Rook's Comics and Games

February has been a good month for Rook’s. We have had strong sales and we have been pretty frugal with our inventory purchases. This got me thinking about cash flow of a small business and a few interesting things that go along with that.

The fist thing that a small retail business needs to manage is cash flow. This is our biggest challenge. A very large portion of our net sales goes back into replacing inventory or to bring in new products. We are still a growing business so more money is devoted to increasing inventory than in a mature store. What this means is that we have to be very good at managing cash flow. The correct way to look at this is to think about working capital. Working Capital is essentially the amount of cash on hand that is needed to run the current business operations. There are some good formulas to calculate working capital but I haven’t done that yet. My idea of working capital is much more seat of the pants. One of my financial goals for 2010 is to do more in-depth business/financial calculations. I case you are curious, I feel like the Working Capital for Rook’s is about 7-10 thousand dollars. This working capital allows us to continue to purchase inventory, pay our employees and our rent even if a month is a little slow. Keep in mind that working capital should not be used for investment or to accrue more long term debt. Working capital should only be used for operations the way the business currently runs. If we want to bring in a whole new product line at Rook’s, that money needs to come from somewhere other than working capital.

In the past, it was fine to use a credit card for working capital. Credit cards terms were relatively stable and it is easy to keep them paid off if you are managing your money right. Things have changed now however. I feel much more comfortable with having the working capital in the bank, even if I still use the credit card for purchases. Credit card companies are being pretty flaky right now and I wouldn’t want a liquidity crunch at Rook’s because our credit card terms changed.

There is another thing to consider with working capital and that is opportunity cost. Working capital is not really making your business extra money. It is making you money in the sense that you can purchase goods when you need to and your business cycle is smooth but it really isn’t do anything other than that. Opportunity cost is essentially the next best thing you could be doing with a given asset. So when thinking about working capital, we want to be sure that we don’t have too much working capital. If we have too much working capital then we are probably missing out on other opportunities. In our case, that missed opportunity is usually in the way of expanding product lines. There are still a lot of products out there that I think we should be carrying. If we have too much money tied up in working capital than I am missing those opportunities and therefore loosing business I could have otherwise had. We could also be using that extra money to invest in some mutual funds or some other type of investment that will grow the extra money while we are not actively spending it. This way when we eventually want to move into a larger space, or make renovations on our current space, we will have the cash we put in, plus a little more from our investment’s growth.

As a small business it is always important to be paying attention to your money. Whether you have too much or too little, there is always something you should be trying to do better.