FINANCIAL MANAGEMENT ISSUES

IN RETAIL BUSINESS

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 PROJECT REPORT
ON

“FINANCIAL MANAGEMENT ISSUES IN RETAIL BUSINESS”

IN THE PARTIAL FULFILEMENT OF THE DEGREE OF
MASTER IN MANGMENT STUDIES UNDER
UNIVERSITY OF MUMBAI
(2013-2014)

Submitted by
Ms POOJA RAMMURAT YADAV
[Roll No: 39]
SPECIALIZATION – FINANCE

UNDER THE GUIDANCE OF

PROF KETAN VIRA

GNVS INSTITUTE OF MANAGEMENT

GTB NAGAR, SION (EAST), MUMBAI 400 037
(AFFILIATED TO UNIVERSITY OF MUMBAI)

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 CERTIFICATE

This is to certify that Miss POOJA R. YADAV from GNVS INSTITUTE OF

MANAGEMENT, Mumbai who is currently pursuing Master of Management
Studies (M.M.S) has completed his project report on “FINANCIAL
MANAGEMENT ISSUES IN RETAIL BUSINESS” under guidance of Prof.
Ketan Vira.

We wish him all success for his Future Endeavour.

Prof. Ketan Vira Dr. R. K. Singh

(Internal Guide) (Director, GNVSIOM) (External Examiner)

GNVS INSTITUTE OF MANAGEMENT

GTB NAGAR, SION (EAST), MUMBAI 400 037

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 (2012 – 2014)

DECLARATION

I, Miss Pooja Rammurat Yadav hearby declare that the project titled
“FINANCIAL MANAGEMENT ISSUES IN RETAIL BUSINESS” is submitted to GNVS
Institute of Mangement, Affiliated to University of Mumbai in partial fullfillment of
the requiremenent for the award of MASTER MANAGEMENT STUDIES under the
guidence and superisor of Prof. KETAN VIRA GNVS IOM, SION (EAST), MUMBAI-37.
This research is my original work and has not been submitted for award of any other
degree or diploma fellowship or other purpose.

Date : _________ ____________________

Place: POOJA R. YADAV
(GNVSIOM—FINANCE)
(Roll No. 201239)

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 ACKNOWLEDGEMENT

I am very thankful to everyone who all supported me for helping me to

complete my project effectively moreover on time.
My deepest thanks to Prof. KETAN VIRA for guiding me for my project with
attention and care. He has been instrumental in guiding me the outline of this
project.
I express my thanks to Dr. R.K SINGH (Director GNVS - IOM) and
Bridg. (retd.) M.K. NAG (Chairman & founder GNVS - IOM) for their extended
support.
I would also thank my institution GNVS INSITITUTE OF MANAGEMENT
STUDIES, MUMBAI and faculty members without whom project would have been
distance reality. I also extend my heartful thanks to family & well wishers.

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 INDEX

1. Executive summary------------------------------------------------------------------------06

2. An Introduction to Retailing------------------------------------------------------------07

3. Financial Management in Retail Business-------------------------------------------13

4. Reasons for Failure of Retail Business------------------------------------------------14

5. Working Capital Issues in Retail Business--------------------------------------------16

6. Sales Forecasting Issues in Retail Business------------------------------------------20

7. Inventory Turnover Issues---------------------------------------------------------------22

8. Impact of Seasonal Cycle----------------------------------------------------------------30

9. Cash Flow in Retail and Diversification Challenges--------------------------------38

10.Credit control-------------------------------------------------------------------------------46

11.Conclusion-----------------------------------------------------------------------------------60

12.Bibliography---------------------------------------------------------------------------------61

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 1. Executive Summary
India is the fifth largest retail market globally, with a size of INR 16 trillion, and has been
growing at 15% per annum. Organized retail accounts for just 5% of total retail sales and has
been growing at 35% CAGR. Though the journey as so far been rather mixed, organized
retail is being tipped as one of the biggest gainers from growing consumerism and rising
income. India’s robust macro and micro economic fundamentals, such as robust GDP
growth, higher incomes, increasing personal consumption, favourable demographics and
supportive government policies, will accelerate the growth of the retail sector.

Retailing in India is evolving rapidly, with consumer spending growing by unprecedented

rates and with increasing no of global players investing in this sector. Organized retail in
India is undergoing a metamorphosis and is expected to scale up to meet global standards
over the next five years. India’s retail market has experienced enormous growth over the
past decade. The most significant period of growth for the sector was between year 2000 &
2006, when the sector revenues increased by about 93.5% translating to an average annual
growth of 13.3%.The sectors growth was partly a reflection of the impressive Indian
economic growth and over-all rise in income level of consumers.

For many independent retailers, the largest asset on the balance sheet is inventory.
Inventory is the “active’ asset, which generates the businesses sales and profits. But without
careful planning, inventory can easily get out of line, resulting in heavy markdowns due to
overstocks and ultimately, serious cash flow problems.

Apparels and consumer durables are the fastest growing vertical in the retail sector. Mobile
phone as a product category has witnessed the highest growth in the consumer demand
amongst all retail products offering, with increasing penetration of telecommunication in
towns and villages. The telecommunication sector has been adding on an average 5 million
new users every month. The other product categories are gaining traction predominantly in
the urban areas and emerging cities, with increasing average income and spending power of
young urban India.

Inventory turnover is a measure of how quickly a company can convert its inventory into
cash and profits. The goal of a company is to hold enough inventory to meet its client’s
orders continuously, but not so much that the cost of holding it outweighs the profits. A
decreasing inventory indicates that the company is not converting its inventory into cash as
quickly as before. When this occurs, the company ends up having increased storage,
insurance and maintenance costs.

Generally in inventory management issues, the problem usually boils down to one of two
things: out-of-stocks and overstocks. At first glance, the two issues appear unrelated out-of-
stocks resulting from unexpectedly high sales, and overstocks from unexpectedly low sales
but they are really the flip side of the same problem. Both result from inadequate planning
and sales forecasting.

India remained as the most attractive market for third year in a row in an index prepared by
At Kearney. Retail sector is the largest contributing sector to country’s GDP.

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 2. An Introduction to Retailing
Overview
Retailing encompasses the business activities involved in selling goods and services to
consumers for their personal, family, or household use. While retailing can be defined as
including every sale to the final consumer (ranging from cars to apparel to meals at
restaurants), we normally focus on those businesses that sell “merchandise generally
without transformation, while rendering services incidental to the sale of merchandise.”2
Retailing today is at an interesting crossroads. On the one hand, retail sales are at their
highest point in history. Wal-Mart is now the leading company in the world in terms of sales
ahead of ExxonMobil, General Motors, and other manufacturing giants. New technologies
are improving retail productivity. There are lots of opportunities to start a new retail
business or work for an existing one and to become a franchisee. Global retailing
possibilities abound.
On the other hand, retailers face numerous challenges. Many consumers are bored with
shopping or do not have much time for it. Some locales have too many stores, and retailers
often spur one another into frequent price cutting (and low profit margins). Customer
service expectations are high at a time when more retailers offer self-service and automated
systems.
At the same time, many retailers remain unsure about what to do with the Web; they are
still grappling with the emphasis to place on image enhancement, customer information and
feedback, and sales transactions. These are the issues that retailers must resolve: “How can
we best serve our customers while earning a fair profit?” “How can we stand out in a highly
competitive environment where consumers have so many choices?” “How can we grow our
business while retaining a core of loyal customers?” Our point of view: Retail decision
makers can best address these questions by fully understanding and applying the basic
principles of retailing in a well-structured, systematic, and focused retail strategy.
That is the philosophy behind Retail Management: A Strategic Approach. Can retailers
flourish in today’s tough marketplace? You bet! Just look at your favourite restaurant, gift
shop, and food store. Look at the growth of Shoppers Drug Mart/Pharma Prix, Loblaws, or
such iconic examples as Canadian Tire or Tim Hortons. Is it easy? No. Look at the experience
in early 2005 of Krispy Kreme, which was at that time closing stores in Ontario and facing
lawsuits from its shareholders over allegations of overstating revenues. To prosper in the
long term, all retailers need a strategic plan and a willingness to adapt.

The Framework of Retailing

To better appreciate the role of retailing and the range of retailing activities, let us view it
from three different perspectives:

 Suppose we manage a manufacturing firm that makes vacuum cleaners. How should we
sell these items? We could distribute via big chains (such as Future Shop) or small

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 neighbourhood appliance stores, have our own sales-force visit people in their homes
(as Aerus— formerly Electrolux—does), or set up our own stores (if we have the ability
and resources to do so).We could sponsor TV infomercials or magazine ads, complete
with a toll-free phone number.
 Suppose we have an idea for a new way to teach first graders how to use computer
software for spelling and vocabulary. How should we implement this idea? We could
lease a store in a strip shopping centre and run ads in a local paper, rent space in a Y and
rely on teacher referrals, or do mailings to parents and visit children in their homes. In
each case, the service is offered “live.” But there is another option: We could use an
animated Web site to teach children online.
 Suppose that we, as consumers, want to buy apparel. What choices do we have? We
could go to a department store or an apparel store. We could shop with a full-service
retailer or a discounter. We could go to a shopping centre or order from a catalogue. We
could look to retailers that carry a wide range of clothing (from outerwear to jeans to
suits) or look to firms that specialize in one clothing category (such as leather coats).We
could zip around the Web and visit retailers around the globe.

Retailing does not have to involve a store. Mail and phone orders, direct selling to
consumers in their homes and offices, Web transactions, and vending machine sales all fall
within the scope of retailing. Retailing does not even have to include a “retailer.”
Manufacturers, importers, non-profit firms, and wholesalers act as retailers when they sell
to final consumers.

Types of Retail Outlets

A market place is a location where goods and services are exchanged. The traditional market
square is a city square where traders set up stalls and buyers browse the stores. This kind of
market is very old, and countless such markets are still in operation around the whole
world.

In some parts of the world, the retail business is still dominated by small family-run stores,
but this market is increasingly being taken over by large retail chains
There are the following types of retailers by marketing strategy:
 Department stores- very large stores offering a huge assortment of "soft" and "hard
goods; often bear a resemblance to a collection of specialty stores. A retailer of such
store carries variety of categories and has broad assortment at average price. They offer
considerable customer service.
 Discount stores - tend to offer a wide array of products and services, but they compete
mainly on price offers extensive assortment of merchandise at affordable and cut-rate
prices. Normally retailers sell less fashion-oriented brands.
 Warehouse stores- warehouses that offer low-cost, often high-quantity goods piled on
pallets or steel shelves; warehouse clubs charge a membership fee;
 Variety stores- these offer extremely low-cost goods, with limited selection;

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 Demographic- retailers that aim at one particular segment (e.g., high-end retailers
focusing on wealthy individuals).
 Mom-And-Pop Shop: is a small retail outlet owned and operated by an individual or
family. Focuses on a relatively limited and selective set of products.
 Specialty stores: A typical speciality store gives attention to a particular category and
provides high level of service to the customers. A pet store that specializes in selling dog
food would be regarded as a specialty store. However, branded stores also come under
this format. For example if a customer visits a Reebok or Gap store then they find just
Reebok and Gap products in the respective stores.
 Boutiques or Concept stores are similar to specialty stores. Concept stores are very
small in size, and only ever stock one brand. They are run by the brand that controls
them. An example of brand that distributes largely through their own widely distributed
concept stores isL'OCCITANE en Provence. The limited size and offering of L'OCCITANE's
stores are too small to be considered a specialty store proper.
 General store - a rural store that supplies the main needs for the local community;
 Convenience stores: is essentially found in residential areas. They provide limited
amount of merchandise at more than average prices with a speedy checkout. This store
is ideal for emergency and immediate purchases as it often works with extended hours,
stocking every day;
 Hypermarkets: provides variety and huge volumes of exclusive merchandise at low
margins. The operating cost is comparatively less than other retail formats.
 Supermarkets: is a self-service store consisting mainly of grocery and limited products
on non-food items. They may adopt a Hi-Lo or an EDLP strategy for pricing. The
supermarkets can be anywhere between 20,000 and 40,000 square feet (3,700  m2).
Example: SPAR supermarket.
 Malls: has a range of retail shops at a single outlet. They endow with products, food and
entertainment under a roof.
 Category killers  or Category Specialist: By supplying wide assortment in a single
category for lower prices a retailer can "kill" that category for other retailers. For few
categories, such as electronics, the products are displayed at the centre of the store and
sales person will be available to address customer queries and give suggestions when
required. Other retail format stores are forced to reduce the prices if a category
specialist retail store is present in the vicinity.
 E-tailers: The customer can shop and order through internet and the merchandise are
dropped at the customer's doorstep. Here the retailers use drop shipping technique.
They accept the payment for the product but the customer receives the product directly
from the manufacturer or a wholesaler. This format is ideal for customers who do not
want to travel to retail stores and are interested in home shopping. However it is
important for the customer to be wary about defective products and non-secure credit
card transaction. Example: Amazon, Penknife and eBay.

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 Vending Machines: This is an automated piece of equipment wherein customers can
drop the money in the machine and acquire the products.
 Some stores take a no frills approach, while others are "mid-range" or "high end",
depending on what income level they target.

Retail Industry in India

Introduction
The Indian retail industry has been thrown open to foreign majors and is packed with
players who strive to offer great products and value-for-money to Indian consumers. The
country holds vast promise for retailers with its burgeoning spending power and rising
middle class.
The US$ 500 billion market, growing at an annual rate of about 20 per cent, is largely
dominated by small shops and stores as of now. The organised segment is in its nascent
stage and has huge potential to harness in the sub-continent. Foreign giants like Wal-Mart
and IKEA have recently received the Government’s nod to enter the Indian market, after
making all the necessary compliances.

Market Size
 India’s retail market is majorly dominated by the unorganised sector. Organised
segment accounts for 8 per cent of the total retail landscape, according to a study by
Booz & Co and RAI.
 The Indian retail industry has expanded by 10.6 per cent between 2010 and 2012 and is
expected to increase to US$ 750-850 billion by 2015, according to another report by
Deloitte. Food and Grocery is the largest category within the retail sector with 60 per
cent share followed by Apparel and Mobile segment.
 The foreign direct investment (FDI) inflows in single-brand retail trading during April
2000 to December 2012 stood at US$ 95.36 million, as per the data released by
Department of Industrial Policy and Promotion (DIPP).

