Money Matters: Ensuring Positive Cash Flow

Floral Finance®

Did you know that a flower shop could actually show a profit on the bottom line and still be strapped for cash? It's true.

How could this happen?

The business could have suffered losses in prior years and had to borrow money to survive. Now that times are better, all the cash the company generates has to be used to pay back the debt.

Or maybe the shop had to buy some equipment. The capital purchase took much of the business' cash. But only a portion of the equipment costs can be depreciated immediately. The financial statement shows a profit — even though cash is now in short supply as a result of the purchase.

Planning is Essential

If you haven't forecasted your cash flow for the rest of the year, now is the time. Believe it or not, it's a fairly easy procedure. You simply have to estimate how much cash will come in each month and how much will go out.

The spending side is fairly straightforward. You just itemize your expected monthly payroll and other expenses. Historical numbers from the previous year will be very helpful in this process.

What you spend each month will vary along with your purchases of supplies and other inventory items. However, for forecasting purposes, all you have to do is be in the ballpark.

The more difficult part of the equation is estimating how much cash will be coming in.

To estimate incoming cash flow, you first need to separate your sales into cash or credit card transactions (immediate cash) and house account charges. Second, you need to determine when you will be paid on the latter group.

Here's an example: Say you expect sales of $10,000 in July. Your experience says that 20 percent will be cash/credit card sales and the balance will be charged to house accounts. Furthermore, you know that, on average, you receive 67 percent of your current receivables from the first billing, 23 percent from the second billing and the balance from the third billing. Here's what your cash flow from those July sales would look like:

In cash flow forecasting, you look at when cash comes in, not when the sale is made. The money you receive each month comes from the sales of several months. If you are not comfortable doing the forecasting yourself, your accountant can help. If you have clear financial statements from the past, a good accountant should be able to put a cash flow forecast together in an hour or two.

If Your Cash is Short

When you finish your forecast, you may find that you won't have enough cash to make it through every month. Many florists regularly expect to be short in July and August.

There are several steps you can take to remedy a cash shortage. The key is to get started early, before the problem becomes a crisis. The following are some ideas to consider:

1. Inventory Reduction

Tying up money in too much or obsolete inventory can be a major contributor to cash problems. Old containers and gift items may simply be gathering dust on backroom shelves.

Although inventory for a retail florist is relatively small compared to other retailers, it is not unusual to find $10,000 or more in containers and gifts that can be turned into cash.

You've got to force yourself to use up the items sitting on your shelves. Employ your staff's design talents and creativity to plan how to move these items.

Most retail florists do a large percentage of their business over the phone. Use these phone orders to your advantage. Create attractive arrangements that utilize the inventory items you are trying to move out.

2. Payroll

Excess payroll is the number one culprit responsible for low profitability.

Are you overstaffed for the level of sales you experience in normal, non-holiday periods? The answer for most retail florists is "yes."

Look at your financial statements. If the owner's/manager's salary is included in the payroll numbers, the total cost of payroll, including taxes and employee benefits, should not exceed 30 percent of sales. If the owner/manager is not on the payroll, then payroll expenses shouldn't exceed 20 percent for shops with annual sales of $500,000 or less.

If your shop is grossing more than $500,000 and the owner/manager is not on the payroll, then the target rises to 23 percent.

Usually the design room is a prime target for wasted payroll dollars.

It is not unreasonable to expect an average designer to put out $800 to $850 in designs per eight-hour day (or $105 per hour) at retail prices.

If your production is low, schedule fewer design hours. Train the designers to work more efficiently. Let someone go if you must.

If your design output is acceptable but payroll is still too high, check your other staffing positions. Do you have too many employees in management positions? A good rule of thumb is that each manager can handle seven to 10 employees.

3. Expenses

Take a close look at your expenses. Can any be reduced or eliminated? Look especially hard at those expenses that repeat every month.

Find a way to reduce repeating expenses, and you will reap a benefit month after month. Most expenses can be trimmed even a little bit, no matter how well you're running the shop.

4. Cost of Goods Sold (COGS)

Because COGS is one of the two largest expense categories, it also should be watched carefully.

A shop that has an average order size of $30 will produce 3,333 arrangements for every $100,000 in sales. If each carnation is only 30 cents, stuffing just one extra carnation in each of those arrangements will add up to an extra $1,000 in costs.

A more expensive flower will boost COGS even more. And when designers begin to stuff arrangements, the problem is rarely limited to only one extra flower per piece. When two or three extra blooms become the pattern, COGS rises quickly. Profitability literally goes out the door as the extra product is given away. To stop this problem, use a design room control form for every arrangement.

If you don't want to count flowers for every design you produce, offer standard arrangements. When a standard arrangement is designed to hit your COGS targets, all "copies" that follow the recipe will also be on target.

If It's Still Not Enough

For most shops, the four steps explained above will solve cash flow problems. However, there are times when large, necessary purchases eat all the available cash. What do you do then? The only answer is to borrow money. Your local bank is probably the best source.

There are two things you must normally do to get a positive response to your request for funds. First, plan in advance. Forecast your cash shortage needs — don't just show up when an emergency is at hand.

Second, show how you plan to repay the money. No banker is going to loan money without some assurance that your business is healthy.

And that brings us to the bottom line and health of your business. A business that is run well should be able to build up a cash reserve over time that will see it through lean periods.

In other words, profitability is the key to solid cash flow. If you're not profitable, all the planning in the world will not save you from shutting down.

You're running a business. One of the goals has to be profitability. No matter how talented you are or how solid your reputation, if you are not profitable, the result is always the same. You'll be out of business when your cash runs out.