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Blog // 30/01/2019

Retail transformers must produce proper forecasts

Retail over the past year

The retail sector has clearly had a tough year. From the high volume of CVAs, to reports of consumer confidence weakening in the run up to Brexit, it is clear that retailers are struggling under the current trading conditions. Retailers should focus on surviving 2019 by using cash visibility and accurate cash-flow forecasting.

In 2018 we carried out research that concluded a lack of cash-flow forecasting is a major risk to retail businesses. In addition, a report from Retail Week also indicated that retailers are actively aware of the dangers of inadequate cash-flow management. This confirms that retailers are aware of the potential impacts of cash-flow forecasting that may affect their futures within the industry.

Retail week also confirmed that 52 per cent of the UK retailers said they were planning to make no new investment in new shops or reduce their current property portfolios to protect their cash position. This shouldn’t be a surprise – with Brexit on the horizon and an uncertain climate, the retail sector is likely to continue facing tough trading conditions.

Looking into the future

A panel of experts have been elected by the Government to advise on the general issues affecting the high street. Retailers, however should not wait for interventions as they cannot afford to lose focus on their working capital management and cash flows. By focusing on their working capital and cash flow management, retailers will be better placed to take preventative action and reduce their risks.

It is important for retailers to look further ahead of the sales data and footfalls as financial health and understanding are key. For example, if a company’s flagship store is incurring high overheads which are consequently eroding profits, it may be more beneficial to take immediate action by reducing volumes of less profitable products to boost profit margins. To make these decisions, retailers need access to reliable data and be robust with their cash management.

Three-way Forecasting

A tool to help retailers with forecasting is a three-way integrated method of cash-flow forecasting, financial modelling this tool combines real-time data from three sources – profit and loss accounts, balance sheets and cash-flow records. Using this method of forecasting, retailers are able to receive a more accurate view of their trading performance and enables them to closely supervise certain activities.

The business needs to have clear strategic objectives for three-way forecasting to be implemented successfully. Clear strategic objectives will inform the timescale and scope of the three-way forecasts. For retailers, it is best to keep the forecasts for the short term whilst being able to cover the entire trade cycle – this cycle includes receiving an order, to taking payment and delivering the end product. Factors such as seasonality and changes affecting market conditions should also be taken into account. In this way, decision makers can be confident that resources exist to react quickly to market changes, without experiencing cash-flow difficulties.

When cash-flow modelling in this way, businesses should consider a number of potential scenarios. For example, it should be possible to predict how the business would perform if a particular product line proves successful, or if sales volumes increase or dip suddenly. The information gleaned can then be used to help guide decision making and can also help businesses to avoid unexpected costs.

Gaining access to real-time, data-based insights is one thing, however the key decision makers then need to act on them to improve the cash position of the firm or increase profitability. For example, accurate cash-flow modelling could shed light on where important value resides by identifying those stores with higher overheads that could be impacting profits. The same data-driven approach could be used to analyse individual product ranges; identifying those that could be delivering more value to the bottom line.

Confidence within Retail

While being used to inform business decisions, accurate cash-flow forecasts can boost lender confidence. By implementing a robust financial model and plan in place, potential backers can be assured by the strength of the management team and its ability to navigate the business successfully even when the trading conditions within the market begin to change or become ‘choppy’. This approach could also be used by managers to secure the funding needed for a strategic transformation programme; investing in the technologies and the structural or operational changes needed to meet customers’ expectations now and in the future.

Roberto Lobue - Menzies Accountant

In the current climate, retailers should take nothing for granted and keep all activities under surveillance. With three-way cash-flow forecasting in place, managers will be better equipped to optimise trading performances and implement plans to transform the business with confidence.

For more information on forecasting in retail, please contact Roberto Lobue on 01252 894915 or email rlobue@menzies.co.uk.

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