Online Retail
Internet is the buzzword in India these days. People have online access 24x7 through their
laptops, iPads and mobile phones. As a result they have continued access to online retail
markets as well. Online retailers are emerging as important sales channels for consumer
brands in India as more and more people, especially the young generation, are shopping
online. From apparel to accessories, kids and infants’ product lines and almost everything
under-the-sun is available on the net these days. Apparel and accessory brands, such as
Puma, Nike and Wrangler, have recorded a big increment in online sales in 2012, led largely
by purchases from smaller towns and cities with consumers paying the full price for these
products.
For instance, footwear brand Nike has tie-ups only with online retailers such as Myntra and
Jabong. And in a very unique initiative, it recently launched its new range of cricket gear on

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Jabong. Such partnerships turn out to be very successful as online retailers provide greater
visibility than a physical store. "Our online store can carry around 10,000 options, while an
offline store can carry only 20 per cent of a given range," said an official.
Online retail in India is projected to grow to US$ 76 billion by 2021, accounting for over 5
per cent of the Indian retail industry, according to a report by advisory services firm
Technopak. This forecast is encouraging more companies- big and small- to sell aggressively
online. Experts believe that much of this growth will come from the rising purchasing power
of consumers in smaller cities, who do not have access to brick-and-mortar stores stocking
high-end brands.

Retail Industry: Key Developments and Investments

 Kottayam, in Thiruvananthapuram, is an emerging market for luxury cars. BMW has
launched its ‘mobile showroom’ in the city wherein people can check-out the brands’
models and go-in for a test drive as well. A weather-proof and air-conditioned structure,
the mobile showroom is a replica of BMW’s luxurious dealerships.

 Hindustan Unilever (HUL), India's largest packaged consumer goods firm, will soon
launch the country's first liquid laundry detergent, hoping that wealthy consumers will
not be hesitant to pay a premium for a product that promises to make their laundry
chore easier. The company claims that the new product removes stains two times better
than any other detergent powder in the market. With 90 per cent penetration in the
core detergent space, HUL is trying to create newer consumption opportunities in the
over Rs 15,000 cr. (US$ 2.51 billion) laundry market with niche and premium products
including Comfort fabric conditioner and Rin liquid blues in the post-wash segment.

 Villeroy & Boch AG, the Germany-based bath, wellness and tableware firm, has
partnered with Delhi-based Genesis Luxury Fashion to commence its operations in
single-brand retail trade in India. Villeroy & Boch’s application, seeking 50 per cent
equity in the joint venture (JV) company for single-brand retail trade, has recently got a
nod from the Foreign Investment Promotion Board (FIPB). The FDI infusion in the JV
would be to the tune of Rs 1.12 cr. (US$ 187,463.60). Genesis Luxury Fashion, that has
brands such as Paul Smith, Bottega Veneta, shoe brand Jimmy Choo, Italian label Etro
and Armani and home and personal care products from Crabtree and Evelyn under its
business in India, will exclusively manage the distribution of Villeroy & Boch tableware
products in the country. The alliance ensures the establishment of a distribution
network through the opening of Villeroy & Boch’s exclusive retail stores in India.

 In a bid to tap the branded footwear market in India, which is estimated to be about Rs
30,000 cr. (US$ 5.02 billion), Aero Group (known for its flagship Woodland brand) is
planning to revive one of its old brands, Woods. The company is contemplating to open
around 30 new, revamped Woods stores in 2013. The eight-year-old brand would now
lay its focus on the fashion quotient, rather than the typical outdoor, rough and tough
image of Woodland, and will have more of the range for women.

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 RP-Sanjiv Goenka Group’s company Spencer’s Retail is on an aggressive growth strategy,
with a focus on hyper-format stores. The company intends to infuse about Rs 600 cr.
(US$ 100.46 million) in setting up new stores and come out with branded and co-
branded products in the food and beverage segment. One of the official spokesperson
from the company revealed that Spencer’s would set up 80 hyper stores in the next 48
months. As of now, the company has 132 stores, including 26 hyper stores, 14 super
market and 92 daily (convenient) stores.

 Godrej Interio, the furniture retailing arm of Godrej Group, is aiming for Rs 5,000 cr.
(US$ 837.14 million) of turnover by 2016-17, with plans to invest over Rs 300 cr. (US$
50.23 million) to expand manufacturing capacity and retail stores. The company is
planning to set up more than 75 stores in 2013 itself with focus on tier II and III cities.

The Indian branded furniture market is worth about Rs 10,000 cr. (US$ 1.67 billion) out
of which Godrej Interio accounts for 15 per cent of the share. The company also plans to
establish 200 speciality stores which will design and built products according to the
consumer's convenience and preference.

Government Initiatives
The Cabinet Committee on Economic Affairs (CCEA) has recently approved Swedish furniture
retailer IKEA's application to enter the Indian industry and set up a single brand retail
venture in the country. FDI would be to the tune of Rs 10, 500 cr. (US$ 1.76 billion), making
it the largest investment to be made by a foreign brand in the Indian retail sector.
Moreover, the Government may further simplify investment norms in multi-brand retail to
please foreign retailers who intend to invest in India but are a little hesitant on certain
clauses. Mr Anand Sharma, the commerce and industry minister, has re-iterated that any
FDI proposal in multi-brand retail will be fast-tracked for sure.
The overall Indian retail sector is expected to grow 9 per cent in 2012-16, with organised
retail growing at 24 per cent or three times the pace of traditional retail (which is expected
to expand at 8 per cent), according to the report by Booz & Co and RAI.
Deloitte also seconds this forecast and expects that organised retail, which constitutes eight
per cent of the total retail market, will gain a higher share in the growing pie of the retail
market in India. Various estimates put the share of organised retail as 20 per cent by 2020.
Exchange Rate Used: INR 1 = US$ 0.01673 as on June 24, 2013

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 3. Financial Management in Retail Business
Areas of Financial Management in Retail Business are discussed as follows:

1. Estimation of capital requirements: A finance manager has to make estimation with

regards to capital requirements of the retail business. This will depend upon expected
costs and profits and future programmes and policies of a concern. Estimations have to
be made in an adequate manner which increases earning capacity of business.

2. Determination of capital composition: Once the estimation have been made, the

capital structure have to be decided. This involves short- term and long- term debt
analysis. This will depend upon the proportion of owned capital a retailer is possessing
and additional funds which have to be raised from outside parties such as relatives,
banks and other financial institutions or government schemes.

3. Choice of sources of funds: For additional funds to be procured, a retailer has many

choices like-
a. Loans to be taken from banks and financial institutions and relatives or friends.
b. Public deposits to be drawn like in form of bonds.
Choice of factor will depend on relative merits and demerits of each source and period
of financing.

4. Disposal of surplus: The net profits decision have to be made by the finance manager.
The volume of Retained profits has to be decided which will depend upon expansionary,
innovative, diversification plans of the retailer.

5. Management of cash: Finance manager has to make decisions with regards to cash

management. Cash is required for many purposes like payment of wages and salaries,
payment of electricity and water bills, payment to creditors, meeting current liabilities,
maintenance of enough stock, purchase of raw materials, etc.

6. Financial controls: The finance manager has not only to plan, procure and utilize the
funds but he also has to exercise control over finances. This can be done through many
techniques like ratio analysis, financial forecasting, cost and profit control, etc.

7. Working capital management: Working capital refers to that part of firm’s capital
which is required for financing short-term or current assets such as cash, receivables
and inventories. It is essential to maintain proper level of these assets. Finance manager
is required to determine the quantum of such assets.

8. Cost-volume profit analysis: This is popularly known as “CVP relationship”. For this
purpose, fixed costs, variable costs and semi variable costs have to be analysed. Fixed
costs are more or less constant for varying sales volumes. Variable costs vary according
to the sales volume. Semi-variable costs are either fixed or variable in the short-term.
The financial manager has to ensure that the income of the firm will cover its variable
costs, for there is no point in being in business, if this is not accomplished. Moreover, a
firm will have to generate an adequate income to cover its fixed costs as well. The

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 financial manager has to find out the break-even point that is, the point at which the
total costs are matched by total sales or total revenue.
4. Reasons for Failure of Retail Business
Slow Revenue growth due to rollout delays and poor same store growth
A large number of retailers are facing delays in rollouts due to delays by developers. This is a
significant risk and can lead to cost outcome. The delays on account of other retailers could
also create impact as malls will not be viable unless all tenants are tied in. The same store
sales as a whole have been falling steadily due to rising competition. Continued sharp
decline in the same in the future will be a risk to the growth.

Pressure on margins due to competition

With increasing competition, catchment areas are shrinking. Coupled with this, the short
age of quality retail space leading to spiralling rentals, underdeveloped supply chain, and
rising employee costs. Which adds to the cost and impact the margins.

Macro slowdown and Rising share of Debt

Macro concerns could hamper the domestic consumption trends and result in lower
footfalls. Going forward, the companies have to depend primarily on debt for funding
growth. Steep increase in cost of borrowing can impact the profitability of the company.

Access to Capital
In business, finances are often a paradox - it takes money to make money. While some
companies are able to start-up with little capital, they often reach a point where they need
additional financing to continue operations. Without those funds available, they are unable
to meet their day-to-day expenses. Securing access to capital before the company needs it is
often the difference between success and insolvency.

Overheads
It’s important to study success, but sometimes it’s just as insightful to study failure. Whether
you are considering starting your own wholesale retail store or have already established it,
this list of the top ten reasons for failure - and what you can do to avoid them - will help you
keep your business on the path to success.

Poor Sales
Sales, of course, are the life of any business and without them, the business soon flounders.
Some causes of poor sales, such as economic factors listed previously, are out of the hands
of company leadership. However, many of the reasons for poor sales can be directly traced
to management. For instance, if changes in customer preferences and the market in general
are ignored, sales will suffer. While there is no way to guarantee sales, managers can be
proactive and responsive to sales trends.

Management/Leadership Problems

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Of the ten reasons listed, this is the one that is completely in the hands of the company’s
owner(s). While many people are great entrepreneurs - able to start a company from just an
idea - these same people sometimes aren’t ready for the management issues they face as
the company matures. Without prior experience or simply because of incompetence, many
wholesale retail store owners are the very reason their company eventually fails. Of course,
with more experience and the ability to spot and address problems before they get out of
hand, business owners are more likely to avoid these challenges.

Economic Factors
The economy is cyclical, which means it periodically goes through low times. Wholesalers
who are unprepared for those times of economic recession are often caught off-guard
financially. While the economy isn’t something a individual company can change, business
owners can prepare for those difficult times through scenario training and financial planning

Overexpansion
Overexpansion is similar to the issue of excessive overhead. While it may make sense in
moderation, too much too quickly can often bankrupt a business. Supply problems, logistic
challenges, staffing issues, and financing concerns are potential obstacles in expanding.
Without adequate preparation and strategy, the attempt to capture more of the market can
quickly turn into a matter of survival.
The important idea within this top ten list is that all these reasons for a wholesale retail
store’s failure can be avoided. With adequate preparedness, as well as balancing the short-
term challenges against the long-term needs of the company, you can successfully navigate
these obstacles and achieve the full potential of your own wholesale company.

15
 5. Working Capital Issues in Retail Business
Inventory - An Asset or a Liability
As discussed above, inventory can be seen as an asset or a liability. Bankers and accountants
typically view it as an asset. A merchant, however, may see the same stock as a liability.
Age is the key. As mentioned above, leading retailers have a monthly review process to
understand the age of their inventory. Age is typically defined as the length of time in weeks
since the retailer last received the merchandise. This definition may vary somewhat by
retailer, but the concept remains constant, age is important.
What defines “old” merchandise? This varies widely by retail segment. In ladies fashion
areas such as Dresses or juniors, anything older than six to eight weeks is deemed
“transitory”. For these merchants, goods in stock for over 10-12 weeks are considered “old”
and are a significant liability. This type of fast paced fashion goods has a short life span for a
retailer and has a smaller tolerance for age.
Merchants who sell commodity goods such as bed pillows have a completely different range
to describe old age. Styles rarely change and may be continued by a vendor for years.
Innovation may add new styles, but rarely displace existing goods. For a merchant in this
type of business, the aging issue is not a concern. Goods can be in stock for months with
little concern about becoming unsellable to a consumer. The concern for this merchant is
not one of the age of the merchandise, but the amount of money tied up in slow selling
goods. Consumers express little reluctance to buy the same pillow style year after year.
Their only concern being that the pillow is clean and in good physical shape.
Other areas such as appliances, commodity clothing, household products and other similar
businesses see age as a problem at months, not weeks, and tend to take permanent price
reductions less frequently on the products.
Understanding these concerns, successful retailers view inventory as an asset or liability as a
combination of age and productivity depending on the type of merchandise considered.
Different rules should be defined for the needs of each category. Usage of current inventory
management systems will enable a retailer to better understand the status of their
inventory. Retailers can then anticipate problems and minimize any potential liabilities.

Purchasing Management
Purchasing management is a key component of smarter financial management for any
retailer, regardless of size. One of the most effective means of controlling purchases is to
implement and enforce the use of an Open-To-Buy process.
As stated above, OTB is a tool designed to direct and control spending by the buying and
merchandising divisions.
Open-To-Buy = Closing stock – opening stock – on order + sales.

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When the Open-To-Buy figure is negative, as in periods 1 and 3 above, retailers are said to
be overbought and have too much stock.
A true Open-To-Buy will account for many other factors such as markdowns and other
financial adjustments that might impact margins or inventory levels. Some retailers also
show unapproved On Order as a barometer for what else might happen.
As each month passes the planned numbers from the merchandise plans are updated with
either revised forecasts or actual numbers. As a forecasting tool the OTB can be revised
weekly to reflect updated plans based on trend and any anticipated changes in future
months.
A key aspect of using an OTB is the agreement of the revised forecast between the
merchant and their senior merchant (or owner perhaps in a small company). Once they
agree what the future might look like, they can then discuss an action plan to impact on-
orders, markdowns or even the promotional calendar to reflect their new view of what is to
come. By design, the OTB is not a sophisticated forecasting tool, but should rely on outside
applications and information to help the merchant revise forecasts.
The senior merchant’s role is one of summary, control and oversight. The senior merchant
should also have an OTB reflecting their area of responsibility. An aggregation of the lower
level OTB should be compared and managed to an OTB they maintain. They must monitor
merchant compliance to agreed actions, approve or deny additional purchase orders, and
hold monthly meetings to review.

Co-Op Funds and Vendor Advertising Support

Many larger retailers negotiate co-op funding from the vendors. This funding traditionally
covers advertising costs to market specific merchandise. These funds are restricted by the
vendor and will only be paid if certain pricing and presentation rules have been met.
Other vendor funding is negotiated in other segments. It’s quite common in grocery to
negotiate and receive “slotting fees” from the vendors to obtain the best “slots” on the
shelving units. Fees are higher for eye level shelves near the ends of the aisles than would
be charged for a bottom shelf, middle of the aisle slot. As grocery purchases are heavily
based on impulse, vendors will pay these fees to have their product seen first.
In the department store segment, buyers often negotiate guaranteed margins for certain
products. The vendor commits to a minimum gross margin percent for their merchandise. If
the department store is forced to sell these products at a greater discount than anticipated,
the vendor will contribute enough funds to bring the gross margin of that product back to
the negotiated level. In this type of arrangement, the retailer and vendor often discuss retail
pricing and promotional schedules in advance.
Other co-op funding for larger retailers can be found in trailing rebates of 1-3% for
purchasing various volume levels of goods. In some cases vendors will purchase custom
fixtures and visual displays for the retailer’s stores.

