For most retailers, poor buying decisions lead to poor cash flow. Obsolete inventory ties up cash. It requires close monitoring to maintain the appropriate level of stock. Spend time to review aging inventory and make adjustments to prices to sell slow-moving products and free up the cash to purchase more attractive merchandise. When possible automate reporting so that store and shelf inventory older than 60 or 90 days are flagged in your reports so that you can take abatement steps.
For all merchants, taking unplanned markdowns is difficult. Build a small expense budget each month called “unplanned markdowns.” Then, when stagnant inventory seizes your cash flow, use a planned markdown strategy on the most troubled products to induce customer sales. The markdown can be offset by the “unplanned markdown” expense line and not have as devastating effect on operations because the markdowns were already built into the budget. Consider setting aside a specific percent of sales each month that is reasonable to cover unplanned markdowns. Begin with 1-2% and adjust as you gain more insight into this troubling issue. Over time you may need to set a fluctuating percentage as inventory from back to school, end of year and holidays may need to be aggressively marked down. Tracking and managing an unplanned markdown budget should also start to reveal patterns about your buying habits and your customer’s purchasing habits. Typical patterns to look for include a local affinity for particular colors (Be smart about purchasing items in the local school colors in paper and other supplies.)
Savvy merchants create a markdown plan for stagnant inventory. Product that is non-seasonal and simply is not selling may go on a 25%/50%/75% markdown plan where the price changes automatically every 30 days until all of the product is eliminated in 90 days. Seasonal products typically need a more aggressive markdown plan that may be a 50%/75% markdown completed within 45 days. Selecting a specific back end cap or other store location for the marked down goods also creates a good merchandising practice. First, it removes poor sellers from the most valuable sales locations in the store. Second, it creates a destination for your bargain-minded shoppers who will regularly shop the discount areas. These bargain hunters can actually accelerate the cash flow and give your store a reputation for having great prices.