Cash flow for shop owners: why profit is not the same as cash

Many shop owners judge the business by whether the till has money in it. That is cash. Profit is a different thing: it is what you earned after the cost of what you sold and your running costs. They move at different speeds, and the gap between them is where shops get into trouble.

Here is a simple case. You buy 100 bottles of juice for $200 and sell all of them for $350. Your profit on the juice is $150. But if you paid for 300 bottles because the supplier gave a good price, and sold 100, your profit is still $150 and your cash is $400 lower than it was, because the unsold 200 bottles are still on the shelf. The profit is real. The cash is not available.

Cash leaves a shop in a handful of predictable ways. Knowing them is half the work.

• Stock purchases. Usually the biggest item, and the one you control the most.
• Rent, power, water and internet. Fixed dates, fixed amounts, no matter how the week went.
• Wages. Due on a set day.
• Supplier credit repayments. If you buy on terms, the bill arrives later and all at once.
• Taxes and licences. Often a lump sum on a date. Check your tax authority or an accountant for yours.
• Owner draws. Money you take out of the shop for yourself or your family.
• Losses. Theft, damage and expired stock turn cash into nothing. See how to reduce stock loss.

Cash comes in from sales on the same day, but suppliers and landlords do not wait for a good week. A slow week does not delay the rent.

Every unit in your back room is money you have already spent. If it sells next week, the money comes back with a margin on top. If it sits for six months, that money is out of reach for six months.

The faster stock sells, the less cash you need to run the shop. Inventory turnover measures this. A shop that turns its stock ten times a year needs far less cash tied up than one that turns it twice, for the same sales.

Slow and dead stock is the worst case. It is cash that has stopped moving, and often will not come back at full price. See slow-moving and dead stock.

None of this means holding too little. Running out loses sales. The aim is the right amount: enough to avoid stock-outs, not so much that it chokes cash. Good reorder points help you hold that line.

You do not need accounting software. A page with five lines is enough. Do it every Monday for the next four weeks.

1. Write down the cash you have now

   Count the till float, any safe money, and the bank balance.

2. Estimate cash in

   Use last week's sales, adjusted for known events such as payday or a holiday. Be cautious.

3. List fixed bills by their due date

   Rent, wages, power, supplier payments, loan repayments and tax.

4. Add planned stock purchases

   Use your restock list. Leave a gap for surprises.

5. Work out the closing cash for each week

   Opening cash + cash in - cash out. Carry it into next week.

A shop starts week 1 with $1,200 in cash and bank. It sells roughly $4,500 a week, of which about $1,100 is gross profit after the goods. Rent of $900 is due in week 2, and wages of $600 a week are due every Friday.

Each week opens with the previous week's closing cash. Week 1 closes at 1,200 + 4,500 - 3,100 - 600 = $2,000. Week 2 is the tight one: rent and power land together, and cash dips to $1,700 even though it was a normal sales week. Keep an eye on that lowest point, and keep it above a safety floor such as one week of wages plus rent.

Now compare cash with profit. Over the four weeks the shop made about $4,400 in gross profit. Take off $3,600 of wages, rent and power and the real profit is about $800. Yet cash rose by $2,400, from $1,200 to $3,600. The difference is stock: the shop bought $12,200 of goods and sold goods that cost about $13,800, so its shelves got $1,600 emptier. That looks like good cash flow, but it is cash borrowed from the shelf. If it continues, the shop will start running out of products.

Now see what a big order does. Suppose a supplier offers a price break and you buy $2,500 of extra stock in week 2. Week 2 closes at $1,700 - $2,500 = -$800. You cannot pay the wages on Friday. The deal was good. The timing was fatal. If you saw this on Monday, you could split the order, ask for a later payment date, or take half now and half in week 4.

• Sell slow stock. A discount that frees up $300 of cash beats a full price that never comes. See how to price products.
• Buy smaller, more often. If your supplier allows it, this cuts the cash tied in the back room.
• Negotiate payment terms. A supplier who lets you pay in 14 days is lending you money. See negotiating with suppliers.
• Count your stock. Cash you did not know was on the shelf, or was lost, shows up in a stock count.
• Keep personal and shop money apart. Pay yourself a set amount on a set day.
• Time your big buys. Avoid placing large orders in a week when rent, wages and tax all fall due.

• You pay suppliers late to afford wages.
• You are borrowing from the till for personal costs and not putting it back.
• Your back room is fuller every month but sales are flat.
• You say yes to every supplier deal.
• You do not know what is in the bank until a payment fails.

Any two of these is a reason to build the weekly plan this week.

Shopkeepa shows your inventory value, best sellers, slow movers and low-stock list, so you can see how much cash is sitting on the shelf and where. The restock list gives you a suggested order quantity, which helps you buy what you need and not what a salesperson suggests. Shopkeepa does not hold your money or run your bank, and it is still in development. Join the early access list to follow it. Details on the inventory tracking page.