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The problem for the mid-size retailer is a lack of leverage with the vendor, as they do not
have the buying power of the multi-billion dollar retailers. Often co-op funding is limited to
a single ad in a year or maybe a season. In some cases though, smaller retailers may be able
to negotiate volume rebates.

Budget Planning
Financial planning lies at the core of the retail planning and is divided into two broad sub
categories, "financial accounting" and management accounting. It is imperative to
understand that for success of any retailing business model, the most critical aspect is
financial planning. It is thus critical for the promoters of Retail Company to begin their
planning process with the following:
1. Detailed assessment of financial resources available
2. Effective and timely use of these resources
The variance in retailing can be understood with examples of business doing an annual
turnover of Rs. 1 lakh, at the same time we have retailers that have an annual turnover of
over Rs. 100 million. It is therefore important for retailers to plan the format and size of
their operation on the basis of the resource available to them at the same time managing
effectively these resources on the scales of time and manpower.
We can consider two types of retail formats that are operational, the retail chain format and
the independent standalone format. While there is no doubt that the former, that is the
chain store retailing is far more profitable than independent retailing, it becomes critical for
a retailer to understand whether his available resources permit him to go for such format.
Talking about financial strategy it is always advisable to go for retail chain format as it
provides much better economics of scale and duplication of efforts at a fraction of cost.
Having said this, we would like to consider planning, issues and controls relevant only to
independent format as they constitute vast majority of retailing operations in India.
Mobilising financial resources is an integral aspect of any business and retail is no exception.
There are a few critical check point and issues that is generally associated with organised
retailing in India.
a) The initial capital required in the setting up of a retail operation of a scale itself could
be quite substantial. While real estate is easily available on lease to retailer
throughout the world, the situation in context to India is not very much conducive to
leasing or renting and this leads to a substantial part of Retail Operations investment
in a retail operation. This is also one of the reasons of slow catching up of chain retail
format in India.
b) Capital investment too forms a major component of initial investment as equipment
and fixtures form the basic infrastructure required in retail.
c) Lack of adequate knowledge of financial of organised retailing is one more critical
issue in propagation of organised retailing in India.

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Although the initial investment in terms of space and providing the necessary infrastructure
for a retail operation can be substantial, it needs to be understood that retailing is generally
a negative working capital business. While it is a common knowledge that most retailers buy
on credit and sell on cash, most products (merchandise) is available on extended credit
terms as well. In fact, an interesting thing to note here is the fact that the greater the
number of stores, the higher would be the power that retailer holds which usually facilitates
from their supplies.
For example if a retailer has a sale of Rs 50 Lakhs per month and was getting an average
credit of 30 days, his total outstanding would usually be around the same value.
However, if the retailer has efficient inventory management systems in place, he should not
at any time be holding more than 15 days of inventory, and therefore have 15 days sale as
cash surplus which he could dedicate for further expansion. It is also critical to understand
that this surplus is not a short term surplus; rather it is a long term surplus and is likely to
increase with an increase in number of stores.
In other words, if financial planning is carefully conducted and all the systems and
procedures are in place, it is possible to generate surplus cash flow in retail operation.
While there is no doubt that this is easier said than done, many of the large multinational
retailers did take a long time to create a cash surplus situation and Indian retailers too
would have to work hard to understand the economics of a retail operation and arrive at
such favourable situations.
In fact, it is the interest free surplus that is used by financially poor retailers around the
world to fund their expansions, Retailers in India too must adopt careful financial methods
to achieve both a high level of credibility and success in their operations. It may also be a
good financial strategy for retailers who use their surplus for expansion to be able to offset a
large part of their profits in terms of taxation by the benefits like depreciation, that they
would avail from the new equipment for their new stores and this cycle could go on.
In other words a large part of what would have otherwise gone into paying taxes could be
used by the retailer for fuelling his growth.

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 6. Sales Forecasting Issues in Retail Business
Generally in inventory management issues, the problem usually boils down to one of two
things: out-of-stocks and overstocks. At first glance, the two issues appear unrelated out-of-
stocks resulting from unexpectedly high sales, and overstocks from unexpectedly low sales
but they are really the flip side of the same problem. Both result from inadequate planning
and sales forecasting.
All too often, before they’ve reached out to for assistance, their response has been to add
an additional layer of inventory to eliminate the out-of-stock problem, only to make the
overstock problems worse.
Once we begin to work together, and the discussion comes around to their sales forecasting
process, one of the first things that often emerges is that they have not been actually
forecasting sales at all. Their focus instead has been solely on how much to buy.  That’s
putting the cart before the horse, however. And that’s usually at the heart of the problem.
Let’s approach it with some basic retail math, if simplified a bit, for any given month:
Beginning inventory + Merchandise Receipts – Forecasted Sales = Ending Inventory
When an independent retailer focuses on how much to buy, they usually start by looking at
how much they’ve bought in the past. But we can rework the retail math to show that they
need to start with a sales forecast and an inventory plan:
Ending Inventory + Forecasted Sales – Beginning Inventory = Merchandise Receipts
If we know how much inventory we want to end the month with, and how much we expect
to sell during the month, and then subtract how much inventory we’re going to start the
month with, we can calculate how much we need to bring in during the month.
In other words, everything starts with a good solid sales forecast. From there, we can plan
how much inventory we’ll need to have to support that plan. Only then can we determine
accurately how much inventory we’ll need to buy.
A good sales forecast has the following attributes:
1. It takes into account relevant sales and inventory histories, to identify extraordinary
sales and inventory levels and any other unusual patterns.
2. It drills down to the department, category and sub-category level, as appropriate, to
identify opportunities and trends, as well as the potential impacts of increased
competition, emerging technology, changes in promotional patterns and new
product introductions.
3. It rolls up from the subcategory, category and department levels to a total
forecasted sales increase that can be tested against the realistic expectations of
what can be actually achieved.
4. It plans in both units and sales dollars, so that the plan is well balanced between unit
sales and the average selling price of each unit sold.

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5. It is dynamic, so that it can be continually updated and adjusted as each month
passes and additional information is developed.
6. It identifies the most likely level of sales for any given month, not the level that
might be possible if things broke just right. As a result, it has a bias toward a flat
sales forecast for any given department, category or subcategory, unless there is
specific reason to forecast an increase or decrease.
7. Effective inventory management begins with a carefully developed sales forecast.
Only then can inventory levels be planned, and merchandise receipts scheduled
throughout the season. This is the key to eliminating both out-of-stocks and over-
stocks.

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 7. Inventory Turnover Issues
What Does Decreasing Inventory Turnover Mean?
When a company’s inventory turnover is decreasing, it means that it is holding its inventory
longer than previously measured time periods. The measure of how long a company holds
its inventory before selling it is referred to as the inventory turnover ratio.

Inventory Turnover
Inventory turnover is a measure of how quickly a company can convert its inventory into
cash and profits. The goal of a company is to hold enough inventory to meet its client’s
orders continuously, but not so much that the cost of holding it outweighs the profits. A
decreasing inventory indicates that the company is not converting its inventory into cash as
quickly as before. When this occurs, the company ends up having increased storage,
insurance and maintenance costs.

Inventory Turnover Ratio

The equation for measuring the inventory turnover ratio is the cost of goods sold, or COGS,
divided by average inventory. To find average inventory use the following equation;
beginning inventory balance plus ending inventory balance divided by 2. Illustrated in an
example, say a business has COGS of $10,000, a beginning inventory of $2,000 and an
ending inventory of $2,100. To find the inventory turnover ratio: $10,000/($2,000 +
$2,100/2) = 4.88. The company turns over its inventory approximately five times turning the
year.

Decreasing Inventory Turnover

A company can determine if its inventory is decreasing by comparing the inventory turnover
ratio of different periods. For example, a company has COGS of $20,000 and an average
inventory of $7,000 for the previous year. The company’s inventory ratio is $20,000/$7,000
= 2.86. Now, say this year, the company has COGS of $25,000 and an average inventory of
$10,000. The company’s inventory ratio is $25,000/$10,000 = 2.50, denoting a decreasing
inventory turnover.

Days to Sell Inventory

Another helpful inventory number to determine if a company has a decreasing inventory is
the average number of days it takes a company to sell its inventory. To calculate the days to
sell, the company divides 365 by the inventory ratio. In the decreasing inventory example,
the days to sell for the previous year is 365/2.86 = 127.62 days. The days to sell for the
current year is 365/2.50 = 146. So, as the inventory ratio is decreasing the days to sell is
increasing.

The Advantages of High Inventory Turnover

Businesses monitor their inventory turnover to determine if the amount of inventory they
buy matches the demand for their product. High inventory turnover means a business must

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constantly purchase new inventory to full-fill demand. If a business doesn't monitor its
inventory turnover, it risks losing customers because of a lack of inventory.

Income
High inventory turnover typically means your business sells many goods during the fiscal
period. If your business must continually restock its inventory and the reason isn't because
of natural disasters or other problems, you're earning revenue for each product sold. If your
starting inventory is 1,000 units and you replace them eight times, you've sold 8,000 units of
product during the fiscal period.

Supplier Negotiations
High inventory turnover may give your business more negotiation power with suppliers.
High turnover means your supplier is also doing well because of the amount of product it's
selling to you. If you believe your business' inventory turnover will remain high, you can
speak with your supplier about lower wholesale prices or price breaks for bulk orders.
Negotiating a lower price for your inventory lowers your cost of goods sold and may
increase net profit.

Shelf Life
Many inventory items have a shelf life that begins to tick away as soon as they leave the
manufacturer or supplier. This isn't limited to food and pharmaceutical drugs -- luxury
goods, electronic equipment and even clothes have a shelf life in the minds of consumers. If
your business has a high inventory rate, it sells products before they have a chance to expire
or become outdated. If a car dealership has a high turnover rate, it reduces the risk of
carrying too many vehicles from the previous year.

Holding Costs
Most businesses must store inventory somewhere before it's sold to customers. If your
company has a warehouse or designated area for storing inventory, you spend money on
holding costs. The longer your inventory is stored, the higher this cost will be for each unit.
If a car sits at a dealership too long, the dealer would spend money cleaning the vehicle,
replacing the fluids and periodically driving it for maintenance reasons.

Disadvantages of High Inventory Levels

Having high inventory levels generally means your company is struggling to turn over
inventory and make sales. When you have a high level of inventory, you face significant
costs and inventory management requirements that have disadvantages relative to
companies that have better inventory turnover and require less resource utilization
to manage inventory.

Poor Turnover
Companies typically want to produce or maintain only enough inventory to meet immediate
demands and to avoid stock outs. When companies have excessive amounts of inventory,
they are generally not selling enough to prevent inventory build-up. This is not a good

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situation as businesses need to turn over inventory efficiently to maintain reasonably high
profit margins and to avoid the costs and other disadvantages that come with high levels of
inventory.

High Costs
Carrying excess inventory has significant costs. One of the highest costs for many companies
is financing the purchase and holding of inventory. Also, the more inventory you hold, the
more you have to spend on labour to manage it, space to hold it, and in some cases,
insurance to protect against its loss or damage. Physically counting and monitoring the
levels of inventory you hold also takes time and has costs.

Loss or Damage
Related to the high costs of high inventory, some inventory can also go bad after a certain
amount of time and go to waste. When retailers buy excess inventory of perishable food
items, for instance, they may have to throw out inventory that spoils or becomes rotten.
When you carry high inventory, you also have greater exposure to lost or damaged product.
Thieves have more products to choose from and you have greater potential for product to
turn up missing or broken when you count inventory.

Strategic Planning Time

Company leaders typically have to spend more time in strategic planning meetings when the
company has high inventory levels. Management must figure out how to communicate with
suppliers, how to improve ordering processes or how to increase market demand to reduce
the high levels of inventory. This problem takes away from the ability of these managers to
focus on other proactive or more important strategic decisions to move the company
forward. Dealing with inventory problems is a more reactive strategy to resolve the issue at
hand.

Advantages & Disadvantages to a Manual Inventory Control System

Even the smallest businesses need to implement some form of inventory control system to
keep an accurate merchandise count, as well as for accounting purposes. Business owners
generally have a choice between using a computerized or a manual inventory system.
A manual system offers a number of potential advantages and disadvantages.

Simplicity
For a very small business that carries a limited amount of inventory or that turns over
inventory slowly, a mechanized inventory system is unnecessary. The business owner can
easily keep track of how much merchandise is on hand with a manual system, or simply by
applying the "eyeball test" to see if it is time to order more. The owner won't need to spend
money on inventory software or take the time to learn how to operate it.

Sense of Control
A manual system gives a small business owner a greater sense of control. Rather than
relying on a computer to indicate when it's time to reorder, the owner can manage the

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process on his own. The need to view his merchandise on a regular basis, such as when
counting stock before placing an order, gives him the opportunity to assess the condition of
his merchandise, reducing the chance of a customer receiving damaged goods.

Labour-Intensive
A disadvantage of manual inventory systems is that they can be highly labour-intensive to
operate. They require continuous monitoring to ensure that each transaction is accounted
for and that products are maintained at the appropriate stocking levels. It is also more
difficult to share inventory information throughout the business, because the lack of
computerization makes accessing inventory records a more cumbersome process. The time
spent monitoring inventory levels could be used on more productive activities for the
business.

Human Error
A manual inventory system relies heavily on the actions of people, which increases the
possibility of human error. People might forget to record a transaction or simply miscount
the number of goods. This results in needless additional orders that increase the company's
inventory carrying costs and use up precious storage space. Inaccurate physical counts could
also result in not ordering enough of a product, meaning the business could run out of a
crucial item at the wrong time.

Push System vs. Pull System Inventory Control

An inventory manager must be able to develop an effective inventory control system to
manage customer demand. The demand for the product will control inventory
costs, carrying costs, ordering costs and storage costs. Inventory control systems are
generally categorized as push or pull models. Knowing the definitions, advantages and
disadvantages of each system will help a company establish which inventory control method
works best for their organization.

Push System
The push system of inventory control involves forecasting inventory needs to meet
customer demand. Companies must predict which products customers will purchase along
with determining what quantity of goods will be purchased. The company will in turn
produce enough product to meet the forecast demand and sell, or push, the goods to the
consumer. Disadvantages of the push inventory control system are that forecasts are often
inaccurate as sales can be unpredictable and vary from one year to the next. Another
problem with push inventory control systems is that if too much product is left in inventory.
This increases the company's costs for storing these goods. An advantage to the push
system is that the company is fairly assured it will have enough product on hand to
complete customer orders, preventing the inability to meet customer demand for the
product.

