Working capital it’s not all wet stock!
Following our look at the effect of wet-stock holdings vis-à-vis retailers’ cash flow last month, a number of retailers have contacted us with their own views on some of the factors that are impacting on their cash and bank balances. The typical comment could be summed up as: "My accounts show a regular, decent profit. So why am I constantly short of cash?"
Plastic part one
The typical independent dealer doesn’t pick which payment cards they accept, nor the means of transmitting card information into the banking system. Instead, card acceptance and processing is usually offered as part of the contractual supply ’package’ with their oil company. In theory this should be a benefit to the retailer in that the oil company will usually have negotiated lower costs for these services than might otherwise be on offer. Indeed, in some cases, the oil company doesn’t pass any of the transaction cost back to the dealer directly. However, the most common complaint from the dealers is that the time taken for sales proceeds to hit their bank account is still too long. While sales on bank debit cards are usually in the account within three working days, those on the oil-company branded or other ’fleet’ cards can still take anywhere between five and 10 working days to be banked.
According to one dealer, there’s been virtually no improvement in payment times on fuel cards since the dawn of the ’electronic’ payment era back in the late 1980s! The result is that at any given time a busy site can have £30,000-£70,000 sitting in the limbo of the EFT system, around half of it for three or four working days, the remainder for up to 10 working days and remember that the cost of all the fuel sold will have been DD’d by the oil company after just three working days.
Plastic part 2
One subject that irked a number of dealers was the reliability (or otherwise) of some of the EFT systems they use, some of which have gained a reputation for ’falling over’ several times a year. Quite apart from the chaos this causes, the retailers are then faced with having to photocopy every single card receipt off their POS, covering a whole day (or sometimes longer ) of sales, before batching them up and submitting them to their card acquirer. In the words of one dealer "That’s when the fun begins," meaning that these manual sales vouchers can take weeks to be accepted and cleared so that the retailer has another few thousand pounds of his cash tied up in the system for far longer than usual.
It’s on the shelves
There’s an unwritten ’Law of Retailing’ that says ’After any shop refit you’ll need to display at least 25% more stock’. Once it was possible to keep a forecourt shop looking well stocked, even if your storeroom was bare, and hence the total value of dry stock could be kept down. Today’s modern supermarket-style forecourt shops don’t have that option. Miles of aisles several shelves high and dozens of chiller cabinets all on view need to be kept looking full. Add to that developments like the emergence of alcohol as a serious part of the modern shop offer, and it’s now fairly routine to see shop stock levels averaging between £50,000 and £75,000 at cost. But it’s not only the value that’s changed. One dealer reminisced about a time when a large part of his forecourt was stocked with items on ’sale or return’ tapes/CDs, flowers, garden products, news etc. In effect the suppliers of those lines were offering extended credit terms whereby many of them would come in once a month and count what had gone since their last visit and then invoice the retailer. Today only news remains as a sale or return line; virtually everything else is paid for on weekly terms.
It’s my account customers
If it is, then sorry, but you’ve only got yourself to blame. If your customers really want the convenience of not having to pay for their fuel at every visit, the simple answer is pre-paid accounts. They give you a month’s worth of cash up front you let them draw fuel up to the maximum they’ve paid. Then you stop them having any more before they pay you another large wedge of cash up front. And you charge them an administration fee for the luxury. Any other arrangement is just asking for trouble.
It’s in the other bank account
High street building societies used to positively encourage cash deposits from small business customers and they offered to count it free of charge. And, as an added bonus, they even paid you interest on the cash you deposited unlike the banks which charged you for counting and accepting cash into your own account. Hence it was common practice for forecourt retailers to open an account at their local building society and deposit bags of cash there, before writing out a cheque from that account and paying it into their bank account. Some still do. Unfortunately real building societies have almost disappeared and most of those that do still exist are really just subsidiaries of the banks whose charges you’re trying to avoid. And nobody wants to count cash for free any more.
It’s called ’working capital’
What we’re looking at here is good old-fashioned ’working capital’. Looking at trends over many years, perhaps the bias has shifted somewhat against the small independent forecourt.
Unbelieveable as it may seem today, even fuel used to come on credit terms longer than three days and many shop suppliers worked on a 30-day credit period. Bear in mind though that in those days plastic payments were at least a little slower before EFTs and many more sites extended credit to local account customers. Overall however, credit today is short and so the amount of working capital needed from each business owner is relatively higher less ’in the bank’ and more ’in the business’.