For you retailers, the holiday season started during the summer season as orders were placed and with supply chain issues, you're likely still contending with vendors, and preparing for replenishment of those orders if all goes to plan.
Our Co-Founder, Larry Hebert has assembled the best of the best in terms of advice to get that cash register ringing, owners' draws increasing and your overall cash flow to have a rock'n good holiday.
Before you start in, be sure to get Larry's gems and gold nuggets of financial wisdom in your inbox:
Actively Use A Detailed Inventory Purchasing Plan For November & December Using An OTB System
An Open-To-Buy inventory plan is essential throughout the year, but especially in the holiday season as most retail businesses generate 25%-40% of their annual sales during November and December.
Orders for the holiday season are placed throughout the year to be shipped in the October/November time frame to ensure ample product is available to meet the holiday demand. Forecasted sales for November and December and the Cost of Goods Sold % are the basis for how much to order and bring in to meet projected sales, cash flow and profitability. Using an OTB system wisely will ensure you don’t over or underbuy causing a reduction in cash flow, lost profitability and failure to meet sales projections.
Forecast Your November & December Sales
Creating accurate forecasts for the holiday season are instrumental to a successful campaign for three reasons. First, it’ll allow for a budgeting process to be instituted for the two busiest months to ensure ample cash is available to pay operating expenses and vendor invoices.
Second, the Cost of Goods Sold % aligned with the forecasted sales will allow for accurate purchases to be made to ensure merchandise is not over or under bought and will meet customers demand.
Third, projecting your sales (cash-in) and operating expenses and non-operating expenses (cash-out) for the period will provide an ending cash for December and the beginning cash available for the new year.
Receiving Holiday Merchandise
Planning the receipt of holiday merchandise is critical for three reasons. Generally, holiday goods are received in October and November to attract early shoppers, introduce specific goods geared for holiday sales and to maximize sales and generate cash. Bringing in goods too early when customers are not “holiday shopping” will have it “sitting on the shelves” too long when the holidays approach and may be viewed as “old
goods” not selling at full margin. This will also cause cash flow issues due to vendor terms and payments required well in advance of it generating cash.
Cash Flow Plan To Pay For Merchandise
It’s critical to have a cash flow plan in place to pay for the merchandise in a timely manner to take advantage of discounts, free shipping and remain on “good” terms with the vendors. Generally, when goods are shipped in October and November for the holiday the inventory will increase significantly, and holiday sales have not started in
Knowing if you have sufficient cash flow from operations or need capital infusion will be essential to managing the operating cash flow and ensuring there are not issues since the revenue from this additional inventory will not be generated until mid-November through December.
Managing Key Product Categories For Holiday
Product category management is a yearly function to ensure you have inventory investment dollars in the correct categories to maximize sales and prevent margin erosion. This is especially important during the holidays when buying trends and spending increase and having the “right product” in place with ample supply will result in increased sales, greater cash flow and enhanced profitability.
When determining the % of a product category use the total sales in the category divided by the overall revenue generated during that period, generally 12 months. When you establish your Open-To-Buy use these category percentages to purchase product during the year and holiday season to meet customer demand.
Confirm Orders Are Sufficient To Meet Projected Demand
It’s imperative a purchasing plan (OTB) is in place to ensure ample product is on-hand to meet holiday demand. When you set a base inventory, the concept is to start and end with that amount of merchandise on the shelves.
If you’re not using an annual Open-To-Buy plan here is the formula:
Nov 1 base inventory PLUS Purchases for Nov and Dec MINUS COGS for Nov and Dec EQUALS Base Inventory on Dec 31
This will assure you maintain your base inventory relative to the annual turns for Nov 1 and Dec 31, and have purchases merchandise equal to your COGS for Nov and Dec.
Clear Out “Old Inventory” During Holiday
Any product over 90 days old is considered “old merchandise” and should be moved at a discount in hopes of generating the product cost or realizing a small margin. These goods have tied up valuable dollars and will inflate your inventory lowering the annual turns and/or cause cash flow issues due to its non-movement during the year.
