Overcoming a Cash Crunch

In retail, where transactions are mainly credit based, cash is the lifeline. In India, since relationships are the cornerstone of running a successful retail business, refusing credit to customers becomes difficult. Apart from credit, there are a host of other reasons which lead to a cash crunch for the retailer.

Owner benefit

Retailers usually indulge in the practice of consuming their own goods and selling them at wholesale price to their relatives. But, when this exercise goes beyond an acceptable level it disrupts the business financially.  “Yes it happens sometimes, when we give goods at wholesale price to our relatives and they don’t pay for months. But what can one do. It’s all about relationships, neither can we deny nor can we ask for early payments,” explains retailer Pankaj Gupta in Katwaria Saria.

Credit Cycle
Credit cycle in retail business is very irregular. There is a wide time gap in credit offered by retailers to the customers and those received by retailer from the wholesalers. It is not the same and therefore, at times results in a situation when these retailers don’t even have cash to pay to the wholesalers and get the stocks.

“The credit period given by the wholesalers is 15 days after which they start charging interest on per day basis. But the credit period given to the customers can extend up to one or two months,” explains Pawan Kumar, a retailer in Munirka.  “The only way for us to overcome this situation is preparing for contingencies. We either take loan from unorganized lenders or sometimes even request the wholesaler to extend the credit,” says Ankit Lal of Kireet store.

Resolving the problem

Even retailers can manage their cash flows in an efficient manner to overcome this adverse situation. Some of the ways and means to safeguard their business from the acute cash problem are:

Vendor negotiations: Negotiation terms with vendors play an important role for retailers to manage their cash flows. Set the terms of negotiations that are most promising for you and the wholesaler. Find out the frequency of your cash inflows and accordingly ask for terms of credit. Wholesaler Gopal Agrawal says, “We give credit to our customers (that is, retailers) on weekly or monthly basis, we supply goods at discounts and credits. The customers who give us good sales we provide them both discount and extended credit. Discount is given to the retailers who don’t avail credit facility.”

“We ask for a monthly window display from retailers, we ask them to keep one shelf for our products whose sale is less and the company pays some amount to retailers for keeping their underperforming products in their shop, In this way retailers need not suffer from the low performance of a product as company is bearing the cost,” informs wholesaler Dhiraj Son.

Inventory planning: Stock is an important tool and asset for a retailer to manage his cash flows. Proper inventory planning, forecasting the demand, analyzing the consumer behavior can easily give an estimate of what sells the most and in what quantity should it be bought from the wholesalers. Therefore, the right product in right quantity can be procured without wasting money on procuring other products.

“The best way to plan your inventory is to monitor customer behavior. List down the items that are sold the most and find out the poor performers. This will facilitate in placing right order for right products,” says Dr Tarun Panwar, a senior faculty member at the Indian Retail School.

Stocking the inventory in a proper planned way may reduce the risk of shortage of cash as you will be placing order according to the demand. Inventory management at the end of retailers is not a tough job. What it requires is proper monitoring of the products that sells the most; prioritize your products in terms of value and quantity and then place orders. Thus, a retailer can reap rich dividends by avoiding a situation leading to a cash crunch.