ChApter 7 | YOUR CASH FLOW FORECAST AND CAPITAL SPENDING PLAN | 137
inventory of $77,000 ($450,000 × 0.60
÷ 3.5). This would raise her initial cash
requirement by $47,000. With that much
cash investment needed, her business idea
probably is not worth pursuing unless she
can generate a good deal more profit than
her Profit and Loss Forecast indicates. This
would undoubtedly mean raising sales
projections, and otherwise trying to force
profits into a questionable business. If your
retail business has an inventory turnover
of three to four times per year, you’ll be
doing pretty well. Many retailers are able to
average only one or two turns per year.
Many people who plan new retail
businesses expect to start with a fairly
small inventory because they don’t have
much capital to invest. This will very
likely cause problems if the sales figures
they expect this inventory to produce
are too high. For example, if you plan to
sell widgets, but can only buy a starting
inventory of $10,000 at cost, it would seem
unlikely that you could produce sales of
$200,000 per year. Even assuming you
doubled the price of the widgets, this
would mean turning your inventory over
ten times in the year. For most businesses,
it simply isn’t realistic to expect inventory
to turn over even seven or eight times a
year.
Many retailers make a similar mistake;
some catch the mistake at this stage,
some catch the mistake when they have a
business consultant review their plan, and
some never catch it. They just sink slowlyinto bankruptcy, wondering why sales
never met projections.
What about Antoinette and her inventory
problem? I shall continue with Antoinette’s
original assumptions, including those for
inventory turnover. This book is simply
not set up to go back and revise all her
numbers. Second, I want Antoinette’s
problem (the fatal flaw in her plan)
to really sink in. I hope Antoinette’s
predicament will give you a vague feeling
of unease as you continue to read her plan.
The lesson is this: Just because a business
plan appears to be thorough and looks
good on paper, that’s no guarantee that it
will be successful. It pays to be skeptical.Typical Problems Retailers Face
You can skip the rest of this chapter if
you’re not planning to run a retail business.
Otherwise, you’ll find the following
discussion extremely useful.
Here’s what Antoinette should have
known about inventory. Inventory manage-
ment separates the professionals from the
amateurs in the retail business. Inventory
is usually the biggest single investment a
retailer makes. Commonly, it happens that
a retailer shows a high taxable income, but
no cash. Why? Because all her cash went
into increasing the inventory.
The goals of inventory management are:
• to have a wide enough selection of
new, fresh merchandise to appeal to
customers