“Where did my cash go?”
Raise your hand if you’ve ever been left wondering where your cash went after reading your year-end Profit & Loss (P&L) statement. If this situation sounds familiar, don’t worry—you’re not alone. P&L statements show profit, but do not tell the whole story about your cash, which is an important indicator of profitability.
Measuring profitability through cash flow
That’s right, the true definition of profitability in retail doesn’t come from measuring your maintained margin or your net income, real profitability comes down to only one thing: cash flow!
Generating strong cash flow is crucial, and it comes from maintaining healthy gross margins, having the right inventory at the right time, and turning over that inventory at a level that supports your expense structure and grows profitable sales in every store classification.
A great measurement for cash flow is gross margin return on investment (GMROI) . This calculation measures the gross margin dollars returned for every dollar you invested in your inventory. A GMROI less than 3.2 typically means you are operating below your breakeven point and cash is probably scarce.
How to calculate GMROI
You can quickly calculate your business’s GMROI by dividing your gross margin dollars by your average inventory at cost over the last 13 months.
Gross Margin Dollars (Last 12 months of Revenue – Cost of Goods Sold)
Average Inventory at Cost (13 consecutive months)
Answers to your cash flow questions
We love to help retailers. Contact us about a no-cost, no-obligation inventory analysis. We can also show you how you can grow your profitable sales and achieve stronger cash flow.
Dan Holman is a certified Winning@Retail™ coach with twenty-plus years of retail success.