Why Do Retail Businesses Fail So Fast…Part 2

Why Do Retail Businesses Fail

Business Killer No 6: Inadequate Capital and wrong Application of the Available Capital

As a retail business, you will hold inventory, either in your warehouse or shelves and inventory ties down money. Even if you want to stock “lean”, by holding minimal levels of inventory, your capital will still be tied down. Also, you will need assets e.g. computers for sales and stock entry, air-conditioners, delivery trucks or vans depending on your size and branch network etc. These are perfectly legitimate investments you must do. However, remember that retail business has nearly insatiable need for cash capital; therefore robbing yourself of capital availability through wrong application of your limited capital is bad for your business.

Reagan Home & Kitchen-Uyo

Reagan Home & Kitchen-Uyo, Akwa Ibom State

 

Solution
To address this issue, avoid stocking up large quantities of slow moving goods rather implement a strategic, demand-based procurement strategy where 60% of your working capital goes into Fast Moving Consumer Goods, 20% slower moving goods and 20% into inventory. Also, avoid spending your business capital on assets you do not need, do not need at the moment, do not need as much or will possibly never need at all!
Every retail business has its own unique needs depending on its size, customer base and investment strategy. Before investing in any asset, ask yourself if that’s the best option there is for the utilization of that capital? Is buying that asset cost effective or will you be better off hiring or leasing it e.g. delivery truck/van. A note of warning! Do not over leverage leasing, it also has the tendency to affect payment for goods that you will need to sell especially during lease repayment periods.

A third challenge against your business capital is taking money out of your business frequently for personal uses (drawings) or investment in other businesses (at least at the early stages).

Solution
Avoid taking money excessively out of business if you do not want your retail business to fail! Pay yourself a reasonable allowance and maintain a compulsory daily savings in a special bank account. Also, ensure that products are regularly and randomly checked against expiration dates and destruction by weevils, other pests and may be rodents (depending in your location) because every packet or piece of product expired or destroyed, reduces your capital by that much value!

Business Killer No.7: Inefficient Cash Flow and Treasury Management

In close relationship to the problem of Wrong Application of Available Capital is the challenge of Inefficient Cash Flow and Treasury Management. Cash Flow Management is concerned with how cash or non cash sales proceeds are applied to the business on a daily or weekly basis to enable the business maintain liquidity e.g. proceeds from POS payments, Bank Transfers and payments via other electronic means like mvisa ). Healthy cash flow management practices ensure that purchases are paid for when made and indebtedness to trade creditors are met when due. What keeps retail businesses running is enough cash coming in through sales, mismanaging your cash flows kills a business with intense speed (A big retail brand closed shop few years ago in Uyo, Akwa Ibom State, Nigeria because it couldn’t pay suppliers leading to the suppliers protesting with placards in front of the big shop).

Mismanaging your Cash Flow will weaken your relationship with suppliers because payment cycles will become unpredictable and unreliable; this could lead to loss of confidence in your organization, loss prompt payment discounts especially on promotional(promo) deals like the regular “Buy ten to get two Free” discounts by major wholesalers and dealers. It could also weaken your organization’s relationships with its bankers, other informal lenders and trade creditors; increased and high cost borrowings with higher finance charges and interest expense among others.

Solution
To avoid getting into this bind, have a Cash Flow Budget. A Cash Flow Budget will help you maintain a healthy cash management regime. For example, a Cash Flow Budget will help you to plan your payments to suppliers and payments for expenditures on the basis of Cash that comes in daily! This way, your creditors and suppliers will have confidence in your organization. If you do not want your business to fail, manage your Cash Flow adequately by establishing and maintaining a Cash Flow Budget!

If possible leverage trade credits rather than bank loans in your early stages in retail. Trade credits are interest free, sometimes pressure free debts that gives a retailer a lot of leverage. Trade credit refers to a situation where creditors (wholesalers typically) will supply goods to you and expect their payments later. Ensure you honour your payment agreements and terms with these suppliers because failing to pay them as agreed could easily, very easily sink your retail business especially when your working capital is low.

Dangers of Over Leveraging Trade Credits
Leveraging trade credit excessively may lead to high selling prices on those products and may create an unpredictable cycle of repayment that may affect your cash flow. You may also be forced to overstock and “owe” on a limited variety of product lines and categories that may not really be that fast moving!

