Cash Flow Strategies Within Reach

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As business owners continue to devise methods to improve sales year after year, it’s important to make time to plan ahead for the proper management of income and expenses to best maintain the inflow and outflow of bookstore funds.

While stores may vary in the way they approach cash flow, proper management encompasses creating systems and methods through to track bookstore funds; processing outgoing payments and controlling the cost, timing, and growth of expenses; balancing the buying budget, managing returns, and taking advantage of discounts and lines of credit; and developing new ways to increase margin.

Here’s a look at some of the cash flow practices employed by Maria’s Bookshop, Copperfield’s Books, and Books Inc., each a store of a different size and with different cash flow strategies.

Establishing a Cash Flow System

Located on Main Street in downtown Durango, Colorado, Maria’s Bookshop sees its customer base increase significantly during the holiday and tourism seasons. A general interest bookstore, Maria’s is open from 9:00 a.m. to 9:00 p.m. daily and carries a mix of books and non-book items, including many Southwest travel guides, books of local interest, and archaeology titles. The store is near several city parking lots, the transit system, and a bike trail, all of which make for easy accessibility.

When spouses Peter Schertz and Andrea Avantaggio bought the store, which opened in 1984, 15 years ago they initially took a “seat of the pants” approach to cash flow, Schertz said. But in order to get into good cash flow habits, he and Avantaggio sought out advice from experts and found that speaking with a certified public accountant and employing a good bookkeeper helped the store shape its cash flow structure. Knowledge gained from the couple’s participation in educational and networking events has also been beneficial to the store’s practices and policies. “All the good ideas we use now we’ve stolen from other booksellers. Going to trade shows and conferences with questions is a pretty good routine to get into,” Schertz said.

Copperfield’s Books has seven stores within an hour’s drive of one another in the area north of San Francisco, California, and a rare books collection adjoining its Petaluma store. The locations vary from shopping centers to vibrant downtown areas and many offer parking and late hours.

Paul Jaffe, the president of Copperfield’s, believes strongly in the importance of having a cash flow statement — a method of tracking the flow of funds into and out of a business — or “some sort of tool to be able to look at cash flow management,” describing it as “a very essential part of any financial management, not just of bookstores.” Using the cash flow statement to evaluate and project the store’s future funds, he can see over a month’s period of time exactly what creditors the store is paying; if the store is paying by cash, credit card, or credit line; and in what specific time frames those payments are going to be made; then, Copperfield’s can plan its cash flow accordingly.

“People can’t just look at their daily bank balance and think they’re managing cash flow,” said Jaffe, because the daily bank balance does not give a full picture of upcoming expenses or anticipated income. He highly recommends using a balance sheet, which shows both income and where funds are going, as well as what assets and liabilities the store has to account for.

Books Inc. has 11 locations throughout the San Francisco Bay Area and employs a comptroller, Kwok Chan, to keep close tabs on the company’s cash flow through daily projections.

“At Books Inc., we have our day-to-day cash and also a line of credit with the bank,” said Chan, who looks at the store’s finances on a daily basis, projecting three weeks out — four if possible — and then looking at when vendors need to be paid, when rent gets paid, and when other expenses need to be met to ensure that there is enough capital to cover those costs in that time frame.

“I do not do a cash flow projection to tell me how much I need on a weekly basis, because our revenue is fairly stable,” said Chan. Instead, he bases future plans on historical sales and creates a projection on a daily basis, looking at how much cash Books Inc. has and an estimate of how much it needs.

When working with just one store, it’s important to monitor the fluctuations in cash, but with two or more locations the expenses and incoming funds tend to balance out among the stores, said Chan. Books Inc. in particular sees steady business throughout the year due to its urban and pedestrian-friendly locations, which stay open after traditional office hours to cater to their communities. The business that each store takes in helps level the inflow and outflow of cash for the company as a whole.

But that doesn’t mean there aren’t curveballs, said Chan, who believes that “if you do a cash flow over a 12-month period, it’s wasting your time.” It’s impossible to predict a huge drop-in title or a laydown book, so doing a cash flow assessment a year out doesn’t account for the unexpected costs, he said. “I would rather spend the time to do the next 30 days on a daily basis so I know precisely how much I need to pay 25 days from now or 20 days from now.”

Planning for Expenses

Like any business, bookstores have recurring, regular expenses and one-off charges that must be handled in a timely manner. Regular expenses include occupancy (rent, utilities, repairs, and maintenance), marketing and advertising, travel, insurance, credit card services, freight out, taxes, and depreciation. While payroll is a regular expense, the overall budget must be flexible to allow stores to meet seasonal demands. Publisher and vendor payments are also dependent on the bookstore’s inventory needs, which generally will vary depending on the time of year.