An example of a push system is Materials Requirements Planning, or MRP. MRP combines

the calculations for financial, operations and logistics planning. It is a computer-based

25
information system which controls scheduling and ordering. It's purpose is to make sure raw
goods and materials needed for production are available when they are needed.

Pull System
The pull inventory control system begins with a customer's order. With this strategy,
companies only make enough product to full-fill customer's orders. One advantage to the
system is that there will be no excess of inventory that needs to be stored, thus reducing
inventory levels and the cost of carrying and storing goods. However, one major
disadvantage to the pull system is that it is highly possible to run into ordering dilemmas,
such as a supplier not being able to get a shipment out on time. This leaves the company
unable to full-fill the order and contributes to customer dissatisfaction.

An example of a pull inventory control system is the just-in-time, or JIT system. The goal is to
keep inventory levels to a minimum by only having enough inventory, not more or less, to
meet customer demand. The JIT system eliminates waste by reducing the amount of storage
space needed for inventory and the costs of storing goods.

Push-Pull System
Some companies have come up with a strategy they call the push-pull inventory control
system, which combines the best of both the push and pull strategies. Push-pull is also
known as lean inventory strategy. It demands a more accurate forecast of sales and adjusts
inventory levels based upon actual sale of goods. The goal is stabilization of the supply chain
and the reduction of product shortages which can cause customers to go elsewhere to make
their purchases. With the push-pull inventory control system, planners use sophisticated
systems to develop guidelines for addressing short - and long-term production needs.

Choosing the Right System

It is difficult for inventory managers to always know how much inventory to order and
when. The type of inventory control system will depend in large part on what type of
product is being produced. Some items, automobiles for instance, may not be able to be
produced with the just-in-time or pull inventory control method. The production of large
items, such as automobiles, is too complex and takes too long to only produce the amount
needed to full-fill specific customer orders. Computer companies, such as Dell, are
incorporating the push-pull system, where raw materials and goods are pre-ordered and
stored, but the actual computer is not assembled until the customer makes an order.

The Disadvantages of the Continuous Inventory System

The continuous inventory system, also known as the perpetual inventory system, is used in
businesses that want to automatically update their accounting records after each
transaction. This is in contrast to the periodic inventory system, where businesses choose to
manually update their inventory records at certain intervals. Before deciding to implement
the continuous inventory system, businesses should first consider the disadvantages.

High Cost of Implementation

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Unlike the periodic inventory system, the continuous inventory system cannot be
maintained manually. Therefore, in order to use the continuous inventory system, a
business must first install specialized equipment and software. This typically results in a
much higher cost of implementation, especially in large businesses with multiple different
locations. Even after the necessary equipment and programming is installed, periodic
maintenance and upgrades will still be necessary on an ongoing basis, which will cost
businesses even more.

Recorded Inventory May Not Reflect Actual Inventory

In a continuous inventory system, transactions are recorded as soon as they take place. For
the most part, this is a good thing. However, it can also be a disadvantage because the
recorded inventory may not reflect the actual inventory over time. This is mainly due to the
fact that physical inventory counts aren't used in a continuous inventory system. Therefore,
whenever errors are entered into the system, items are stolen, or merchandise isn't
properly scanned, the recorded figures will not match with the actual inventory.

Greater Complexity
Another disadvantage of using the continuous inventory system is that it requires
businesses to offer additional training to each of their employees because of the complexity
of the system. For example, employees will need to be trained on how to use the company's
specific software programs and also be trained to use special equipment, such as scanners.
With a greater number of people entering transactions into the system, the company
assumes a much greater risk of mistakes being made due to human error.

More Time-Consuming
When using the periodic inventory system, businesses allocate a certain time when
inventories are recorded. Depending on the business, inventories could be done weekly,
monthly or even annually. This makes the periodic inventory system much less time-
consuming than the continuous inventory system. With the continuous system, each
transaction must be recorded immediately, auditors must review transactions to make sure
they're correct and physical inventories must still be completed to cross-reference and find
discrepancies in the figures.

How to Calculate Inventory Turnover Ratio Using Sales & Inventory

The inventory turnover ratio measures the number of times each year that a company goes
through its entire inventory. When determining the company's inventory, you use the
average of the inventory totals taken throughout the year. The higher the resulting ratio,
the shorter the average amount of time that goods sit either in the company warehouses or
on store shelves. A higher turnover ratio means less money spent on holding on to
inventory, but also a greater risk that the company could run out of supplies if demand
spikes.

Step 1

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Add the inventory totals your company tracks during the year. For example, if your company
reports its inventory totals each month, add the 12 monthly totals.

Step 2
Divide the totals by the number of times per year your company takes inventory to calculate
the average inventory for your company. For example, if the monthly inventory counts total
$480,000, divide $480,000 by 12 to find the average inventory equals $40,000.

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Step 3
Divide your company's costs of goods sold during the year by the average inventory to find
the inventory turnover ratio. In this example, if your company sold goods costing the
company $320,000 during the year, divide $320,000 by $40,000 to find that inventory turns
over eight times per year.

The Limitation of Inventory Turnover Ratios in the Retail Sector

The inventory turnover ratio is widely used to analyse financial performance of not only
retailers but also manufacturers. Since more inventory means more money tied up in
merchandise, analysts like to see a high inventory turnover ratio. The higher the ratio, the
less inventory the firm is keeping in relation to its sales. When used in isolation, however,
the inventory turnover ratio will leave a lot of questions unanswered.

Definition
The inventory turnover ratio is calculated by dividing the firm's annual sales by inventory
levels. It is ideal to use weekly or monthly data to calculate average inventory levels
throughout the year. If you have access to weekly data for instance, you need to add up all
the end-of-week inventory levels and divide the total by 52 to arrive at an average. Monthly
data is almost as helpful. In the absence of such detailed figures, you can simply use the
inventory level captured at the balance sheet as of the end of the fiscal year. The resulting
number will tell you how many times the average inventory has been turned over during the
most recent year. A ratio of 24, for example, implies that the firms sells the amount of
product sitting on its shelves 24 times over the course of the year. In other words, the
inventories are depleted twice a month, on average.

Static Data
A serious limitation of the inventory turnover ratio is that analysts often have to calculate it
based on year-end inventory levels found on the balance sheet, as most firms do not release
average weekly or monthly inventory levels. Quarterly figures are a little better, though not
ideal. As a result, the figure can be skewed due to unusually low or high inventories at the
time the inventory numbers were captured. The problem is compounded for retailers who
use year-end data in their balance sheets. Inventory levels tend to be particularly low on the
last day of the year, following Christmas sales, even if the firm spent a great deal of the year
with bloated inventory levels.

Inventory Management
One reason analysts like to see low inventories in relation to sales is that items sitting on
shelves may spoil or go out of fashion. A supermarket may be more prone to the first issue,
whereas a clothing retailer may instead get stuck with out-of-season merchandise. These
problems, however, do not only result from excess inventories but also due to
mismanagement of the stocked items. A supermarket can carry a great deal of inventory yet
do an excellent job of keeping all its items fresh, for instance. The inventory turnover ratio
fails to capture how well the inventories have been taken care of.

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Lost Sales
Another issue is that low inventory levels can result in lost sales. A clothing store that carries
too few heavy coats, boots and gloves will likely lose a lot of sales following an unexpected
blizzard as it will run out of stock relatively quickly. The inventory turnover ratio cannot tell
the analyst whether the firm could have sold more if stocks were higher.

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 8. Impact of Seasonal Cycle
Retail Seasonality
Introduction
For many independent retailers, the largest asset on the balance sheet is inventory.
Inventory is the “active’ asset, which generates the businesses sales and profits. But without
careful planning, inventory can easily get out of line, resulting in heavy markdowns due to
overstocks and ultimately, serious cash flow problems.
For retailers whose businesses are subject to seasonal fluctuations, the challenge of
managing inventory levels is magnified. Seasonal fluctuations in sales levels require that
inventory levels anticipate both the seasonal peaks in sales as well as the seasonal ebbs.
The way to manage these seasonal fluctuations, and maintain positive cash flows
throughout the year, is to develop detailed sales and inventory plans before the season
begins, use those plans to guide your merchandise purchases, and as benchmarks in-season
to guide your progress.
Planning takes time, time you may not think you have, but invariably those independent
retailers that take the time to carefully plan their sales and inventory are far more profitable
than those that don’t.

Getting Started
Before you begin the planning process, you will need to know what you’ve sold in the past,
and how much inventory you had on-hand to generate those sales. While effective planning
goes far beyond merely what you did last year, this information is an important reference
point. You will need to extract that data from your POS system, by category and month.
Unfortunately, many POS systems do not maintain a history of monthly inventory levels, so
all you may be able to extract is sales data.
Second, you will need to determine the unit of measure that you will plan with. The two
primary options are to plan in units or in retail dollar value. In almost all instances, I
recommend planning in retail dollars. If you are going to do your planning in units, be clear
in your own mind why units are the way to go in your particular business, and planning in
retail dollars is inappropriate.

Step 1: Plan sales

The planning process begins with building a sales plan. For independent retailers, most sales
plans are broken out by category and month (although in some cases, especially highly
seasonal businesses or categories, it may be more appropriate to plan sales by the week).
The question to ask is a very basic one: “What is the most likely level of sales from stock
(excluding special orders) by month (or week) Note that the question is what’s the most
likely level of sales, not what’s the most you could possibly sell. It’s easy to get in trouble by
planning what you might be able to sell, which has a relatively low probability of occurring,

31
rather than planning for the most likely level of sales, which has the highest probability of
occurring.
Start by reviewing the prior year’s sales histories, and make adjustments for unusual events,
such as weather, out of stocks, one-time promotions, etc. Then factor in the appropriate
increase or decrease based on your current sales trend and your reading of the sales
potential of the category for the upcoming season. For larger categories, it may make sense
to break the sales plan down further, by sub-categories, styles or vendors.

Step 2: Plan inventories

Once a sales plan has been developed, the next piece of the planning process is to build an
inventory plan. The question to ask is this: “How much inventory do I need at the end of
each month to support the next month’s sales (in some cases the ending inventory may
need to support more than just one month of future sales), as well as maintain effective
merchandise displays?”
It makes little sense to bring in more inventory at any given time than you need to set your
displays, support your planned sales until the next vendor delivery, and provide a safety
stock in the event of an unexpected sales spike or a late delivery. Committing to inventory
too far in advance, and then bringing it in all in one shot is one of the surest ways to find
yourself over-stocked down the road.

Step 3: Plan discounts

There are two primary types of discounts a retailer might take, promotional discounts
during the season, and clearance markdowns as the season winds down. Planning these
discounts goes hand in hand with planning sales and inventories if you are using retail value
as your unit of measure. A discount, just like a sale, decreases the retail value of your
inventory on hand.
Planning clearance markdowns are particularly critical to protecting gross margins, and cash
flow. If you plan the date of the first seasonal markdown before the season even begins, you
can plan the inventory you want to have on hand at that point in time, and thus your
markdown percentage. 

Step 4: Plan inventory receipts

If you’ve planned sales by month, ending inventories by month and discounts by month, it’s
easy to calculate how much inventory to bring in each month, by category. You need to
bring in enough to cover that month’s planned sales, planned discounts and planned ending
inventory, less the prior months planned ending inventory. In this way, for example, a buyer
can know before a season begins how much inventory to plan on bringing in each month of
the season.

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Step 5: Plan pre-season commit percentages
Once inventory receipts have been planned, the next step is to plan how to execute those
receipt plans. The question to ask is, “How much of my receipt plan do I want to commit to
buying now, before the season begins?” 
The pre-season commit percentage is the percentage of the season’s receipt plan that you
commit to before the season begins. It’s the bets you place before the season has even
opened up. Every seasonal retailer has to place these bets. A seasonal retailer has to
commit to enough inventory to set displays and cover early sales, sales which are a critical
early indicator of the season to come. Similarly, a retailer frequently has to commit up front
to merchandise scheduled for delivery later in the season to assure they’ll have core stocks
of key items and categories at that critical time.
This is a critical step that is too often overlooked. Too frequently, once a receipt plan has
been set, buyers spend it. But that is fraught with danger. The greater the pre-season
commit percentage the greater the risk associated with those commitments. The best way
to think of this is in terms of the calendar. The higher the pre-season commit percentage,
the further out into the selling season those commitments will cover, before any sales have
been made to indicate which way the season will go. Will I run an increase or a decrease?
Will the styles or colours I’ve bought be the hot sellers? The further out the commitments
go the greater the risk that overall sales volume may not be as high as planned, or that the
fashion trend may develop in a different direction than anticipated.

Step 6: Plan continually throughout the season

The process doesn’t end with preseason planning. In-season planning is even more
important. As each week goes by, and sales trends begin to develop, adjust your sales plans
accordingly, and adjust inventory plans for those updated sales plans. If sales are exceeding
plan, you want to be sure you have the inventory to keep the momentum going. Conversely,
if sales are coming up short of plan, the sooner you adjust your inventory plans, and thus
your scheduled receipts, the less likely you are to end up with excess inventory that needs
to be marked down at season’s end.
Every time you are about to place a reorder, or a new order on new merchandise, update
your sales plans. A buying opportunity may look very attractive and seem like an easy
decision, but if you are already bought up or sales are not tracking to the plan you could be
unintentionally increasing your markdown exposure.

Step 7: Take markdowns expeditiously

When sales start to fall behind plan, it’s very tempting to think that you’ll make up the sales
later in the season. But when sales fall behind plan, inventories begin to back up as well.
When inventories back up, pressure builds on prices, which if not addressed can lead to
steep markdowns that decimate margins. The first thing to do is adjust future receipts to get
inventories back in line, but it usually doesn’t end there.

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When sales are soft, the weakest of your items or categories will usually suffer
disproportionately. They simply aren’t as desirable at their full retail price. Mark them down
as soon as you identify them. A 25% markdown, for instance, taken immediately, will
accelerate their rate of sale and get you out of that inventory. If you wait until clearance
time, when everything is marked down, it may take 50% to 75% to clear the inventory.

