Nearly all independent retailers struggle with the same issues. They need to generate a reliable stream of cash flow. Plus, they need to do it by building an inventory that meets their customers' needs while providing a reasonable margin. Therein, lies a set of challenges that can thwart, frustrate, and confuse even the most dedicated store owners.

Many local merchants are watching their monthly revenue numbers drop and wondering how they'll survive during the coming year. Given the state of the economy, their concern is understandable, especially if they're extended on their credit lines. In this setting, it's worth noting the success of consignment shops. Though their business model is different, their success depends on the same retailing rules followed by small store owners.

Below, I'll explain how consignment shops operate and why small retailers should watch them. There are important lessons to be learned which can make the difference between your store barely surviving and thriving over the next several months.

Overview Of How They Work

The main difference between a consignment shop and a conventional retail store is that the former's owner rarely assumes ownership of the merchandise. In most cases, a person will bring something they own and offer to split the sales price with the store's owner. Because he does not take ownership of the items, his store's finances work differently than a conventional retailer's finances.

For example, a consignment shop owner will seldom have money invested in his inventory. That means he doesn't need to arrange credit lines or other types of financing to buy assortments. When an item sells, the owner splits the proceeds with the consigner; usually, the agreed upon split is 50%/50%.

The Key To Generating Cash Flow

The arrangement between a consigner and the consignment shop guarantees the merchant will generate a 50% margin on every item within his store. Like a small retailer, his goal is to maximize his sales. He does this by identifying the optimal balance between the price of an item and how quickly it moves. If he can properly identify the right balance, he'll increase the productive sales that each square foot of his floor generates.

This is not unlike the objective of a conventional independent retailer. Price and turnover are inextricably connected. The right balance can help move an item quickly, generating cash flow in the process.

Fulfilling A Broker's Role

A consignment shop owner plays the same role as a small retailer: he is a broker. He functions as a screen between consigners and customers. He must choose his inventory carefully in order to generate as many sales as possible per square foot. If he chooses poorly, his sales will suffer.

The same is true for local retail merchants. Floor space and cash flow are limited. It's impossible to carry every assortment offered by vendors, so the merchant must choose which products are most likely to sell at a given margin. An added problem is that a poor decision will saddle him with inventory in which he has invested his limited cash flow.

Building A Tightly-Focused Inventory

The most successful consignment shops are those whose owners carefully build their inventories around certain assortment categories. They are extremely selective in the products they accept from consigners. That allows them to leverage each visit. Customers who are interested in a product within a given category are likely to be interested in other products within that same category. That increases the average number of items purchased per visit, which helps maximize sales per square foot.

Small retailers can learn valuable lessons by observing the model set by successful consignment shops. As retail sales continue to struggle, their example may hold the key to a profitable year.