I love to watch the VH-1 Classic Rock channel with my son. I particularly like the 80's videos with the big hair, suspenders and parachute pants- on the guys. The demand for parachute pants must have gone away, because I don’t see my local department store stocking them in inventory.
The two biggest costs to a retailer are inventory and receivables. Put another way, these two areas are largest uses of cash. If the gift shop owner wants to know where her cash is, look at the checks you wrote to stock the shelves and the money you’re owed on purchases!
“Stacks of unsold clothing are clogging store aisles and pressuring profits” at Wal-Mart. Their first designer line has been pulled “from several hundred of the more than 3,000 stores that carried it”. The reason? Wal-Mart’s CFO “says clearing out stocks of unsold clothing is going to be a chore and could pressure (profit) margins all summer…It’s about getting the stores cleaned up right now.”
The Lesson: If inventory isn’t selling, don’t order more. Get rid of what inventory you have, even if it requires selling it at a loss. Selling the inventory allows you to recover the cash you've spent and reinvest it more productively.
Your Homework: What do you have in inventory that isn’t selling? What percentage does that product line make up of your total inventory? How much cash could you free up by selling it at a loss- 10% for example. How could you use that cash?
(Source: “Fashion Faux Pas Hurts Wal-Mart”, Wall Street Journal, 5/21/07)
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