Seasonality Challenges
All retailers and vendors want for Christmas is supply chain success. Using logistics
technology, savvy shipping strategies, and better planning, many will get their wish.
Parents won't score any points telling their children they aren't getting this year's must-have
holiday gift because of aging U.S. infrastructure, port congestion, a lack of truckload
capacity, and faulty demand planning. Likewise, vendors don't stand much chance using
these excuses with retailers.
The holiday shopping season is make—or—break time for suppliers and retailers—
economic, geopolitical, and technology issues notwithstanding. Getting the right products to
the right place at the right time is never more critical—or more expected—than in the
months leading up to the frenzied holiday rush.
Suppliers and retailers must gear up to optimize their supply chains and distribution
networks to deliver high volumes of product in record time.
During last year's peak season, for example, consumer electronics giant Hewlett-Packard
shipped 10.5 million products to U.S. retailers in the first 25 days of November alone. The
company provides the retail channel with 60 percent more printers and PCs, and twice as
many cameras, during the holiday season versus other times of the year, according to HP
spokesperson Laura Wandke.
Holiday stress is felt all along the supply chain—from manufacturers and retailers to third-
party logistics providers (3PLs), transportation carriers, and infrastructure outposts.
U.S. ports, for instance, handled a record 1.37 million TEUs last October, traditionally the
busiest shipping month of the holiday season. That number will jump 6.5 percent to 1.46
million TEUs this October, predicts the National Retail Federation.
"The holiday season puts great pressure on all U.S. supply chains because everyone peaks at
the same time," explains Larry Ravinett, senior vice president of logistics and supply chain
solutions for National Retail Systems (NRS), a Secaucus, N.J.-based 3PL specializing in retail
logistics.
"Forty percent to 50 percent of revenue for the year is earned in this very short time
period," he adds.
Because manufacturers depend on the holiday season to post large revenue numbers, they
don't want to be "the one whose merchandise is not on the shelves," says Brooks Bentz, a
partner with consulting firm Accenture's supply chain practice.

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Adding to the stress for suppliers is the fact that amid these heightened holiday conditions
—which are piled on top of the already challenging transportation market characterized by
infrastructure woes, tight capacity, rising fuel prices, and a driver shortage—retail stores are
particularly demanding about maintaining on-time deliveries.
Retailers hire additional seasonal labor, and "they don't want those workers standing
around waiting for shipments to arrive," says Ravinett.

A NEW APPROACH
Surprisingly, many vendors are not as spooked by seasonality pressure as they have been in
the past. Traditionally, the peak season cocktail of lax pre-planning, mixed with poor supply
chain visibility and expensive, last-minute shipments, meant missed sales opportunities and
a killer post-holiday revenue hangover.
Over the last several years, after enduring record port congestion, an ongoing driver
shortage, and a 10-day West Coast port shutdown that backlogged more than 300,000
ocean containers, the industry has better prepared to deal effectively with seasonality
challenges.
The ghost of these Christmases past has haunted supply chain professionals into accepting
pre- and contingency planning as a way of life during the peak season. The industry as a
whole is making a conscious move toward employing proactive strategies and technologies
to overcome capacity challenges and achieve the velocity needed for holiday season
success.
"Because of our long-term relationships with our third-party logistics and technology
vendors, we do not expect many surprises this holiday season," says Steve Revere, vice
president of information technology for Wild Planet Toys, a San Francisco-based company
that receives 300 orders daily from large toy retailers such as Wal-Mart, Toys R' Us, and
Target during the holiday season.
Why the more upbeat attitude about peak season from vendors such as Wild Planet Toys?
"Shippers and retailers have gotten smarter," says Ravinett. "They are diversifying—for
example, using multiple ports, such as Tacoma or Oakland on the West Coast, as well as East
and Gulf coast ports, to bring in freight.
"In addition, importers transporting ocean freight from Asia have learned to depend on a
mix of steamship lines," he continues. "They can pick transit times from 38 days to 11 days,
using the ship as a way of holding back or speeding up the freight as needed."
Other strategies, such as blending domestic and import freight, using DC bypass, and
improving the flow of supply chain information via technology and automation, have also
helped ease some of the holiday burden for vendors.
On the service provider side, 3PLs and freight forwarders are contributing their knowledge
at the point of origin, and nudging shippers to embrace effective inbound logistics practices.

35
This has helped start the peak shipping season even earlier, as companies strive to mitigate
congestion and avoid paying the highest shipping rates at the busiest times.
"Peak season now starts in late June or early July," says Bentz. "Companies are trying to
position themselves to capitalize on the retail marketplace's desire to drive sales. Christmas
merchandise appears in stores by August, so vendors naturally say, 'Let's start earlier.'"
Retailers—both online and off—have jumped on the early holiday trend. Nearly 40 percent
of Internet merchants, for example, plan to start promotions earlier this holiday season than
last year, with more than 62 percent beginning before Nov. 5, according to the eHoliday
Mood Survey from Shop.org and BizRate Research.

EASING HOLIDAY HEADACHES

Suppliers and retailers that fare best in this holiday environment are those that make the
necessary strategic changes and enhancements to their information, process, and
technology capabilities, says Bentz.
Rather than dealing with seasonality challenges as they occur, companies must develop
effective, long-term strategies that focus on inbound logistics practices.
Peak season shippers should position themselves to succeed in the following areas,
according to Bentz:
Transportation network management. Develop a comprehensive, real-time view of the
supply chain and of available transportation alternatives, including service options,
cost/service trade-offs, and preferred providers.
Strategic transportation services sourcing. Use a holistic, multimodal approach to procuring
transportation services, and leverage overlapping capacity and demand networks to
optimize costs and service.
Demand planning and forecasting. Feed updated demand data to all trading partners, with
enough granularity—such as specific information by day, week, or month—to enable
proactive planning to meet capacity and service requirements.
Supply chain visibility and event management. Provide real-time visibility at the SKU level
so inventory can be tracked, diverted, or reallocated as needed. By doing this, shippers can
detect potential disruptions and identify and address bottlenecks.
In addition, vendors should open the lines of communication with their retailers and third-
party partners. While many companies pay lip service to the importance of constant
communication, actually executing on it makes a world of difference during the challenging
peak season.
Take, for example, NRS' work with kids clothing retailer The Children's Place. "The Children's
Place executives give us constant product and shipment updates," says Ravinett.
In its extensive pre-planning stage, The Children's Place shared its carton forecasts, volumes,
and projections with NRS, and together the companies formulated new holiday distribution

36
strategies including merging import and domestic freight, and shifting some order volume to
NRS distribution centers.
The Children's Place also gave NRS, in advance of peak season, a container of freight to run
through its system to test label reading, pre-scanning, and EDI messaging capabilities.
"We also work closely with FedEx, one of The Children's Place's major carriers, so we are all
on the same page. Communicating and working in tandem is crucial," says Ravinett.
Effectively communicating demand to carriers is imperative for securing holiday season
capacity, agrees Bentz. It also lands shippers in carriers' good graces because it helps
carriers more accurately organize their schedules. And the more detailed information
shippers provide, the better.
"Telling a carrier you expect to ship 50 loads per week during the holidays is not clear
enough," Bentz explains. "If you tell a carrier you have 40 loads on Monday and 10 loads on
Tuesday, the carrier can adjust to that schedule, or tell you it can't accommodate your
freight. Sharing that level of information gives carriers an opportunity to deliver the service
you need."
While the very nature of seasonality means the peak shipping season will always come with
its fair share of headaches, savvy vendors and retailers work closely with their supply chain
partners to maintain high performance during the most demanding time of year.
Here is a closer look at two companies that have optimized their supply chains to conquer
peak season issues.

SEARCHING FOR AUTOMATION

Realizing this outdated system was impeding its flow for the crucial holiday rush in 2000, the
company began searching for an integrated distribution solution. Wild Planet wanted a
system that would automate the entire ordering process—including returns—as well as
support electronic data interchange, and provide accurate reporting.
It chose Epicor for Distribution, an enterprise solution offering order fullfillment, inventory
tracking, customer relationship management, financial management, and reporting
capabilities, from Irvine, Calif.-based business solutions provider Epicor. Since implementing
Epicor for Distribution, Wild Planet has increased its fill rate by 40 percent to 85 percent,
and now usually fullfills orders in 24 hours if it has inventory, according to Revere.
Under its new streamlined ship-fill process, the Epicor system matches orders to available
inventory and, once approved by a Wild Planet employee, generates an order file to send to
Orion. After Orion ships an order, it sends a file back to Wild Planet, which the Epicor system
automatically matches up against outstanding orders. This way, Wild Planet receives
accurate inventory information and knows exactly where orders are in the shipment
process.
Having a ship-fill process it can depend on has allowed Wild Planet to approach the peak
season more strategically, particularly when it comes to inventory planning, notes Revere.

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"The biggest pressure we face during the holidays is determining who will take the inventory
risk—us or the retailers. It is hard to predict what toys will be hot each season, so major
customers such as Wal-Mart and Target usually place small orders at first, and hope that we
will have in our warehouse whatever products become popular," he says.
In order to accommodate this model and capitalize on sales when its toys become popular,
Wild Planet's supply chain must be nimble. Today, it is able to keep a close eye on product
demand and boost production and shipping when necessary to provide retailers with
additional inventory.
Coordination among its San Francisco headquarters, Hong Kong office, Asian contract
manufacturing facilities, third-party providers, and retail customers is now electronic,
allowing for seamless communication of demand information. The company pulls inventory
data from its retailers daily and, "if we see a product with more than just a slight uptick in
sales, we start ramping up production as much as we can," Revere explains.
In addition, the new system allows Wild Planet to balance inventory across its customers,
and easily shift inventory concentration where it is most needed.
This strategy of "robbing Peter to pay Paul" helps boost profitability, says Rodney Winger,
director, product marketing, manufacturing, and supply chain management for Epicor. "If
Wild Planet's margins are better with Kmart than Wal-Mart, it can shift inventory away from
Wal-Mart to the higher-margin store. That flexibility is important."
The company also has a better handle on demand planning and forecasting, which is crucial
for any supplier during peak season. While predicting which products will become the year's
must-haves is never an exact science, the additional reporting information Wild Planet gets
from Epicor for Distribution has helped it create historical forecasts that work for both
existing and new products.
"Last year, for example, the Wild Planet Lazer Tripwire spiked during the holidays. So the
company can take that item's run rates and apply them to another product they feel is the
hot ticket this year to forecast the new product against a previous one," explains Winger.
"Wild Planet can use historical trends all the way down to a product group or individual SKU
as part of that advanced forecasting process."
Having greater visibility and flexibility in ship-fill, inventory optimization, and demand
forecasting has Wild Planet expecting a happy holiday.

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 9. Cash Flow in Retail and Diversification Challenges
In the world we now live in, financial health requires a commitment to proven retail
business fundamentals, a commitment to operational discipline, and a heightened attention
to detail.
When economic conditions were more favourable, it might have been possible to
consistently generate positive cash flow without this commitment to core retail
fundamentals, operational discipline and attention to detail. But regardless of economic
conditions, in both good times and bad, these are the core retail fundamentals that drive
exceptional cash flow, for retailers of all sizes.

1. Detailed Sales Forecasting 

Detailed sales forecasting identifies and quantifies where opportunities are, while assuring
that the overall forecast is realistic. Sales forecasting provides direction and purpose to a
season. It’s the first step in deciding how best to allocate your resources.
The best sales forecasts, however, don’t just forecast sales dollars, they also forecast the
components of sales dollars, unit sales and average selling price. A 5% increase with a 15%
increase in units but a 5% decrease in average selling price is likely to put a lot of pressure
on average selling prices and margins. Alternatively, a 5% increase with a 5% increase in
units and no change in the average selling price is not as likely to create downward
pressures on average selling prices or margins.
Most importantly, detailed sales forecasts give you the budgets that you need to make your
pre-season purchases, and the benchmarks you need to guide your in-season decision
making. Forecasting is the beginning step in being able to forecast your cash flow, and then
deliver on that forecast.
Detailed sales forecasting promotes positive cash flow. 

2. Active Inventory Management and Lean Inventory 

At heart, retailing is trading. The very first retailers were traders, and the very best retailers
have always been traders. Traders buy and sell, buy and sell, buy and sell… and then buy
and sell some more. The notion of retailing emphasizes the importance of turning inventory
over.
Every retailer is focused on sales, and rightly so. The instinct to maximize sales, however, is
often coupled with the instinct to always have in stock whatever a customer might want.
Trading gives way to stocking, leading to slower turning inventory. Inventory has a funny
way of consuming available cash. There’s always something to buy, and what seems like a
good reason to buy it; new items, new categories, broader assortments, greater depth of
stock.
I recommend maintaining lean inventory levels. Simply defined, lean inventory is the sweet
spot between having the inventory needed to support the sales forecasts, without the

39
burdens and risks of excess inventory. Maintaining lean inventories requires that inventory
levels be actively managed.

Active inventory management and lean inventory promotes positive cash flow. 
3. Maintaining Initial Mark-up Percentages 
Eroding margins can have a devastating impact on cash flow. Conversely, margins that are
stable and even increasing are essential to sustaining positive cash flow. And margin
management begins with initial mark-up percentages.
Mark-up erosion occurs when cost increases from vendors are partially absorbed by the
retailer in the form of lower mark-ups. Usually it happens because the retailer is fearful of
the impact on sales if the full percentage increase is passed on. A 55.0% mark-up becomes a
54.5% mark-up, for example. That’s money you can’t get back, and across a full assortment
of items, over the course of time, it adds up.
Initial mark-up percentages can also erode when the sales mix shifts from higher priced,
higher margin goods to lower priced, lower margin goods. On an item by item basis the
initial mark-ups look okay, but with lower priced, lower margin good contributing a greater
share of sales, the aggregate mark-up slips, leading inevitably to a lower maintained margin.
Along with sales and inventory, initial mark-up percentages need to be planned out to
create a budget to guide your purchases as well as benchmarks to guide in-season decision
making.
Planning initial mark-up percentages promotes positive cash flow. 

4. Protecting Maintained Margin Percentages

Markdowns take a bite out of gross margin percentages, but the impact on cash flow
occurred well before the markdown was taken. When a markdown is taken, the resulting
cash flow is merely a cash recovery on excess inventory. The negative impact on cash flow
occurred when the decision was made earlier in the season to bring in inventory that
ultimately couldn’t be sold at full retails and margins.
Preseason planning can prevent the excessive breadth and depth of assortments that leads
to markdowns. Forecasting sales and closely aligning inventory levels to those forecasts
prevents the build-up of excess inventory. Further, flowing merchandise throughout the
season, as close as possible to the planned time of sale keeps things fresh, promotes a sense
of urgency in customers and allows you to respond to the sales trend, thus minimizing
markdown risk.
Promotional discounting also impacts margins. Many retailers over the past few years have
felt compelled to discount to drive sales. An increased level of discounting, however, places
enormous strains on cash flow. Like markdowns, promotional discounting doesn’t generate
full margins, the cash needed to pay the merchandise payables and all of the other expenses
of the business.

40
Pre-season inventory planning, just-in-time principles and limiting promotional activity
promotes positive cash flow.

41
5. Manageable Cost Structures
Variable cost structures are manageable cost structures, and the more manageable the cost
structure, the more control a retailer has over cash flow. As it turns out, all costs are
variable costs over time. Given enough time, all costs can be managed. The objective is to
make every cost as variable as possible, to make them as manageable as possible.
Take rent expense, for example. When retail sales went off a cliff in late 2008, what did the
major national retailers do? They went straight to their landlords. Their mission was to
reduce their rents, but another way to think of it is that they began to manage lease
expense, which is typically thought of as a fixed cost, as a variable cost. 
Payroll, however, needs to be considered separately. Payroll is a step variable cost, due to a
mix of full-time (fixed cost) and part-time (variable cost) employees. That makes payroll
pretty manageable. But store level payroll is not merely an expense. While payroll levels
cannot be totally divorced from sales levels, engaging, passionate employees are essential
to delivering memorable customer experiences and generating plus revenues.
Variable cost structures promote positive cash flow.

