Articles & E-books

Cash Flow and the Comics Retailer by Robert Pavel

Posted: August 21, 2005 01:13 PM

Cash Flow is the term used to describe how cash moves in and out of a business. Your ability to predict and make effective use of cash is often crucial to the level of profit, if not the survival of the business.

In an ideal world, your income and expenses would be steady, highly predictable and would coincide perfectly so there was always enough cash to meet invoice deadlines or other expenses. In the real world, you may not generate revenue in sufficient quantity or in time. This is called a shortfall and must be addressed by borrowing funds, at prevailing interest rates, or postponing payments and perhaps jeopordizing your vendor relations.

In the comics business the availability of cash to pay bills each week is very dependent upon the cash receipts of the previous week. Payments for special purchases require the accumulation of larger sums than are ordinarily received during an average week. By creating a simple cash schedule and by planning your expenditures you can avoid shortfalls, interest penalties and possibly squeeze a few extra profit dollars through "leverage". Poor cash management practices have put many comics retailers out of business and keep many others "on the brink".

Consider the following ideas:

1. If your checking account pays interest, it is to your advantage to make deposits daily and write checks as late as possible. (Discounts for early payment are a major exception to this!)

2. Obtain delayed payment terms from your vendors whenever possible. Some vendors offer 30-day payment terms from the invoice date. If they are anxious for your money, they will offer you a discount for early payment. If you're on COD from your distributor, working to get on a terms payment basis is the single most important thing you can do that can significantly increase your financial strength.

3. To obtain the highest benefit from your vendor's terms, you want to pay the invoice with funds generated by selling units from that order. For example, given 30 day terms, if you can only sell 10 copies of an issue @ $1 each within 30 days,then limit your purchase to 20 copies @ $.50 each to pay for the entire $10 order. Any larger quantity and you will need to dig into your own funds to pay the invoice. In other words, order to sell out. When you're in strong financial shape you can afford to carry slow-moving inventory ... until then you must be conservative with buying. This means tracking sales and knowing your inventory.

4. Discounts of 2% within 10 days if invoice are worth taking if you have the cash on hand. (To do this without borrowing money, you should be able to sell enough units within 10 days to pay for the entire order.) Ignore the discount if you don't have the cash or if you have a better way to generate the equivalent of an annualized 19% yield on that cash over a 20 day period (the maximum number of days between the due date and the end of the month). Careful sales tracking and ordering means that you can accumulate enough cash to take advantages of favorable trade discounts - and you can make as much profit from shrewd buying as you do from some of your more marginal merchandise lines.

5. If your vendor does not offer payment terms but insists on cash on delivery, you may be able to use the leveraging principle. The theory of leveraging states that if you can earn a higher percentage of profit than the cost of your funds it pays to borrow capital for the investment. This translates into asking your bank for a loan or using your credit card's cash advance if you can generate sufficient sales to pay the interest and still have some profit for you. This is a tactic which should be used very rarely. Bank loans are not an option for most operators, so we're really discussing credit card advances as financing, which are very expensive. But when the rare times come when there's a read opportunity for profit, extending yourself financially can make sense. Then plow the profit from this one-shot event back into your company's regular operations. Again, work to get off COD.

Basic Cash Flow Schedule

We've provided a sample Cash Flow Calendar. When you receive an invoice, enter the amount in the week box when you must mail the payment to reach the vendor by the invoice due date. For each day, enter your anticipated weekly sales total. Subtract the invoices and your fixed, regular expenses from the receipts and note the weekly positive or negative balances. Your goal is to avoid negative balances by judicious buying practices. When you create a positive balance, you are making money. At breakeven, you don't lose but you also don't get ahead.