Maintaining a healthy balance sheet is critical to any business. In retailing, a significant portion of the finances raised to fund the business may be secured against the assets in the company’s balance sheet.
There have been well known instances of large retailers with severe inventory problems who were forced to overstate the true inventory value on the balance sheet. Marking down the inventory to its true market value would place some of these retailers in breach of their banking covenants causing them to be technically insolvent. Hence, they were not able to take badly needed markdowns to clear the inventory and purchase new goods.
Smarter retailers regularly review inventory aging reports. Special attention is paid to seasonal merchandise and other goods with a pre-determined shelf life. Taking markdowns in a timely fashion may create pressure on the Open-To-Buy in the short term, but will greatly enhance the long-term viability of the business.
Retail is intrinsically a cash business. Managing the relationship between inventory turns and vendor payment times is another critical aspect of keeping a healthy balance sheet. Utilizing effective financial and merchandising software solutions can greatly improve insight and understanding of the financial health of a retail operation.