High Streets Initiative 9 July 2018

5 ways aged debt has affected small retailers and how to stop it happening to you

Poundworld founder Chris Edwards is struggling to save the chain

With more large retailers, including New Look and Poundworld facing the pinch of crippling debts, it seems like it’s only to be a matter of time before another well-known brand announces store closures.

Well, it turns out some of the problem could be down to retailers spending most of their time chasing unpaid bills from debtors.

In a recent survey by Liberis, 61% of retailers labelled aged debt as one direct cause of halted growth. Unable to claim these unpaid invoices, how can retailers reach their full potential?

Here are five real-life examples from the Liberis survey which show how aged debt has negatively affected retailers, with actionable steps to ensure this doesn’t happen to you too.

  1. “We are unable to hold stock”

Businesses need in-house stock to survive, however ordering stock becomes an issue when the customer fails to pay. Not only has this left a business without a profit, but they are now left with stock they’re unable to store or shift.

For retailers, stock is one of the most significant expenses. But finding a balance between the costs and benefits of holding stock is crucial.

Always keep in mind that:

  • Too much stock equals extra expense as it can lead to a shortfall in your cash flow and incur excess storage costs
  • Too little stock equals lost income from fewer sales and also undermines customer confidence from false advertising
  • The wrong stock means lost income from lost sales, write-downs and poor customer service

Finding the best supplier for your business can help reduce stock levels. Your supplier could hold onto stock for you or even ship it directly to customers on your behalf. Suppliers who offer agreeable payment terms, such as 30 days credit (or more in some circumstances) means you won’t have to keep cash flow tied up in your stock.

However, if the worst should happen and your customer fails to pay, then you need to have a clear debt recovery process in place, which you can read about here.

  1. “It has stopped me from investing in new equipment”

Online shopping is often blamed for putting a huge strain on bricks-and-mortar businesses. Consumer demand for innovative shopping experiences is increasing – something the online world has catered for. Whether it’s through next day delivery or simply saving our payment details, consumers want experiences rather than just products.

Despite this, 85% of consumers still prefer to shop in physical stores rather than online, so it’s clear that our high street isn’t dead, it just needs re-inventing.

However, as so many retailers are faced with aged debt, their chances of remaining innovative are slim. According to the Liberis survey, 23% of retailers are having to take out loans to bridge cash flow gaps caused by unpaid invoices. Without the cash flow to invest, retailers are often not able to realise their ideas.

Let’s take a look at how Zara is transforming the way we shop in-store.

Zara, the popular Spanish fashion retailer, is currently making waves in the industry after becoming the first to introduce augmented reality (AR) into its stores as part of efforts to engage with millennials and increase footfall.

The technology brings traditional shop mannequins and window displays to life through a virtual fashion show, featuring its latest looks on international models – all through an app on its customers’ mobile devices. The app also features options for customers to click and buy clothes online in a bid to connect offline and online shopping.

In a press release, Zara explained “The app features a tool for sharing the experience on social media, encouraging users to take and submit photos of the holograms, establishing a virtual connection that appears remarkably real”. The experience ran for a two-week trial period in April 2018, though the plan is to roll it out fully.

  1. “Less cash flow to invest in my business’ future”

Competition in the retail industry is fierce, making the need to invest and remain innovative crucial. However, 43,000 retailers last year were in financial distress, so it’s clear cash flow is limited.

The Liberis survey supported this, with 30% of retail respondents saying they are currently owed over £20,000.

It’s not just small retailers who are facing a financial crisis from their debtors. Several multi-national suppliers have been left with mounting debts after their customers have fallen into administration – most recently Toys ‘R’ Us, the corporate giant of children’s toys.

With all its 105 UK stores now liquidated and their 735 US stores following the same fate, Toys ‘R’ Us have left its suppliers £23.7m out of pocket, with Mattel (manufacturers of Barbie) owed an excess of $135m (£101m) – more than any other.

Based on Toys ‘R’ Us’ website, its suppliers, including Mattel, are unlikely to receive payment for their outstanding invoices anytime soon:

“Any balances outstanding as at 28 February 2018, the date of appointment of the Administrators, will rank as an unsecured claim against the Company. Please be aware that on the basis of information available, you are unlikely to receive any payment in relation to your claim.”

In an interview with  Reuters UK, Isaac Larian, chief executive of Bratz dolls maker MGA Entertainment, said, “We have a $14-$15m (£10-£11m) payment due that hasn’t been paid. If I was a guessing man, I wouldn’t think I’d get all of it back.”

For retailers who need to gain a competitive advantage to stay profitable in a crowded market, the chances of investing in their business’ future are looking slim, simply because their debtors are failing to pay up.

Fortunately, not all is lost. There are ways businesses can plug cash flow issues. For example, seeking short-term finance can fill gaps in cash flow.

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high street

 

Traditional retail thinking isn’t working: It’s time to change now or shut up shop

Without an essential shift in mind-set and financial expectation, the prospects for the long-term landmarks on the British high street will remain dire.

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  1. “It has prevented me from releasing capital to open new outlets”

Opening new outlets is every retailer’s dream, but without the capital behind them, many retailers are wary of opening another store to grow their presence.

Even after retailers have carried out their market research and know that their offering will fulfil the needs of customers in a certain location, retailers are still unable to make that step.

The BBC recently reported that the rate of new high street stores opening is at the lowest level in seven years, with fashion and general clothing being the highest number of shop closures by business type.

One of the main reasons for less new stores opening? Yes, you’ve guessed it, the burden of high debt. If retailers are struggling to pay their own bills due to late payers and cash flow issues, opening a new outlet will is likely to be furthest from the business owner’s mind.

Before opening a new store or if you’re moving locations, ensure that you take into account the business rates as well as carrying out thorough market research. This will show you whether the venture will be viable before you make any rash decisions. 

  1. “Aged debt has had a negative effect on my business and has hampered the success of my business”

Let’s face it, achieving success is a shared goal for all businesses, but debt will inevitably put the brakes on this, especially if you’re waiting on payments. How can you invest money back into your business if it simply isn’t there?

It also appears that retailers are struggling to find the time to focus on ensuring their business’ success, with the Liberis’ survey discovering that 63% of retailers are spending up to 3 days a month chasing late payments.

This suggests that the impact of aged debt is hampering the success of retailers.

Prior to its closure, Mattel (manufacturers of Barbie) were Toys ‘R’ Us’ second-largest supplier, accounting for 11% of its global sales. However, Mattel started to feel the strain of Toys ‘R’ Us’ closure a mere six months afterwards, with its shares falling more than 2%.

With so many small and independent retailers struggling with the effects of aged debt, it’s time they acted now and learned something from the corporate giants who are facing liquidation.

However, it’s evident smaller business owners haven’t implemented proper procedures for chasing unpaid bills, with 40% of respondents in the Liberis survey revealing they don’t have a clear debt recovery process in-place. If small retailers don’t adapt soon, they risk following the same fate.

Rafferty Gifford is a digital marketing specialist at Liberis, an alternative finance provider specialising in small business lending

Read more about the issues affecting high street retailers in 2018:

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