Cash margin looks at the net change in your bank account. Here’s what you as a retailer can learn about your business from it.
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Cash margin and gross margin: What’s the difference?
Every point-of-sale system on Earth gives you gross margin, right? What you sold in relation to the cost of the item that you sold. But cash margin looks at the net change in your bank account. Think of it this way: a customer comes into your store and buys something for $100, and you paid the vendor $50 for that item. Every point-of-sale system will say the gross margin is $50 and that’s correct, but what if you only sold one of those items but bought 30 from the vendor? From a cash margin perspective, you would be upside down $1,450.
Is your bank account growing or running out of cash?
The concept of cash margin is what you sell at retail minus what you received at cost. That’s the net change in cash.
Cash margin close to gross margin is best.
Think about the math as you think about your inventory, your sales, and your profitability:
If your cash margin as a percentage is close to your gross margin: Great job! You are doing great! You’re doing what you should be doing.
If your cash margin is lower than your gross margin: You overbought. You’ve spent more on inventory, and you’re not getting your cash out.
If your cash margin is higher than your gross margin: You’re selling off old inventory. Sometimes that’s a good thing: you want to sell off old inventory if you have too much of it. But if you do too much of it, customers are buying last year’s goods. Imagine how much more sales you could get if they were buying current, fresh, wonderful retail inventory!