6. Finance Working Capital Internally

Do you borrow the money you need to finance your seasonal working capital needs, or are
you able instead to fund your needs from accumulated cash flow? Put another way, at the
end of your peak selling season, does the cash on hand go to pay back the outstanding
loans, or does it go toward the merchandise you’ll need to bring in for the next season?
I encourage my clients to set for themselves the goal of financing their working capital
needs internally from accumulated cash flow. It creates a healthier Balance Sheet and keeps
financing expense to a minimum.
How do you do it? By adopting a monthly cash flow plan that leaves you at the end of each
season with ever-increasing cash balances, thus gradually (or not so gradually) reducing the
amount of your seasonal working capital needs that you have to finance externally. It’s a
project that will leave you with a much healthier balance sheet, and sustained positive cash
flow.
A cash flow plan promotes positive cash flow.

Cash Flow Management 

The most successful retailers over the next few years will be proficient in maximizing the
cash flow from their businesses. Some may do it by generating significant increases. But
many, if not most, will do it by skilfully driving cash flow from the revenues they’ve got.
They will build a cash flow plan, manage to the plan, and then deliver that plan. 
A cash flow plan enables you to establish monthly budgets and benchmarks for all of your
key cash-impact accounts, benchmarks that you can manage to. It enables you to identify
potential cash pinch points in future months at the earliest possible point in time and gives

42
you the greatest opportunity to develop the widest array of options to deal with potential
cash shortfalls. 
In the world we now live in, a forward-looking cash flow plan is an essential tool for
maximizing the amount of cash flowing from the top line to the bottom line. And
consistently generating positive cash flow is an essential ingredient in building long-term
financial health and competitiveness.
Being successful in the coming years is going to require that retailers of all sizes become
skilled and disciplined in managing these retail fundamentals to consistently drive cash to
the bottom line. Put simply, retailers will need to become adept at planning a number, and
then delivering that number, each and every month.

Diversification of Retail Business.

The most successful retail firms have developed and implemented a corporate strategy that
enables them to create and capture super-additive value by diversifying more intensively
into assortments and retail formats that are related to one another, while expanding into
their home regions and carefully spreading their geographical boundaries across world
regions. This study synthesizes the findings of this thesis and provides an actionable plan for
corporate retail managers to
1. Diagnose the current degree of diversification in their corporate retail portfolio,
2. Compare their degree of diversification with the long-term industry average and
their main competitors,
3. Assess how different diversification strategies might affect their firm performance,
and
4. Develop a diversification and divestment strategy to optimize their corporate retail
portfolio, which in turn can substantially increase their chances to outperform
competition in the long run.
Retail firms are confronted with an intensive multimarket rivalry across assortments, retail
formats, and countries. In this highly competitive retail environment, senior managers are
challenged to choose and implement the right corporate strategy. Confronted with this
difficult decision, chief executives typically ask questions such as: To what extent should we
diversify into different assortments, retail formats, and countries? How can we measure the
degree of (un-) relatedness in our corporate retail portfolio? And, is it at all possible to
outperform competition in the retailing industry by focusing more intensively on related or
unrelated diversification?

Step 1: Diagnose Your Current Degree of Diversification

Corporate-level diversification in the retailing industry can be related to three dimensions:
(1) the assortment diversification into food and non-food retailing, (2) the retail format
diversification into retail formats such as convenience stores, supermarkets, discount stores,
hypermarkets, warehouse clubs, and department stores, and (3) the international
diversification into foreign countries. Retailers can easily identify their degree of

43
diversification in each dimension at a given point in time by applying the entropy index. The
entropy index captures both the breath (number of different assortment categories, retail
formats, and countries) and depth (relative importance of each assortment category, retail
format, and country, which is measured in sales relative to the firm’s overall sales).

Step 2: Compare Your Degree of Diversification with the

Industry Average and Your Main Competitors When corporate retail managers have
identified their firm’s degree of diversification in each dimension, they can compare their
degree of diversification with the long-term industry average of the relationship between
diversification and firm performance. This thesis investigated if there is an optimum degree
of diversification in the retailing industry. While the results indicated that assortment
diversification into food and non-food retailing has a negative effect on firm performance,
both retail format and international diversification have an inverted U-shaped relationship
with firm performance. At lower levels of retail format and international diversification,
increases in retail format and international diversification increase a retailer’s profits.
However, beyond moderate levels of retail format and international diversification,
increases in retail format and international diversification decrease a retailer’s profits.
Researchers have proposed that at higher degrees of diversification, diseconomies such as
rapidly increasing transaction, governance, and coordination costs as well as increasing
organizational complexity might outweigh the benefits of diversification (e.g., Palich,
Cardinal, & Miller, 2000).
As a result, a retailer can increase its firm performance by diversifying into retail formats
and foreign countries up to a certain threshold which indicates the profit maximum. After
this threshold, its profits likely start to decline. In contrast, increases in assortment
diversification decrease a retailer’s firm performance, i.e., retailers that focus on consistent
assortments in their retail format portfolio are able to achieve the profit maximum. Against
this background, Figure illustrates an integrative portfolio planning and management model
to support chief executives and managers at the corporate headquarter in their
diversification decisions.

44
By calculating their degree of assortment, retail format, and international diversification
according to the entropy index, retail managers are able to diagnose if their current extent
of diversification is within the “profitable growth” zone or within the “profit decline” zone as
outlined in Figure. The longitudinal analysis of the 70 leading retail firms over thirteen years
shows that the profit maximum can be reached at the line between a degree of
approximately 1, 1 at the retail format diversification continuum (minimum = 0 and
maximum = 2, 4) and a degree of approximately 1, 1 at the international diversification
continuum (minimum = 0 and maximum = 2, 9) and a minimum degree of 0 at the
assortment diversification continuum. This line marks the outer edge of the “profitable
growth” zone (i.e., consistent assortments and moderate levels of retail format and
international diversification). Retailers can increase their profits by extending their degree of
diversification up to this threshold, while further diversification activities likely decrease
their profits as they enter the “profit decline” zone. Accordingly, retailers reach the profit
minimum at the outer edge of the “profit decline” zone (i.e., at very high levels of
assortment, retail format, and international diversification). Combinations of moderate
levels of assortment, retail format, and international diversification are illustrated by dashed
lines because of the unfavourable effect of increased degrees of assortment diversification
on firm profits. If profits grow or decline in this area depends on the relative degrees of
assortment, retail format, and international diversification.
Retail firms can also track their historical yearly changes of the degree of diversification in
the three dimensions and compare those changes with changes in their subsequent firm
performance. Such comparisons can help retail managers to gain a deeper understanding of
their firm’s idiosyncratic diversification performance path compared to the long-term
industry average. In addition, when corporate retail managers evaluate acquisitions
(internal developments) or divestitures of retail formats and expansions into foreign
countries, they can use this model to estimate how such activities will change their degree
of diversification within or across the “profitable growth” and “profit decline” zones.
After having compared their degree of diversification with the long-term industry average,
corporate retail managers can compare their degree of diversification with their main
competitors’ diversification behaviour. Take, for example, leading European retailers such as
Carrefour, the Metro Group, Auchan, and Sainsbury’s. All four retailers started in grocery
retailing. As illustrated in Table, French-based Carrefour was ranked at number two,
German-based Metro Group at number three, French-based Auchan at number fifteen, and
U.K.-based Sainsbury’s at number twenty-eight according to Deloitte’s 2009 sales-based
ranking of the worldwide leading retailers. However, Auchan and Sainsbury’s yielded higher
profits than Carrefour and the Metro Group (Deloitte, 2011). Put differently, Carrefour and
the Metro Group operate at far higher costs than Auchan and Sainsbury’s. The results of this
thesis suggest that this might be related to the former two retailers’ higher degrees of
diversification activities.

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Step 3: Assess How Different Diversification Strategies Can Affect Your Performance
Related and unrelated diversification are the two types of diversification strategies (e.g.,
Ramanujan & Varadarajan, 1989). Similarly, intra-regional and inter-regional diversification
are different types of international diversification (Qian et al., 2010). Corporate retail
managers can measure their degree of related versus unrelated retail format diversification
and intra- versus inter-regional diversification with the entropy index.4 Researchers have
proposed that low to moderate levels of diversification are highly correlated with related or
intra-regional diversification, while moderate to high levels of diversification mainly consist
of unrelated or inter-regional diversification (e.g., Palich, Cardinal, & Miller, 2000).
Consequently, the “profitable growth” zone in Figure E.1 mainly consists of diversification
activities into related retail formats and intra-regional countries, whereas the “profit
decline” zone can be referred to unrelated retail format and inter-regional diversification.
Since the assortment diversification index consists of two assortment categories (food and
non-food), unrelated assortment diversification increases along the whole assortment
diversification continuum. As shown in this thesis, not all diversification strategies lead to
superior firm performance. While the results indicate that increased degrees of unrelated
assortment and retail format diversification destroy firm value, the thesis suggests that the
most successful retailers have diversified more intensively into assortments and retail
formats where they have a sound knowledge about the business processes, competitors,
and customer needs. These retailers grow with assortments and retail formats that have a
close “fit” to their skills, core competences, and established operations, which they have
developed over long periods of experimental learning.
As a result, a parent retailer’s ability to exploit synergies by sharing superior intangible and
tangible resources across its retail format portfolio can be regarded as a critical success
factor in today’s highly competitive retail environment. A similar concept applies to a
retailer’s diversification into foreign countries within and across world regions. Successful
retailers have understood that they can reap the benefits of diversifying into foreign
countries as long as they are able to leverage their superior resource base. In particular,
retailers have to be cautious when they spread their boundaries more intensively across
world regions. While publicly owned retailers are especially well equipped to access the
financial and human capital that is required for successfully expanding their international
scope more intensively, privately owned retailers often struggle to yield profits from their
activities at higher degrees of inter-regional diversification.

Step 4: Develop a Diversification Strategy to Optimize Your Corporate Retail

Portfolio
The implementation of a diversification strategy requires a largely irreversible amount of
capital and results in high sunk costs (Lubatkin & Chatterjee, 1994). Consequently, the
choice of the right diversification strategy is fundamental for a retailer to achieve superior
firm performance. Executives have to make smart choices when they decide about their
companies’ future by evaluating acquisitions (internal developments) and divestitures of
retail formats (which also have direct implications for a firm’s degree of assortment

46
diversification) and international market entries and exits. Confronted with such difficult
decisions, corporate retail managers can use the integrative portfolio planning and
management model as described in the previous steps 1-3 of this guideline. The integrative
portfolio planning and management model suggests that retailers can extent their
boundaries through related diversification until they reach the limits of the “profitable
growth” zone, while they should evaluate divestments of unrelated company parts if they
are diversified at high levels within the “profit decline” zone. Of course, this decision should
be made after an intensive analysis of the retail firm’s individual characteristics (e.g., its
historically evolved businesses, competences, internal processes, and ownership structure)
and its competitive environment. Figure also suggests that it can be a superior strategy to
reinvest a firm’s profits into the existing retail format and country portfolio, especially when
a retailer is close to the optimum level of diversification (i.e., at the outer edge of the
“profitable growth” zone). With this regard, chief executives can use their retail firm’s
profits to foster innovations in their existing corporate retail portfolio instead of expanding
at increasingly higher levels into new retail formats and foreign countries.

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 10. CREDIT CONTROL
After accounts have been opened and placed upon the books of a firm, a great variety of
problems arise in controlling their use. As we have seen, these problems may be grouped
into three main classes: routine problems, special problems and problems of promoting full
use of accounts.
The routine problems (correct identification, prevention of overbuying or exceeding
restrictions, and prompt and accurate service) arise every time a purchase is made on any
account. These problems and the system of authorization set up to meet them were
discussed in the preceding chapters. The special problems of credit control, to be treated in
this chapter, do not arise with every purchase on every account but emerge from time to
time in connection with some of the accounts. What are they?

Types of Special Problems of Credit Control

Perhaps the main types of these special problems in credit control are the following:
returned goods, claims, complaints and adjustments, discounts and allowances, cashing
checks, and keeping up-to-date on derogatory information.
Such problems as these are constantly arising in reference to some of the accounts. Unless a
definite policy is formulated and a system or arrangement of some kind to enforce it is set
up, the store will be subject to certain and unreasonable loss. Preventive policies and
measures are required to protect the firm here just as in the case of the routine problems
previously discussed. In the following pages of this chapter we shall consider each of the
special problems of credit control in turn, examining its nature and discussing policies or
systems employed to meet it.

Returned Goods
One of the important problems encountered in controlling the account is that of regulating
the privilege of returning goods, for returns generally run much higher on credit than on
cash purchases.

Advantages of the Return Privilege

In modern retailing the practice has become quite general to sell merchandise to credit
customers on approval, giving the purchasers the privilege of returning the goods and
cancelling the charge if they wish. This practice is, of course, born of the desire to increase
business.
When shopping, a customer might be hesitant about purchasing some article if she could
not return it should she later wish to do so. This may be due to any one of a number of
reasons. Perhaps she cannot, or does not wish to, make an immediate final decision on a
certain article. She may be unable to choose between several styles or kinds, and wish more
time in which to compare them or to get the reaction of friends or members of the family.

48
There is the possibility that if several styles or kinds of the article are sent on approval, the
customer will finish by retaining one or more. Or, she may like two or more items, say fur
coats, and wish to try them all in her home with the hope of inducing her husband to let her
get the higher priced article. She may wish to see if the item, or which ones of certain
articles, will "go" with her other things for example, to see if a piece of furniture will fit in
with the other pieces in her home. And, of course, she will want to be able to return any
article which proves defective. It is obvious that the return privilege may be a service of real
value to the customer and may also result in increasing sales.

Disadvantages of the Return Privilege

But, unless controlled, it may turn into a first rate evil. Customers may order goods on
approval with no intention of purchasing them.
Wearing apparel, for example, may be secured on approval, actually worn to some function,
and then returned. Radios may be ordered for a party or for the broadcast of election
returns, a football game or a prize fight, and then returned the next day. Rugs and furniture
have been secured on approval and then sent back to the store after the party. Some
customers seem to love to "play at shopping" and, just to get the thrill from selecting and
buying things, are continually charging goods which they do not intend to retain but to
promptly or finally return.
Returned goods mean increased expenses for the store. Generally, the merchandise has to
be called for at the customer's home, brought back to the store, unwrapped, put back in
stock, perhaps remarked, resold, wrapped, and delivered again. Additional bookkeeping is
necessitated. The whole job of selling and delivering the article has to be done over again.
Also, the returned merchandise may have become somewhat soiled or may have suffered in
some other way, thus necessitating a mark-down. Furthermore, in order not to miss any
possible sales, stores which are liberal in sending goods on approval must maintain
proportionately larger stocks of merchandise on hand. This is an expense.
But a policy of doing away with the privilege of returned goods cannot be adopted for the
privilege is too valuable to both store and customer. Instead, the store should aim at control
of the problem so as to secure the most sales and service with the least expense. In
formulating such a policy, it is necessary to discover first of all the main reasons for
returning goods.