At Maria’s, “controlling payroll expenses through the holidays and peak tourist seasons is important. What that comes down to is scheduling appropriately,” said Schertz. That task is handled by Avantaggio, who manages scheduling efforts through computer software.

“As far as paying vendors, we just try to pay bills when they’re due,” said Schertz. “I don’t like to get sideways with vendors; I like to honor their business and I like them to honor ours. I like to pay them on time. I like to be square with them.” With payments for supplies like bags, bookmarks, or labels, which are less regular, Maria’s pays as needed, without necessarily budgeting their costs out over the year.

Maria’s also worked to create a line of credit to act as a safety net, but it is important not to rely on it too heavily, said Schertz. “It is there when we need to increase inventory for the holidays or for the busy tourist season,” he explained, but it’s paid off quickly.

Additionally, Maria’s has made use of the American Bookseller Association’s yearly ABACUS survey, which Schertz called an invaluable financial tool. “It helped us analyze our expenses up against our peers’ and helped us figure out what adjustments we needed to make to keep expenses in line. All this stuff does have its own effect on cash flow.”

One of the main focuses for Copperfield’s when looking at expenses is to monitor “creepers”: maintenance costs and supplies that slowly go up every year without being easily noticed. It’s essential to keep on eye on such costs as insurance liability and worker’s comp, phone and Internet services, and alarm systems, said Jaffe. “It’s a really good idea to go out and get quotes every couple of years and look at that. Those are all affecting our business and they all add up. It’s all accumulated expense that can get quite large,” he said.

Jaffe tries to spread expenses out where he can, using an Excel file to track payments owed. Delaying a book order by a day so that it falls into the following 30-day payment window can help when cash flow is tight, and paying some vendors by credit card and then paying the card off before the closing date can add an additional 30 days to a payment deadline. Copperfield’s also pays certain publishers on a weekly basis, avoiding a month-end pileup of publisher bills when many other bills are also coming due. They are small strategies, but they can add up to a big stretch on funds, said Jaffe.

At Books Inc., Chan keeps a column in his cash flow statement that tells him the company’s outstanding debt and always keeps that number in mind. “If you don’t know your outstanding debt, you’re dead,” he said. “You’ve got to know how many checks haven’t been cashed. You have to know that your bank balance isn’t your real balance.”

For the most part, Chan uses his personal experience to determine when Books Inc.’s payments need to go out and how each payment is treated.  Chan always makes sure to pay small publishers early when possible, he said. “The small guys need the cash to do their business. I want to help them because I am a small business person and I know how important it is to cash flow. I pay early or on time.”

Chan also keeps track of publisher or vendor discounts that are offered for paying early. “I like payment discounts. In my daily cash flow, I note who has an early payment discount and who I don’t want to mess with,” he said, adding that it is important to keep positive relationships with vendors and to keep payments going out on a regular basis. 

It is helpful to have a good relationship with your vendors and your landlord, said Books Inc. President Michael Tucker, who works closely with Chan on company finances. “A lot of people turn credit departments into the adversary. If you can keep [payments] consistent, they have a little more faith; keep money on the table and keep it moving. You don’t want the first time that you’re having a conversation to be when you’re desperate,” he said.

Managing Inventory and Increasing Margin

Inventory management requires a careful balance of outgoing payments and incoming cash, incoming and outgoing stock, and management of returns, publisher or wholesaler discounts, and credit line usage.

In managing inventory at Maria’s, buyers use Above the Treeline to determine what books need to be ordered and what needs to be returned. Book buyer Jeanne Costello scrutinizes the numbers and inventory levels to maintain a fresh, controlled stock, and to avoid inventory creep.

“You want to have every book, but you just can’t afford it in terms of space or in terms of purchases,” said Schertz. Instead, it’s about “keeping that inventory number down, keeping the shelves fresh, keeping books on the shelves that will sell.”

By buying both direct from publishers and indirectly from wholesalers, Maria’s takes advantage of vendor discounts that match what they are looking to purchase. “We try to be careful on what’s appropriate or not. We can’t stock up titles that aren’t going to sell or are going to sell over such a lengthy period that it outweighs the discount or the free freight,” said Schertz, adding that he credits Avin Domnitz, ABA’s former CEO, and his Two Percent Solution method for opening his eyes to that.

Periodically, Maria’s Costello looks at every section of the bookstore and compiles return lists in Above the Treeline. “When you look at that inventory on your shelf, those are dollars. It could just be sitting there, or you could send it back and you can buy a book that might sell. That’s the way we look at it,” said Schertz.  

Also important is having a bank that is familiar with your business. “Having a good relationship with your banker is so important, and we have learned that,” said Schertz. “We share our ABACUS data with our banker. He knows our business, he knows our concerns, he knows our reputation. We’re not going in there and begging for money in an emergency. It’s well planned out.”

