What’s the first thing you tell business owners about finances and cash flow?

Developing a realistic financial forecast for your business–and using it to hold yourself and your team accountable–is crucial. A detailed budget and cash flow projection serve as benchmarks for monitoring progress, which is helpful no matter how your business is performing. If you hit or exceed your revenue target, focus on what you’re doing well and do more of it. If you’re falling short, use your own data to pinpoint your weak spots and address them. 

Your projections should span at least 12 months, and preferably 18 or 24 months if your business has been around long enough to have established sales and spending patterns upon which to build your forecast.

So once you have that historical data, where do you start?

I recommend creating a base-case budget: Start with your recent historical results and build upon them using conservative assumptions about sales growth and input cost increases. Then stress it by creating a low case. Assign a percentage haircut to your sales and an increase to your expenses to see how tight your margins can get before your cash flow turns negative. Many entrepreneurs who are just starting out create budgets based on what they want to happen instead of also considering a worst-case scenario.

Once the budget is in place, what's the next step?

A budget is useful for planning and benchmarking your performance, but your cash flow projection is your most important tool. Start with an annual budget and cash flow projection, then allocate these figures across 12 months, incorporating any seasonality in sales or buying patterns and lump-sum fixed costs.

Your annual budget might show that you are covering your expenses each year, and maybe carving out a profit, but looking at your anticipated cash inflows (which will be heavily dependent on the scenario analysis discussed above) and outflows (expenses are likely far more predictable than revenues) by month shows you pretty quickly if and when you’ll run into a cash crunch. In periods where you see that your month-end cash balance will be tight or turn negative, you can draw on a line of credit, for example, to help smooth out your fluctuations in cash.

QuickBooks and other accounting software packages provide straightforward frameworks for budgets and cash flow forecasts. The more you can automate, the more likely you are to use these planning tools as you can analyze your performance in a few clicks provided your inputs are up to date.

How can retailers sell excess inventory without compromising their brand?

It’s easy to feel like a failure when your inventory isn’t moving, but there are creative options to entice customers to buy, and you’ll want to employ them before your cash flow gets too tight. 

If you have a brick-and-mortar establishment, you can offer a slow-moving item at a discount (or as a gift) with the purchase of a popular higher-margin item. You could also have a pop-up sale at a high-traffic, high-end location (a hotel or a curated invitation-only makers’ market) with a healthy assortment of aged inventory items mixed in with the new. Or hold private friends-and-family sales events that include slower-moving items. Entice customers with thematic cocktails and nibbles and make sure you have room for guests to sit and relax so they can enjoy a beverage while they try things on.

What about for online retailers?

For online retailers, you can curate a favorites page or “look of the month” section on your website that features a combination of aged inventory and fresh items. Entice customers to purchase the entire look by offering loyalty points, a modest discount or special gift packaging. A piece that may seem old and tired to you can be a must-have for a customer if it has been re-photographed and presented as a key piece of a complete ensemble. You can also place aged items in an Editor’s Picks area on your website or add a new page called Classics and feature evergreen items there. Consider adding a small beauty item, or another product that isn’t seasonal, as a gift with purchase.