Reasons for Returning Goods

Most of the instances of returned goods are due to the store itself and the rest are due to
the customers. The proportion of returns due to either can be reduced considerably without
hampering sales or service.
Let us consider first how the store itself may contribute to excessive returns. 1. Some
returns, perhaps as much as a fifth or a quarter, may be due to errors of the store
personnel. The customer may be given the wrong package, size, colour, type, brand, and so
on. 2. The merchandise may not be as represented, may be defective, or may be damaged in

49
delivery. 3. The sales department may be over-liberal in sending out goods on approval. It is
obvious that returns due to any of the above causes may be reduced without adversely
affecting sales.
Returns for which customers are primarily responsible may be divided into three main
classes. The first class may be called the ordinary and unavoidable returns. The customer
may find that the article does not go well with her other things. She may change her mind or
find what she considers a better buy either at the same store or elsewhere. If she has been
sent several articles from which to make a choice, some will naturally be returned. Thus,
there is bound to be a certain proportion of merchandise returned for which no one can be
held to blame. Such returns represent a valuable service of the store to the customer and
should be justified by increased goodwill and sales volume.
The second main reason is negligence on the part of the customer. She selects the wrong
brand, size, colour, or article. She may be negligent also in the sense that she does not
realize the expense of returns to the store and therefore does not buy as carefully as she
might. Such returns, as well as those due to the following type of customer, may be reduced
by education.
Thirdly, some returns are due to intentional abuse of the privilege by a certain class of
customers who secure goods on approval with no intention of keeping and paying for them.
A study of 4,357 returns* made by Esther F. Podester, New York Journal-American, and Paul
E. Murphy, Frederick Loeser & Co., Inc., Brooklyn, classifying the returns by reasons and by
departments shows that the fault for returned goods lies mainly with the retailer, and that
most of the returns in the department store studied were in the home furnishings and
ready-to-wear departments.
TABLE I
WHY CUSTOMERS MAKE RETURNS
NUMBER OF
RANK REASON FOR RETURNS PERCENT of TOTAL
RETURNS
1 Defects in merchandise 1,049 24.1
2 Unsatisfactory fit 865 19.9
3 Sent "on approval" 637 14.5
Wrong items sent--item
4 633 14.5
damaged in delivery
Dissatisfaction arising
5 from mail or phone 291 6.7
orders
Dissatisfaction with
merchandise sent on
6 286 6.6
promise order because
item was "out of stock"
Delivery despite
7 199 4.6
cancellation
8 Found for less elsewhere 183 4.2
9 Miscellaneous 135 3.1
10 Unclassified 79 1.8
TOTAL 4,357 100.0

50
 Establishing a Control System for the Returned Goods Problem
This consideration of causes for returning goods affords us a background for developing a
system of control. An effective system will cover the following points.
1. Determine policy. It is necessary, first of all, that the store decide definitely just what is to
be its policy regarding the returning of goods. It will be found possible to completely serve
the customer in regard to the privilege of buying upon approval, and to secure the greatest
results in good will and increased business for the store, by the adoption of a much less
liberal policy than that now followed by most retail establishments.
2. Educate sales personnel. The second step is to instruct the sales personnel in order that
they may have a clear understanding as to just what is the policy of the store. They should
be shown the reasons for the privilege of returning goods (service to the customer and
increased sales), they should be made to understand clearly the expensiveness of excessive
returns, and they should be informed concerning the special articles (for example,
mattresses) or conditions (for example, certain sales events or keeping articles more than a
certain number of days before returning them) to which the return privilege does not apply.
The program of education should aim to impress the sales people with the seriousness of
the returned goods evil and lead them to be more careful in furnishing the correct goods to
each customer, influencing or discouraging, as the case may be, certain customers in regard
to securing goods "on approval," and in trying to make each sale a permanent sale.
The movement on the part of leading stores toward giving the customer more adequate
information as to the composition of merchandise and the qualities to be expected of it
should operate definitely in the direction of reducing excessive returns. But it is not enough
to formulate a stricter policy concerning returns and to try to educate the sales force
concerning that policy. A third step is necessary to make provision for a systematic check on
returned goods.
3. Check returns systematically. The aim here should be to keep such records of returned
goods that it will be possible to easily ascertain just what and how much merchandise is
returned, the reason given by the customer for the return, and how much the merchandise
is marked down if it is necessary to do this in order to finally sell it. A system of this kind will
enable the store to ascertain the details regarding its returned goods evil and to fix the
responsibility upon certain departments, buyers, other personnel, or policies.
4. Educate customers. Fourth, the store should educate customers found to be abusing the
return goods privilege and close the accounts of those who cannot be educated.
5. Cooperate in a community policy. A fifth step is of great value wherever it can be taken.
This is getting the stores in the trade area to agree to a definite community policy of
engaging in a cooperative program of educating the public in regard to the evils of excessive
returns of merchandise. Cooperative advertising may be used. Names of customers abusing
the return privilege can be sent in by the various stores to the control organization (for
example, the retail credit bureau). Information as to the types of goods most generally
returned can also be communicated by the member stores.

51
Acting for all of the stores cooperating, the agency receiving such information can write
educational letters to those customers who have been reported by several stores as abusing
the return privilege or who have been reported by any one store as returning more than a
certain proportion of purchases during the year. In cases where customers do not reform as
a result of educational letters, the manager of credit sales may protect his store by closing
its accounts with such customers. Advertising material may be sent out by the stores as a
group for the purpose of educating the consumers to buy more carefully.

Consumer Education
In Dallas an audit of 100,000 charge accounts, made for the period January to June, 1931,
revealed flagrant abuse of the return privilege by many customers. Ten thousand of them
had returns amounting to 20 per cent or more both in terms of dollar volume and units
purchased during this period. During the six months' study, 4,700 of those who returned 20
per cent or more made purchases amounting to $417,449 and returned $210,969 or 50.54
per cent of what they bought; they made 91,230 purchases but returned 27,682 or 30.34
per cent of them.
Nature of program - A vigorous program was adopted to combat the abuse. The Retail
Merchants Association organized a "Returned Goods Bureau" with a secretary in charge,
adopted a uniform policy governing returned goods, and held monthly meetings to
coordinate the effort among the stores. A million copies of a pamphlet containing the "Rules
Regulating Returns" were enclosed with statements and packages. A series of newspaper
advertisements was used to educate customers, news stories were run in the daily papers,
the rules governing returns were prominently displayed throughout the cooperating stores,
especially in women's departments where the return privilege was most abused, posters
were displayed on billboards throughout the city, a series of letters was sent to all
customers returning 15 per cent or more of purchases, and the cooperation of women's
organizations was secured in the drive.
The effort was made to confine requests for approvals to cases of illness and emergencies.
Salespeople were found by shopping tests to be weak in overcoming suggestions made by
patrons that purchases should be made on approval, and the authority for granting the
return privilege was generally taken from the sales force and vested in the floor man or
department head. Training courses were given to the sales force to correct weaknesses in
selling. As a result of the campaign, sales to chronic returners naturally showed a decrease
but the reductions in returns were considerably greater.
Results - The Dallas campaign has been concerted and continuous since October, 1931, and
while the business of the department stores gained greatly in the pre-war period little
ground was lost in the control maintained of merchandise returns. In 1937, returns were
from 20 to almost 50 per cent less than in 1930. Wartime conditions caused an increase in
the proportion of goods returned until the year 1947.
By following some such community program for consumer education and training of
salespeople, the privilege of returning goods can be prevented from becoming the evil
which it so often is, and can be transformed into a relatively inexpensive service of great

52
value to both the customer and the store. Errors due to the store are avoidable and can be
materially reduced. Over-liberal policies pursued by the sales department can be restricted
with no loss to customer or store but with considerable savings. Negligence upon the part of
customers can be decreased by an educational campaign. Customers who intentionally
abuse the privilege of returning goods can be reformed or, failing that, be cut off completely
from the books.

Claims, Complaints and Adjustments

From time to time some customers will make claims or complaints. Some of these claims or
complaints are well founded; others are unjustified.

Kinds of Complaints and Claims

The complaint may often show up in the form of a request from the customer to close her
account. She may complain that she received rude treatment on the floor, in the office, or
from the delivery department. A complaint, again, may concern poor service; delivery may
not have been performed as promised, the wrong merchandise or not all the goods
purchased may have been sent; the merchandise may have been defective or
unsatisfactory; there may have been incorrect postings or similar errors on the bills;
payments or credits may not appear on the statement, because they were received after the
closing date, and therefore cause complaints, and so on.
Form letters, such as the following which is used to answer complaints arising from the fact
that statements do not show payments or credits received after the closing date, save time
and expense.

ANSWERING ONE TYPE OF COMPLAINT

Dear Madam:
The transaction about which you recently inquired was entered on your account [space for
date]. In order to complete the bookkeeping work during the latter part of each month so
that statements may be mailed on the first, it is necessary to close our books on the twenty-
fifth of the month.
Therefore, you will notice that our statements have printed on them the following notation:
"Purchases, payments made, and goods returned after the twenty-fifth of each month, will
appear on the following month's bill."
Your patronage is deeply appreciated, and we trust that this explanation will answer your
question satisfactorily.
Very truly yours,

In some cases instalment customers will insist on an adjustment if price declines occur, or
on free repairs throughout the length of the contract. Here there is little the retailer can do
to protect himself if he has violated the principles of securing a down payment and a rate of

53
contract payments adequate to make the value of the merchandise substantially exceed at
all times the total amount of instalment payments owed.
The cause for a claim or complaint may not be due to the credit personnel, but the credit
office very often will be the one to hear of it, especially if the customer has been so moved
as to request that her account be closed. Claims or complaints not due to actions committed
or omitted by the credit sales department must, of course, be referred by it immediately to
the responsible department. In all cases, before closing an account at the request of a
complaining customer the credit office should directly contact the client and endeavour to
discover the exact cause of the difficulty.
Sometimes the claim or complaint can be immediately adjusted to the satisfaction of the
customer. In other cases, where some time is required to make a thorough study of the
matter, the credit sales department should communicate by telephone or by letter with the
customer, expressing regret and the desire to be of service in stating that the matter is
being referred to the proper authorities for immediate investigation.

Adjustment Policy
In regard to various types of claims and complaints the store must work out a definite and
clear cut policy so that when the occasion arises and the actual facts regarding the claim or
complaint are known, immediate action may be taken which may be final.
It is most important in formulating a sound adjustment policy to adopt the correct attitude
in approaching the problem. That is to say, claims, complaints and adjustments should not
be regarded with irritation as unmitigated evils, but should be frankly welcomed. They
reveal faulty merchandise and service, suggest new and better goods and ways of doing
things, and offer an opportunity to promote good will and thoroughly sell the customer on
the store. It is preferable to have the customer complain to the store, which gives it a
chance to remedy the situation and preserve her good will, than for her to say nothing
except to her friends.
Attaining the correct attitude toward complaints is facilitated by the realization that the
overwhelming majority of the complaints are not serious and may be adjusted easily with
very little expense to the firm or loss of customer good will. According to L. E. Frailey,* an
analysis of several thousand complaints received by one company showed that 22.5 per
cent of the complaints were honestly made and legitimate, 41 per cent were half-cocked
and the result of impulse rather than reason, 23.7 per cent were "blinds" set up as a
defence for lack of funds, and 12.8 per cent were initiated by pure, unadulterated
cussedness.
The figures would vary in different companies but if those given are more or less average it
should be possible to handle seven out of eight complaints with ultimate satisfaction to the
company and the customer. Only the 12.8 per cent caused by natural-born trouble makers
would cause difficulty, and would need to be handled without gloves.
Principles. The first principle in sound adjustment procedure is to establish and maintain a
definite and fair policy an impartial policy of being willing to meet the customer half way.

54
This means that the adjustment must be fair to customer as well as to the store, that it
should not be hardboiled on the basis that the customer is always wrong nor should it be
wishy-washy on the principle that the customer is always right. The policy should be
established and also maintained, which means that exceptions must be very infrequent in
order to preserve customer confidence.
The second principle is to promptly acknowledge every complaint. Unless this is done, the
customer may come to feel that the complaint is being ignored and become so exasperated
that even though the adjustment finally offered is eminently fair, it may be insufficient to
restore good will.
Acknowledgments may be made by letter (sometimes special delivery letters are used) or
telephone, and sometimes a telegram or a personal call by the store's outside
representative is employed. A third principle is that adjustments should be handled by
employees who possess a sales personality and mature judgment in dealing with
complaints. The customer is flattered by having her complaint handled by someone who
apparently possesses authority and who is willing to approach the matter sympathetically
from her point of view.
A final principle is to act so as not to make the adjustment and antagonize the customer too.
Often a merchant is so reluctant to make an adjustment and argues with the customer so
much before doing so, that when he finally settles the claim or complaint he loses both in
the adjustment made and in antagonizing the customer. If he is going to antagonize his
customer, he should not make the adjustment. If he is going to take the loss represented by
making the adjustment, he should do it immediately and in such a way as to offset it by
increased consumer good will.
Adjustment letters - In handling adjustments by letter, it should be realized that the
structure of letters allowing adjustments should be different from the structure of those
refusing to make adjustments. For example, if the adjustment is allowed the very first
paragraph of the letter should start out with this pleasant fact. If it is to be denied, however,
the letter should begin and also end on a pleasant note and the refusal, with reasons
therefor, should be placed in a paragraph in the middle of the letter. The psychological
reason for the difference in structure of letters allowing and refusing adjustment is to be
found in the fact that the strongest and the most important paragraphs of any letter are the
first and the last, and naturally the pleasant rather than the unpleasant thoughts should be
placed in the strongest position.
In regard to complaints concerning defective or unsatisfactory merchandise, adjustments
are generally made in the case of the larger stores by the department manager concerned.
He should know more about the price, quality, durability, cleaning or treatment of his
merchandise than anyone else. On the other hand, a specialized adjustment man to take
charge of all merchandise claims and complaints might possibly handle adjustments more
from the viewpoint of general good will for the store, rather than from the viewpoint of the
good of the particular department. Also, it is thought that having to face the same

55
adjustment man each time might discourage those possessing a tendency to make
unreasonable claims and complaints.
It would seem worthwhile to keep a record of adjustments made in such a way as to spot
persons who are chronic and unjust claimers and complainers. Such customers, like those
who make unreasonable returns or are unreasonably slow-pay, should be discovered and
recognized as the unprofitable customers which they are.