In order to keep cash flowing into the store, Maria’s Bookshop offers a diverse inventory, including non-book and gift items, which now make up about 20 percent of its sales. The store also works to get the best discounts available from vendors, paying ahead or electronically to get an additional percentage off, and it keeps a handle on shrinkage and damaged books. Regarding shrinkage, Schertz said, “We’re certainly not 100 percent there, but we are trying to have a handle on it” by being more aware of sections where shoplifting is a problem and moving easily stolen items to where they’re more visible or carrying fewer items that can be easily pocketed.

A critical element to Maria’s success, said Schertz, is its staff. While managing the outflow of cash and keeping an eye on the inflow are important, a strong staff can make all the difference in bringing in customers and sales, he said. “We have a great staff. They are out there hand-selling books, and that is a key component to cash flow: You’ve got to keep it coming in to get it out. It all comes down to individual sales out there on the floor and add-on sales. It all comes down to having a great staff that enjoys doing that and is capable of doing that,” he said.

Copperfield’s buyers purchase from both publishers and wholesalers, and they look for stock offers that they can take advantage of. They also take advantage of early payment terms from wholesalers and publishers.

Using a returns schedule, Copperfield’s tracks the flow of inventory into the store and the flow of sales out of the store. Oftentimes, said Jaffe, “it’s not that we need to return books for cash flow, but it’s that if there are books that aren’t selling, we want to make sure they leave the store in a timely way so we can recharge our store for fresh inventory.”

Remainder buyers and non-book buyers work within a buying budget at Copperfield’s. “We do a monthly inventory analysis and we do that analysis for all our subject categories: for new, remainder, sidelines, magazines, calendars, and greeting cards,” said Jaffe. Copperfield’s looks at what the monthly inventory is on hand and what the inventory turn is. “If we see that our numbers are getting a little bit out of whack — if our turns are going down, if our month’s on-hand inventory is going up — we can adjust accordingly,” said Jaffe.

Books Inc. begins each year knowing that for the first nine months it will be working off the cash balance from the previous year and that it will make most of its money in the fourth quarter, the holiday season. Chan plans on filling inventory throughout the year using leftover capital, then working with the store’s credit line come October to bring in stock for the holiday season, which will be paid off in December or January with the holiday profit. However, he said, “I try not to use my line of credit because I hate to pay interest.”

Buyers at the Books Inc. headquarters handle all frontlist buying for the stores, while store managers handle restock buying. Each department has its budget for buying, which is generated weekly, and the buyers know each week what money they can use to purchase from publishers and wholesalers. Buyers are responsible for keeping their budget for books, remainders, and sidelines in control, said Tucker. Buyers are also tasked with taking advantage of publisher or wholesaler promotions when possible.

Books Inc.’s buyers order from publishers when there’s plenty of time to receive the order, and from Ingram or another wholesaler when the merchandise is needed right away. Regular orders are placed with publishers to maintain inventory and for events that are planned well ahead of time in order to secure the best discount.

Books Inc. utilizes Above the Treeline to keep track of inventory turns for each store and genre and to manage returns where and when needed. “Inventory systems can tell you how quickly you’re selling what and in what period of time,” said Tucker. Returns are managed on a store level, with the oversight of senior buyers. “The flow of returns makes a lot of difference to what happens with cash flow,” said Tucker. “It’s on a cycle.”

What’s critical, he added, is avoiding bottlenecks in the system. “It’s got to be a constant flow of what’s coming in from the buying and what’s going out through the store.” Waiting for returns credits or payments will get the store stopped up on the buying side, which affects the inventory that brings in further cash. “Make sure the flow is happening,” stressed Tucker.

Books Inc. has also made an effort to increase margin at its stores, said Tucker. “The shift has become of product, really,” he said, with non-book and gift items carrying a higher margin than books. Bringing in merchandise that adds a percent or two to profits can make a difference over a year, said Tucker, so Books Inc. has upped its used books, remainders, gifts, and non-book from about two percent of inventory to 12 –14 percent.

But, ultimately, Tucker said, “customers really want a different kind of experience.” Books Inc. stores work to create displays that mix new titles with backlist, as well as gift items and other fun merchandise that customers in their particular communities might enjoy. Like many other indies, Books Inc. strives for a welcoming atmosphere featuring experienced booksellers and a curated inventory that can only be found in its bricks-and-mortar stores.

Additional Resources

Balancing the inflow of cash and its outflow may take some careful consideration and work, but booksellers agree that the process is important. For more information on managing cash flow, take a look at ABA’s educational resources, including the popular Two Percent Solution, ABA’s bookstore financials worksheet, and Surviving Tough Times: Best Practices.

Booksellers can also find important information on buying, budgeting and monitoring finances, and increasing margin through ABA’s education curriculum.