Business Killer No. 8: Inadequate Technology

In retail, technology is very crucial to your success or failure no matter your size. To avoid the risk of your business failing, acquire technology solutions that will help control your procurement and inventory processes and enable optimal performances on your Sales and customer service management functions. Technology has to do with your systems, computers, networks and data storage. Since all aspects of your retail business operations can be automated, acquiring a solution that will seamlessly handle all the aspects of your operations will mean securing your business from early failure. Without an adequate technology solution, it will be difficult or almost impossible to have an accurate value of your stock (in-store and at warehouse). “Balancing” your daily sales account i.e. cashiers’ sales (both cash and POS) and matching those against actual stock that have left your shelves as a consequence of those sales transactions, will be very difficult to track.

Solution and Risks
When buying technology, buy what best suits your organization’s needs, budget and possibly your employees’ levels of skill. Also, buy a solution that is cheap and robust, possibly one with a one-off license that will not require regular updates and upgrades. Without adequate technology, control and accountability will be difficult in your business and if you have no control, be sure that you are headed downhill. Examples of retail technology solutions include Metropos by Metrofountain and Quickbooks

Business Killer No. 9: Your Personal Health, Safety and Security:
Most retail business owners handle many functions on their own. This is okay in your early stages especially when your capital is small. However, understand that you may handle 3-4 people’s jobs at once but you are not 3-4 people; therefore ensure you get someone or a team to work with you to reduce the stress of multi-functions and help you maintain a healthy work-life balance. Your business does not have to close down because you or a member of your management is sick or out of town. For sustainability, ensure there is succession by having someone or a team work with you in your business. This will ensure continuity.

Challenges, Solutions and Risks
The challenge that most retail business owners usually face is who to bring in as a manager or an assistant (especially the one man business model types) . Many retail businesses bring in family members, in-laws and friends. Everything is wrong with this decision. Unless and until you have adequate structures and controls in place and have made it clear that every family member, no matter the relationship, must abide by the rules and policies. As consultants, and on the strength of our experience, we advise that you don’t bring family members into your business except maybe your wife/husband and children (if you are married) if they share your vision and want to do the business with you! Even then, implementation of penalties will be difficult in the event of a breach; so we usually recommend that no family member comes into the business except your wife and children, again, if they share your vision and wish to continue the business!

To ensure continuity and sustainability giving some form of stake or ownership to your senior most trusted, skilled, experienced and loyal employees or get into a partnership with a trusted person. If you are considering partnership as your sustainability strategy, ensure your lawyer draws up a legally binding Partnership Agreement with clear terms, conditions and expectations. visit our blog www.steepleglobal.com.ng/blog or click here and Sign Up Here to receive our highly informational and valuable business success posts)

Business Killer No 10: Poor Inventory Control Practices

Inventory is the engine of retail business. It generates all the income and is the reason why customers come to your shop or don’t. However, inventory takes up a lot of cash, so you must strike a balance between purchases that lock up your cash and high-selling-high-demand products. Your purchasing team, current and new suppliers and even customers will always want you to stock more; customers will always ask for new or different products. Note however that some customers may never come back to buy what you purchased on the basis of their order, after you stock it! In the end, you may hold more than necessary inventory and this can easily kill your cash flow and retail business!

Solution
To manage this situation and offset the pressure to over-buy or buy the wrong products, create an Inventory Buying Budget! This budget is usually based on some predetermined factors like high-selling-high-demand products, high profit-high-potential-products etc. There must be a percentage of the budget that’s left to the purchase of new products. Lastly, follow your Open-T0-Buy (OTB) plan and budget! Your OTB budget is the basis of your Inventory Buying Budget! Visit our blog www.steepleglobal.com.ng/blog or click here and Sign Up Here to receive our highly informational and valuable business success posts)

Conclusion
Understand that over a third of the retail businesses that fail, fail not because they are unprofitable,(most are actually profitable as at shut down dates) but because they fail to avoid what we call the Critical Failure Factors that could act against any retail business! Some retail businesses simply run out of business because their creditors have run out of patience. Don’t let this happen to you.

Thinking of starting a business or strengthening your existing business? Come talk to us! Send us an email here info@steepelglobal.com.ng or call us on +234 80 561 78895 or +234 81 8170 1100. Also follow us on Facebook @SteepleGlobalServices or our Twitter handle @steepleglobal or Instagram@Steepleglobalservices and let’s discuss ideas and help you begin your journey towards financial freedom!

Steeple Global Services(www.steepleglobal.com.ng ) is a business consulting firm based in Uyo, Akwa Ibom State, Nigeria. We help to bring your business idea into reality, set up your new business for you and/or help to turn around your ailing or struggling business(s) into profit making ventures. We help businesses grow!!

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