And an excellent time to eliminate these products and generate additional cash is to put them “on sale” during the highest consumer buying season of the year. Besides normal purchasing habits of buyers, they will also be inclined to purchase additional products at a reduced rate, if available, for gifts.
Early Shipment Discounts & Free Shipping
Many vendors will allow for product discounts and free shipping if merchandise is delivered earlier in the year (Sept/Oct). It allows them to improve their revenue per quarter, make room in their warehouses and receive payments earlier than normal improving their cash flow.
For the retailer, it provides an excellent opportunity to improve the Gross Margin % of their products, thus creating more Net Income. In order to do this, the retailer must have the cash available for early pay, a line of credit or other means of cash. And the discounts and free shipping received for early shipments must be more than the interest paid between the time payment of the goods and payment of the loan. May times using credit cards, due to their high interest, negates any savings.
Analyze Previous Holiday Revenue &Trends To Anticipate Holiday Sales
Forecasting and projecting holiday sales is very much enhanced with analysis of past holiday seasons and economic trends. This is reflected in your sales forecasts, COGS associated with those sales and how much inventory to bring in to satisfy consumer demand. Bringing in too little will result in missed sales, reduced cash and lower profitability. Bringing in too much inventory will cause cash flow issues with excess product on the shelves, a higher ending inventory in excess of the base and lost profits
when the overbought inventory must be placed “on sale” at a discounted price to move it for new product after the holiday concludes.
Have An Ongoing Line of Credit (LOC) To Avoid High Interest Credit Cards To Pay For Holiday Goods
Having an LOC from your bank in place will allow for the payment for holiday goods, if cash is not available, at a much lower interest rate than typical credit cards. Credit card rates can be between 15%-25% where LOCs are generally a small % above the prime lending rate set by the Feds. LOCs can be 5%-8%. Generally, these will be paid when the bulk of the holiday sales are realized in December depending on when you had to take
possession of the goods. But the hundreds or thousands of dollars you will save by using an LOC with a far less interest rate will make for a more successful holiday, additional cash in the bank and greater profitability.
Gross Profit Margin % (GPM%) on sales
This is the most important metric in your business. The is the average profit on every piece of merchandise that is sold in the store. And the actual dollars it produces is what pays the operating expenses, loan principal, draws, capital investment with any excess residing in your bank account.
During the holiday most retailers DO NOT have to have sales at discounted process to move merchandise. Make sure GPM% is calculated accurately as many times it’s configured erroneously. Below is the formula to determine
the retail of goods based on the cost to the retailer.
Cost price in dollars/Cost of Goods Sold %
First determine the GPM% you want to achieve and subtract that from 100 (this is the % of the retail price).
Product cost - $75
GPM% - 60%
COGS % - 40%
$75/40% = $187.50
If you purchased a product for $75 and your goal was to have a 60% GPM% the sales price of the item would be $187.50.
$187.50 x COGS 40% = $75 (the original price of the product)
Don't Chase Products If You “Sell Out” During The Holiday
If you run out of a product you specifically purchased for the holiday, DO NOT try to reorder. The time to get it shipped to your business and cost of doing so will be to your detriment, more than likely, your order won't arrive in time to sell at full retail. Thus, you’ll have additional inventory at the end
of the holiday that will need to be placed “on sale” at a reduced price negating the profits you were trying to generate by reordering. Managing your OTB Product Categories properly based on historical sales will place you in an excellent position to maximize all sales and miss very few opportunities.
We hope you found Larry's 12 Tips helpful, if you have any questions, always feel free to use the contact page on our site to get in touch. Overall, we suggest you give our service a try, it's super affordable, you have a 14 FREE trial and it was created by a true advocate for your success...not to mention it's used by some super successful retailers that have said, OpenToBuy.co has kept them in business, especially in this tricky retail landscape.
We look forward to being your financial resource for going BIG with your retail business!
Thanks for reading,
Larry & Bryce
Larry Hebert, our Creator and Co-Founder has helped hundreds of retailers both keep their doors open & scale their operation to great success...this is where he drops his knowledge gems and gold nuggets so you can thrive!