Every business owner wants to avoid cash shortages, especially in a rough economy. In the following interview, management consultant and lecturer Dr. David J. McKinney offers practical advice on what jewelers should—and shouldn’t—do for a healthy cash flow.

Dr. McKinney, what is cash flow? Is it profit?

Cash flow is simply movement of money in and out of a business during any accounting period. A definition I like is: earnings before noncash expenses like depreciation and amortization. Profit is just the difference between assets and liabilities. Cash flow is also the best barometer of your business’s health and how it’s managed. A positive flow guarantees the value of your investment in your business, regardless of fluctuations in financial markets.

How does a jeweler get good cash flow?

With carefully planned strategies to enhance business operations, ones that link your business model—meaning how your company does business and makes money—with specific financial goals. But many jewelers don’t use tools for that—specifically, cash-flow budgets and open-to-buy merchandising programs, which are the roadmap for appropriate expenses—or have a business plan or annual strategic management plan.

What does a cash-flow budget do?

It anticipates a store’s in- and outflows of cash and can be written for any specific time period—day, week, or month. Personally, I like to combine a cash-flow budget with an open-to-buy program that monitors inventory activity and restocking based on sales projections. Most jewelers avoid that, too, but it’s worth the effort.

And an annual strategic management plan?

That looks at possible business scenarios that could help a struggling business and provide healthy cash flows. It has three projections—pessimistic, probable, and optimistic—and reasonable financial outcomes for each on every expense line.

Something else many jewelers don’t use—and should—are detailed microeconomic metrics to evaluate sales and inventory performances. A jeweler should understand differences between metrics like ROI (return on investment) and ROE (return on equity) and also how results of a business model can impact cash-flow returns.

Why don’t more jewelers use these tools?

Many are averse to changing how they’ve done business and use “business as usual” as a security blanket. They use the same business models for years, without significant modifications, become complacent, and don’t grow. The result is the same as in nature: Anything that stops growing starts dying. So jewelers with the best chances of surviving and thriving are those who embrace change and redefine their position in today’s marketplace.

How much cash should a business keep on hand?

Enough for at least three months’ worth of operating expenses. Remember, most business don’t fail because they’re unprofitable. They fail primarily because they can’t pay their bills or can’t easily convert assets—like inventory—into cash. Every jeweler needs a rainy-day fund to offset unexpected cash shortages and keep a positive cash flow.

Aren’t cash flow problems now largely caused by the recession?

Certainly the recession impacts jewelers, as it does any business, but an already sick cash flow is only made sicker by recession.

Meaning?

Many jewelers’ cash flow problems are found in their business model. If it’s weak or no longer relevant, cash flow is weakened by problems inherent in operating the store. Tough economic times only magnify that. On the other hand, despite recession, most Americans still get reasonable incomes and make discretionary purchases. So there are opportunities for smart jewelers to grow business and become dominant in their markets.

What hurts cash flow?

Regardless of economic cycles, poor cash flow results from three things: overestimating sales income, underestimating expenses, and failing to project cash shortages. When such pressures affect cash flow, jewelers usually reduce “easy” costs, especially marketing and staff. But these should be preserved, not cut, to capitalize on growth opportunities. A business owner must be frugal—but not to the point of eliminating what grows business.

What liabilities can be cut to aid cash flow?

Inventory. It consumes cash, so reduce it. Shift the burden to just-in-time suppliers. Customize your products with personalized designs. Stock specific inventory targeted for specific sales. Focus on the 20 percent of clients who provide 80 percent of your income, and the 20 percent of products providing 80 percent of your sales.

Also, most jewelers hold inventory items four to six years. That’s not good cash-flow management. A smaller inventory frees up cash and carries smaller costs. Jewelers who want to thrive should focus on smaller inventories and higher annual turnover ratios.

How high?

At least 2.0. Many analysts even suggest 3.5 to 4.0, comparable to other industries. Some jewelers call that unrealistic, but that’s what buggy-whip makers said about competing with cars, or slide rule manufacturers said about handheld calculators—and look what happened to them.

What else hurts a jeweler’s cash flow?

For one, most jewelers never measure their ads’ effectiveness and don’t calculate how much revenue is generated—or not—by ad costs. Another is that most jewelers wait for clients to walk in. That’s unacceptable. A jeweler must attract them with aggressive marketing, like telephoning prospects with special offers or brown bag luncheons for executives in their offices to discuss holiday gift ideas.

What are other cash flow sources?

Additional profit centers. For example, a jewelry store is a natural for a wedding concierge service; a jeweler could get referral fees from other firms with which it develops strategic alliances. Another is showcasing products on Friday evenings. Local musical groups or designers might pay a jeweler to display or perform.

Look at sourcing materials yourself. Some cost 30 percent to 40 percent less if purchased from China or India rather than Europe. Look outside the box for ideas. For example, some fashion industry stores, like DKNY, have added smoothie bars as a customer service—and a new profit center. In Norwich, England, Winsor Bishop Jewellers added a restaurant next to its store and uses it for special events for its best clients. Another of its profit centers is called Rent Our Rocks, which lets people rent jewelry short-term.

Which is best?

The best source of good cash flow is differentiation in the marketplace. Too many jewelers look alike, offering the same merchandise in the same boring manner. They don’t give consumers good reasons to buy from them or a memorable shopping experience.

Are there less obvious ways to increase cash flow?

Different accounting methods. For example, LIFO (last in, first out) inventory accounting is most beneficial when costs of goods rise. You can accelerate rising inventory costs to decrease taxable income. Look, too, at changes in the balance sheet that don’t appear on the income statement but affect cash flow, like repayment of bank loans, borrowing, or similar transactions. Another is paying bills: Prioritize payments to keep a positive cash flow, rather than deplete it.

How does borrowing affect cash flow?

An influx of new cash from borrowing gives a business, especially a struggling one, a chance to survive. Borrowing is more difficult now, but rates are near a record low. If you have a mortgage or loan, try refinancing at a lower interest rate to lower expenses and improve cash flow.

Any final suggestions?

Take time to analyze the nuances of your business’s cash flow. Use reasonable microeconomic metrics, like GMROII (gross margin return on inventory investment) to measure sales and inventory performance for each store counter, product, and salesperson. Be creative and differentiate your business in the marketplace. And remember: Even small, positive changes can have a significant impact, cumulatively, on your business’s health and cash flow.

Dr. David J. McKinney, chief associate of Global Jewellery Business Advisors, is a business management consultant and lecturer on the jewelry business. The former CEO was a professor at the Gemological Institute of America’s School of Business, and his business and management expertise is used in the public and private sectors, including the Hudson Institute and several state legislatures. Contact him at GlobalJewelBusAdv@gmail.com or The.Professor.777@hotmail.com.