IN THE KNOW

October 2023

Asset Rich and Cash Poor: The Retailer's Dilemma

David Brown

Growing up in a small rural community, farming was a big part of the economy where I lived in New Zealand. Back then farming, although the backbone of our export economy, was a struggling industry, dependent on government subsidies to sustain it in its international markets.

Leap forward to the 1990’s and the growth in dairy exports to China saw land prices rocket as big conglomerates started to buy up farms in order to maximize their output of milk and related products. Many sold out and retired while others continued in their previous tradition of growing crops or raising sheep as they had always done.

On paper the farmers who stayed were suddenly wealthy. The land underneath their farm was worth a small fortune, yet they continued to earn a relatively poor return from their existing enterprises. It was the first time I had heard the phrase “asset rich yet cash poor” used.

It’s not a unique phenomenon to just farming. Other industries can tie up a large amount in assets while earning a below average return on those assets – and jewelry retail is no exception to the rule.

The difference with jewelry is the way these assets are made up. Where farming may consist of land, and construction and other industries see their tools of trade held in equipment, for jewelry retail the most common surplus accumulator of assets falls under the category of inventory. This is where “Lazy Cash” goes to hide, far away from the bank account where it belongs. Almost like a vortex, surplus cash seems to get dragged in the direction of extra product. Like a small child unable to sit still and in need of being occupied, it has to amuse itself on the shelves rather than where it can be more usefully engaged with paying bills or rewarding its owners.

There is often a reverse correlation between cash and inventory. Find a store with cash flow issues and you’ll often find the same store has surplus inventory bulging at the seams. Find a business pumping out good levels of cash and you will normally find a business with a healthy stockturn that makes its product accountable.

If you look at the metrics used to analyze business performance, one of the most valuable is Return on Assets. This measurement is commonly referred to by Fortune 500 companies but seldom enters the language of the main street retailer. Granted, you can’t live off percentage returns, only cash, but the efficient use of assets is like the efficient use of time. If you had to get a job completed, would you rather it took you one hour or two? Either way the job gets done but the expenditure of effort is half what it could be with one method than the other. Likewise with your assets. Is there any point in tying up spare cash to gain a return when half that cash did the same job?

Let me put it another way. If I offered to borrow half your cash interest free and return it in one year, would you say yes? Chances are you wouldn’t – yet I see many retailers making this very bargain with their jewelry show cases on a daily basis and thinking nothing of it. How about a more positive scenario? What about if you could take half your inventory, sell it off for cost and put the money in your back pocket to use entirely for your personal pleasure and it never needs to return to the store again? What would you do with it? Put it towards a new home? An exotic holiday? The kids’ college fund? Or redeploy it earning a return that could see your income increase indefinitely?

Now your situation may well be different. My scenario above assumes a store with half of its inventory being surplus to requirements. You may have only a small portion of surplus inventory, but chances are you will have some that can be gainfully employed in a better way.

Inventory is just Cash by another name – but you’ve got to call it if you want it to come to you.