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Save It for a Rainy Day

In the summer of 1989 my parents did something quite unique for an independent, single-store retailer. They bought a fully-integrated IBM computer system including POS and inventory control. It was a state-of-the-art IBM AS/400 with three hard drives and almost a complete Megabyte of storage. The unit was larger than our copier machine. My parents had to build a custom countertop in the office to fit the beast, run a bunch of new wiring to our six new cash registers and five new workstations, and outfit the closet in the office to hold a dot-matrix printer that printed on green-bar paper.

Our version was over 3x this size!

All in all they spent about $180,000 on that system including the software and support. (That’s the equivalent of about $368,000 in today’s dollars!)

They had the money back then because A) they had been saving, and B) it was the 80’s and everyone was making money in retail at that time.

Let’s talk about A) a little more. Savings. Cash Reserve. Rainy-Day Fund. Do you have one?

By most accounts 2018 was one of the strongest holiday seasons ever. Several retailers have told me this year was “better than expected.” That phrase usually means more money in the bank to start the new year than usual.

You have several options ahead of you for what to do with that money including:

  • Expand your footprint: Maybe you have been eyeing a larger space or better location, or buying instead of renting.
  • Expand your inventory: You could buy more now to maximize spring and summer sales, expand into a new category, or to grow your store’s capacity overall if you feel like you’ve been under-inventoried.
  • Pay down your debt: Almost always the best option. Getting out of debt and getting rid of high monthly bills—especially during the slow months—makes a whole lot of sense.
  • Pay yourself: If you haven’t been paying yourself a salary, I would suggest that you start doing that right now. If you have been paying yourself a salary, you could use this for a bonus for you and the team.
  • Upgrade your systems: New registers, new software, new tech are all solid investments (and not nearly as expensive as they were back in 1989).
  • Upgrade your infrastructure: Is it time for new shelving fixtures or a new floor?
  • Save it for a real emergency or need: Maybe it is best to just sit on it for a while. Economic trends tend to go in cycles and we never know how long this cycle will last. Plus, you never know when a real financial emergency might hit.

These are all valid uses for the extra cash you earn in an up year. They are all easily justifiable, too.

If you’re in this predicament (a nice one to be in, for sure), can I offer you some suggestions? If I were to prioritize them, I would list them this way:

  1. Save it for a real emergency.
  2. Pay down your debt.
  3. Upgrade your system.
  4. Expand your inventory.
  5. Pay yourself.
  6. Upgrade your infrastructure.
  7. Expand your footprint.

Since Cash is King in retail, having cash reserves in the bank is the most critical element to your long-term success.

Paying down debt is good because it lowers your monthly payments and helps with cash flow month-to-month, but it doesn’t help you when something unexpected happens. You have to have some money put away with really strict rules on when and how you can spend it. After you’ve done that, then start whittling down that debt. Because of the cash flow, those two have to be your priorities. 

Of course, the old adage is true, too. You have to spend money to make money. You can swap #3 and #4 interchangeably, but with tech changing so fast, having mobile apps, tablets on the floor for quick checkout, and systems that take things like Apple Pay can all help you take care of your customers better. Both 3 and 4 should help you make more money next year. If you’re happy with your tech, maybe you look into expanding into a new product category.

If you’ve already done 1-4, then pay yourself. You’ve earned it—especially since you’ve already done 1-4! You can slap a coat of paint on one wall and get some new free racks from your vendor for a fresh new look for your store if necessary.

You’ll notice, however, that I put “Expand your footprint” last. Unless you’re in an absolute hellhole or have a landlord forcing you out through outrageous raises in rents and CAM, choose this last one carefully. It has far more long-term consequences (both good and bad) than the other six.

When my grandfather moved Toy House from its original location on First Street to the Mechanic Street location, he went from 10,000 square feet to 20,000 square feet. The one kicker, though, was that he could afford to make the jump because he could afford the new building with the level of sales he was already making at the old building. If you need an uptick in sales to make the new place affordable, then it isn’t affordable.

His advice would have been to NEVER expand your footprint because of a windfall from a very good year.

Only expand when your current sales are good enough to support the expansion.

Retail is fickle. Retail is full of surprises. No matter what you do with any windfall from a good year, first put some money away and then pay off some debt. That is the “eat healthy and get exercise” of the retail world that will keep you alive for years to come.

-Phil Wrzesinski

PS I know retail has been tough and tight the last decade. I understand you have some rainy day fixes that you’ve been waiting for this windfall to get accomplished. Still try to put some of that cash away if you can. Tithe at least 10% of your earnings into your savings for the next rainstorm. You’ll thank me later.

PPS One year after buying that computer, Target opened in Jackson. Our business took a 15% hit that year after a decade of windfalls. It was an eye-opener for my parents and a quick lesson in how things can change so fast and why cash reserves are so important. Like I said, you never know what is right around the corner.

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