Discounts and Allowances

Certain types of customers tend to insist upon discounts or allowances from the regular
prices charged. And the practice of many retail stores in the past has been to grant
discounts from the standard prices to special classes of people. A questionnaire survey of a
score of retail stores in metropolitan New York has revealed that at many of the stores cash
discounts were allowed to store employees and in addition to one or more of the following:
clergy, charitable or religious organizations, purchasing agents, teachers, nurses, dress
makers, theatrical people, interior decorators, hotels and clubs, members of the Association
of Army and Navy Stores, and city employees. In one case such discounts amounted to
approximately two per cent of the net sales of the store.

Discounts
Such discrimination among different customers was apparently even more widespread in
the past, but the recent trend seems to be toward the elimination of cash discounts or a
reduction in the classes of customers accorded them. Special considerations justify giving
employees a discount, it is generally felt, although as early as 1937 Bristol-Myers brought
suit against a retail store under so-called "fair trade " laws and restrained it from granting its
employees a 10 per cent discount on price maintained goods.
Giving discounts or allowances for the purpose of increasing sales volume is becoming
recognized as a form of competition which often does not increase any one store's business
but merely cuts into the gross income of all. Giving trading stamps for cash purchases or for
payment of an account by the tenth of the month following purchase represents one form
of giving a discount to one class of people. Trade stamps are illegal in a number of states,
and it is questionable whether this method of giving discounts is really advantageous to the
average retail store.
Christmas clubs - A different idea is found in the Consumers Thrift Corporation Copyrighted
Plan which has been used by some retail stores. In the case of the "Christmas Thrift Club," all
customers who purchase from $50 to $100 in merchandise from the store before December
10 receive a credit memorandum dividend of two per cent which may be used to buy
anything in the store up to the 25th of January in the following year. The dividends increase
to 5 per cent on purchases totalling over $1,600. The cash customer has the total amount of
her purchases entered in her pass book before leaving the store, while the payments of the
charge and instalment customers are entered in their pass books. Discounts are allowed on
charge accounts paid in full by the 25th of the month following purchase and on instalment
accounts paid within ten days of date due.

56
The "Christmas Gift and Savings Club" plan is similar to the Christmas savings clubs still used
by so many banks. Pass books are issued to customers wherein weekly deposits are
recorded, and between December 9 and December 15, the pass books are redeemed with
credit memo random certificates covering the principal plus dividends which range from 5
per cent to 10 per cent according to the amount deposited. The credit memoranda are not
cashable but are of use only in buying merchandise or in paying accounts.
Cooperative buying associations - Another type of system for giving discounts to certain
customers, whether cash or credit buyers, is found in cooperative buying associations such
as that exemplified by the Association of Army and Navy Stores. The consumer-members of
this association are service men and ex-service men and their families who have paid the
initiation fee required. The store-members of the association give certain discounts (5 per
cent or less) to the consumer-members. They appear to be the so-called higher priced
stores in the various lines of business. Where only a few stores in each line in a community
are members, it appears that the sales may possibly be somewhat increased because of this
discount arrangement. As more stores in a given line join, or offer equivalent discounts, the
advantage to the store in that line should tend to decline.
Generally, retail stores make no distinction between cash and charge sales, taking the
position that charge sales are made on a cash basis, and therefore refuse to give discounts
for cash. Of course, if charge sales were in reality, as well as in theory, “on a cash basis,” it
would mean that a store would insist on payment at time of rendition of bill or close the
account.
Thus, it is argued that stores which allow credit customers to take their time in paying bills
should in fairness give the cash customer a discount for cash. That is the kind of treatment
the retail stores, themselves, get when they buy from wholesalers or manufacturers. If the
retailer takes advantage of the credit terms of the seller, he pays the list price; if he pays
cash, he gets a discount. Terms and discounts are used to stimulate collections, and to make
the credit customer pay for the cost of carrying him.

Allowances
Allowances is a word used in several senses in retail trade. It is sometimes used to mean a
partial credit or refund in the case of defective merchandise although we have termed this
an adjustment. It is used to stimulate credit sales by some furniture, clothing and other
kinds of houses which often distribute coupons good for one dollar on purchases of a
certain size. It is used in the sense of a trade-in allowance in instalment selling.
Allowances also refer to the settling of certain bills for a partial payment of the total amount
owed. This it is necessary to do in some cases, but the manager of credit sales must always
assure himself that the debtor's situation is truly just as represented and that no chance
exists of collecting the full amount. Sometimes the debtor's solution lies in making a
composition settlement with all of his creditors through the agency of the retail credit
bureau a matter discussed in the last chapter of this text.

57
In handling the problem of discounts and allowances on credit purchases the store may
adopt a policy of having the persons who ask for such concessions go for an answer to the
credit sales department which will not merely refuse them but will also explain the reason
why the store cannot give discounts or allowances. An arbitrary or dogmatic statement that
no discounts or allowances are made, may often drive away a prospective customer. But if
the matter is explained to the customer so that he understands that the store treats all
customers alike and will not discriminate against any one, the customer can usually be
secured and kept.
It is evident here that policies concerning discounts and allowances may come to constitute
quite a problem for the stores in a given line or even in an entire community. If only a few
stores give discounts, they may possibly profit somewhat at the expense of the great
majority who do not make such concessions.

Cashing Checks
The service of cashing checks is primarily a function which banks are supposed and expected
to perform. They have the signatures of their customers on file and can make positive
identification which a store often cannot do in many cases. But retail stores generally offer
this service as an accommodation to build good will and fear that if they should refuse,
customers will go to a competitor who does cash checks. In some cities (for example,
Minneapolis) it has become a rather general custom for stores to charge fees for cashing
checks.

Kinds of Situations
When a check is accepted from a credit customer for payment on his account, there can be
said to be no added risk involved since the credit allowed the customer is subject to final
collection or payment of the check. Of course, there is the possibility of a customer settling a
past due bill with a check (which later turns out to be bad) in order to be allowed to charge
a large amount, and then skip out.
When the credit customer tenders his check, desiring to secure cash for it or to secure part
cash and apply the remainder on his account, he should be made to indicate over his
signature the amount he has received in cash. This prevents the cashing of checks at the
store and exhibiting the cancelled checks later as proof of payments on account.
When the customer does not have an account but wishes to purchase merchandise with a
check, most stores will accept the check, whether large or small, if reasonable identification
can be made. Even if he does not desire to purchase merchandise, many stores will give
cash for the check in case it is small.
Identification - The identification when a small check is given for a purchase or merely for
cash may go no further than securing the address of the buyer and perhaps his telephone
number.
In a large store this may be done by the floor man who O.K.'s the check. Large checks must
be O.K.'d by a cashier or by the manager of credit sales or one of his authorized assistants. A

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telephone call may be used to check up in making the identification and authorizing the
acceptance of the check.
Post-dated checks - Post-dated checks are accepted from credit customers in cases where
convenience is served. The customer may wish to get the matter off his mind and not cause
the store added effort in collection. Also he may desire to settle a delinquent balance by
giving several post-dated checks.
When post-dating becomes a habit with a buyer, however, it indicates that he is living
beyond his income. And when the checks turn out to be no good at maturity, or when the
customer asks that they be not cashed at maturity but that new post-dated checks be
accepted, the practice becomes a nuisance which can only be remedied by a firm
understanding or a closing of the account.

Bad Checks
Losses on bad checks in retail stores are estimated to be relatively small, and to offset this
loss the stores consider that they gain in good will and in cash sales. Some protection
undoubtedly arises from State bad check laws. The better laws of this type make tendering a
check without sufficient funds in the bank prima facie evidence of fraud, while other bad
check laws require that the retailer must prove that the passer of the bad check actually
intended to defraud not always an easy task to perform in court, and if the retailer fails he
may face a suit for damages brought by the bad check passer.
Procedure - In connection with the matter of damage suits, it may be said that in instances
where there are apparent attempts to pass fraudulent checks, steal merchandise, etc., the
store should proceed cautiously and not physically detain offenders. The police should be
called or a detective or protective agency notified, thus shifting the responsibility to others
than the store or store personnel. Sharp customers and shrewd attorneys can manufacture
damage suits against the merchant out of what might appear to the layman to be very little.
The credit bureau should be notified by the store as soon as fraud is spotted and the bureau
should be given full details as to the kind of fraud, the name, address, occupation,
description of the person, and any other pertinent information so that it may warn other
members by telephone, Tel-Autograph,* Teletype, bulletin or other means of
communication.
"Photecto." - Pictures of persons giving checks (or of all applicants for accounts, if desired)
may be taken secretly by a special, electrically controlled and operated camera called
Photecto which was placed on the market in 1938. The machine is equipped with a high
grade lens adapted to the lighting conditions of each place where installed, is housed in a
standard radio cabinet made to match the furniture and fixtures of the office, and operates
silently.
Advantages claimed for the use of the machine in the credit sales department are that it
gives permanent identification of clientele and makes the store's credit system more
complete; allows granting more credit accounts, permits more freedom in cashing new
customers' checks, and saves losses on fraudulent purchases ; identifies check forgers and

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persons making fraudulent purchases ; permits greater cooperation with police
departments by furnishing positive identification for arrests, with other stores using
Photecto by interchange of pictures of forgers and crooks, and with the credit bureaus. In
large department stores it may be used by the credit sales department, the check cashing
department, the personnel department, and the shoplifting detail.
Forestalling fraud - The passer of bad checks usually endeavours to do his passing in the
afternoon after the banks have closed. Unless the manager of credit sales can secure
completely satisfactory identification or secure endorsement of the check by a thoroughly
responsible person, he should refuse to deliver the merchandise until the check has been
cleared at the bank. This is especially important in case the check is for a large amount. The
other usual type of retail credit fraud is unauthorized purchases on accounts by persons
claiming to be the customer or his child or relative. This problem was treated in the
discussion of authorization. Telephoning the customer for verification or refusing to deliver
the goods except to his address (in case contact cannot be made by telephone) is the action
usually taken when the manager of credit sales cannot satisfy himself as to the identification
of the purchaser.

Keeping Posted on Derogatory Information

Another necessary activity in discharging the function of Controlling the Account is watching
out for the development of any derogatory information concerning customers. This is
information as to developments adversely affecting the willingness and ability of the
customer to pay as agreed. For example, this may be information as to domestic troubles,
divorces, deaths, suits, judgments, bankruptcies, filing of notices of non-responsibility for
debts of the wife, loss of job, chattel mortgages, and so on. Such information may be
secured by the credit man through many channels such as the newspapers, court
proceedings, conversation with others, and daily bulletins or messages from the local credit
bureau.
By keeping posted on any derogatory information which develops regarding his accounts,
the manager of credit sales may be enabled to act in time to protect the store in case of
further purchases by the customer, or in collecting the account. Certain other problems like
those concerning closing accounts, skips, slow-pays, etc., will be treated in connection with
the study of the function of Collecting where they naturally belong.

Consumer Credit Education

As implied in earlier pages, efficiency in handling the special problems of credit control, as
well as credit management problems in general, can be significantly increased by
cooperation among retail credit granters in consumer credit education.
Local associations of retail credit managers or local credit bureaus can sponsor consumer
educational campaigns through newspapers, over the radio, in the form of billboard
advertising, and by means of enclosures in bills or other methods, all stressing the
advantages of sound credit.

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The disadvantages of buying on extremely long terms, the cost of such credit, and the
danger of going into debt beyond ability to pay promptly, or of obligating oneself over too
long a period, can be emphasized through cooperative educational efforts by managers of
credit sales.
The advantages of sound credit and the extent to which the individual benefits through the
prompt payment of his bills, the satisfaction of having a good credit record, and what is
necessary to build and maintain such a record all can be stressed to the consuming public in
these cooperative educational programs.
In such programs, at times, attention of consumers can be directed to each of the special
problems treated in this chapter and to other problems so that the consuming public may
be educated to habits that will contribute toward ever better service for it in credit granting
stores. Concerted action in the education of credit buyers will prove to be of distinct
advantage to consumers and credit granters alike.
The problems we have been discussing in this and the preceding chapters are mainly
concerned with controlling the account so as to protect the store. Now we shall examine
those activities in control which are primarily for the purpose of increasing business from
credit customers,

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 11. Conclusion
In India the vast middle class and its almost untapped retail industry are the key attractive
forces for global retail giants wanting to enter into newer markets, which in turn will help
the India Retail Industry to grow faster.
India at the crossroads with regard to the retail sector. Several emerging market economics
have gone ahead and reaped the benefits of modern retail. Politics is an unfortunate reality
that has been coming in the way of success of organized sector and ultimately the overall
retail sector.
The hue and cry created by unorganized sector against Reliance Fresh, Wal-Mart especially
in U.P., Jharkhand etc. is not appreciable, it is the major hindrance in the growth of retail
sector. There is need of balanced approach to retail & govt. has to play a very vital role in
shaping the future course. Though tradition retail has been performing a vital function in the
economy, but it has to shed off its shortcomings and inefficiencies and this is actually
happening. Thus, the organized sector is not only impacting the other sectors positively but
also it has benefited its own competition i.e. unorganized sector. So, organized sector
becomes the growth mantra of Retail sector.
India's strong growth fundamentals along with increased urbanisation and consumerism
opened immense scope for retail expansion. Further, easy availability of credit and use of
'plastic money' have contributed to a strong and growing consumer culture in India. The
untapped rural market also has high growth potential.
Retailing involves a lot of finance investment in terms of merchandise, real estate,
infrastructure building investments, human resources which needs to be managed and
optimised for the better operational efficiency and a healthy ROI (Return on Investment).
Therefore it becomes important to understand the various dimensions of finance
management as played out in the retail scenario.
Thus managing your finance decides most critical aspects of business plan like:
1. Budget planning
2. Performance measure
3. Resource allocation
4. Future business estimation
5. Analysing present business

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 12. Bibliography

1. http://www.mimts.org/journals-jims8m/Retail%20Management%20in%20India-23.pdf
2. http://www.rasci.in/downloads/2011/Indian_Retail_Sector_2011.pdf
3. http://shodhganga.inflibnet.ac.in/bitstream/10603/6407/7/07_chapter%202.pdf
4. http://www.zenithresearch.org.in/images/stories/pdf/2012/May/ZIJMR/22_ZIJMR_Vol2_Iss
ue5_May%202012.pdf
5. India Brand Equity Foundation
a. http://www.ibef.org/download/Retail50112.pdf
b. http://www.ibef.org/download/Retail-261112.pdf
c. http://www.ibef.org/download/Retail-March-220313.pdf
2. http://www.hurlbutassociates.com/retail-perspectives-blog/bid/52261/Sales-Forecasting-
and-Inventory-Management-for-Independent-Retailers

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