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Is your startup in trouble?
Jan 19, 2012
Before planning to close your retail business, consider fixing your cash flow and managing your inventory better.
Q: My business is currently in dire straits, financially speaking, and I am already thinking of closing the business (a bookstore/gift shop) if by the next quarter it does not make a profit. Is there any last-ditch measure that you could suggest in order to prevent the shutdown?
A: There are many ways to approach this problem, but the one thing you should look at before considering closing down is the level of cash flow the business generates.
If your monthly cash flow collections from sales are able to cover your expenses and payables, there is a high probability of saving the business by implementing some marketing efforts. It is possible that accounting shows you are experiencing losses, but it doesn’t mean that you are running out of cash, yet. You could look into the causes of the losses: how you price your merchandise, how you control your inventory, or simply mismanagement resulting in frequent theft. As long as there is cash flowing into the business, there is a strong chance that it would survive.
If you are in this situation, first look at your pricing policy. Maybe your pricing does not provide sufficient margins that support your operating expenses. This normally happens when you price your merchandise too competitively in order to boost your sales. Do you mark down your merchandise too often? This can lower the average selling price of your merchandise, thus lowering your total gross margins.
Budget your pricing by determining the minimum gross margin you should attain at any period, and use this to calculate your breakeven sales. Let’s say your monthly operating expenses amount to P75,000. Use this figure to equal your gross margins in order to break even. If your gross margins is P75,000 and your average gross profit rate is 20 percent, derive your break-even sales by dividing P75,000 with 0.20, which gives you P375,000. If your actual monthly sales does not reach P375,000, then it means that you are losing.
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