Toys “R” Us was my favorite store as a kid. Of course, many would argue that I am still a kid.
Either way, it was like walking into a fever dream. Bright lights, flashy colors, and toys from floor to ceiling. They were the undisputed king of the toy retail industry. 1600+ stores and billions in revenue.
But that crown eventually toppled from ceiling to floor.
A downfall best observed as a lesson in how mismanaged cashflow can crush a profitable enterprise. It started with a big chunk of debt. In 2005, Toys “R” Us was bought out by private equity firms who borrowed $5 Billion to make the purchase. A lot of their cash flow started going to heavy interest payments on these new owners’ debt.
Cash flow is the money a business has on hand to spend.
Profits are the bottom-line money a business earned, but not necessarily available to spend. Say, for example, you just finished a $1M contract and the client has 60 days to make the final payments. If you have rent to pay in those 60 days but no cash on hand you have great profit, but serious cash flow problems.
This is where Toys “R” Us went wrong; debt was eating their cash.
On top of that, toy retail is a very seasonal business. It booms during the holidays and is pretty slow the rest of the year. A lot of profits, by the time you’re done counting, but also a lot of time during the year when no new cash is coming in. Times when you still need to pay rent, manage warehouses, pay employees. See where this is going?
Enter Amazon, the king of eCommerce.
Toys “R” Us actually had a deal with Amazon in 2000 to build up a joint online toy store. It ended early with lawyers and courtrooms.
The problem for Toys “R” Us was that they relied on Amazon all the while and never built up their own online presence. After that, they were playing a high stakes game of catch-up.
Ultimately, Toys “R” Us couldn’t keep up and collapsed. Not due to a lack of profits, but because they couldn’t manage their cash wisely enough to sustain themselves in the off seasons.
Amazon, meanwhile, under Jeff Bezos’s bold emphasis on cash flow, reinvested every penny into the business. Buying warehouses, expanding operations, and building large delivery networks.
Amazon didn’t close a year with a profit until 2003, almost 10 years into the business! Yet they had tons of cash coming in from investors and sales. This allowed them to create a cycle of growth and turn into the beast they are today.
So, in the end, cash flow and profits are both extremely important for a business. But it is cash flow that will give you the runway to become profitable and to sustain that profitability.
Manage your cash flow wisely, and make sure you’ve got cash set aside for when your business might need it most.
