that your inputs play a very important role in your modeling, analyzing past financial data, identifying trends, patterns, and incorporating those types of things into your model is really important taking this historical data. Seasonal fluctuality can really help you predict the timing of your cash inflows and outflows. And one thing that we like to say is that you know, your model is only as good as your inputs. So making sure that you have good inputs, so that you can accurately predict your cash flow is very important, using realistic assumptions for upcoming promotions, economic conditions, market trends, especially when it comes to retail are things that we really like to incorporate. I’d also say regularly updating your data, reviewing your inputs, your data is very important thing up to date gathering financial data, cash balances, accounts receivable, accounts payable. Some of those issues that we mentioned earlier in the podcast that some companies weren’t doing is something that we always focus on, when creating a 13 week cash flow or any cash flow, you know, and the more accurate your data and the more current your data, the better your forecast will be. We also you know, kind of included in this is variance analysis, checking your actual versus budget, because there’s really no point in having a projection if you don’t have something to measure it against. That’s something that’s really, really important. And then as you kind of update your actuals, you’ll have a rolling cash flow thinking and just one more that comes to mind is just continuous improvement, evaluating your model, forecasting progress results, and identifying areas where maybe you can improve your model, depending on the client and then adjusting your forecast methods accordingly are some tips that I have. Charvi I’m not sure if any others come to mind for you.

Charvi Gupta  13:33

Sure, I’d like to add a couple of points here. We often deal with retailers that overlook the impact of return policies on the cash flow. And returns can affect revenue cost inventory levels by a large part from lost revenue returns have so many costs that you have to account for their shipping handling warehousing costs. Credit card costs are the funds, restocking costs, which can include inspecting the packaging and preparing for the product for resale. So all of these need to be factored in as well. And in software retailers, it’s important to estimate return rates accurately and then adjust cash flow projections accordingly. Also, we often see companies that forget to include one of expenses. These can be worker’s comp that gets front loaded, or even insurance, a portion of which might get paid upfront, and then spread over a number of months or even license and permit renewals that are done quarterly.

Steve Katz  14:33

Okay, terrific. Well, thanks for sharing those tips as well as all the information that we talked about. Before that there’s quite quite a bit to digest, I think, and I know, it’s likely that there’ll be some follow up questions from those who are listening today. So Charvi I know you had agreed to serve as follow up contact for any of those inquiries. Do you want to provide your contact info?

Charvi Gupta  14:57

Yeah, I can be reached by email at [email protected], which is C G U P T A @GetzlerHenrich.com or by phone at 929-215-1526.

Steve Katz  15:12

Allright, perfect. Jake, Charvi, Michael, thank you so much for joining us today. Really appreciate it.

Charvi Gupta  15:18

Thanks for having us, Steve.

Jake Ringelstein  15:20

Great to be here. Thank you very much.

Steve Katz  15:22

Yeah, it was it was great having you on really let’s let’s do try to do it again soon to provide more tips and listeners. We hope that as always, this Hilco Smarter Perspective podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to help make them that much more successful moving forward. Until next time for Hilco global. I’m Steve Katz.