How Small Businesses Manage Cash Flow Amid Fewer Vendor Visits
October 23, 2024 - Megan Borders
Nanostores, or small, traditional, family-owned stores, are the largest retail channel worldwide. According to Albuquerque’s Economic Development Plan, small businesses play an important role in the local economy. Old Town alone is home to over 150 small businesses.
Are you a small business owner who works with suppliers for inventory purchases or perhaps a supplier for these small businesses?
UNM Anderson School of Management Assistant Professor Sebastian Villa, in collaboration with Professor Rafael Escamilla (from Arizona State University) and Jan Fransoo (from Tilburg University), has researched how nanostore owners make purchasing decisions. He offers a suggestion to optimize nanostores’ cash flow, which can benefit both store owners and suppliers.
Nanostore owners face tough decisions each day about how to manage their immediate cash flow. They must balance demand between buying products for their customers to ensure happy returning customers and keeping enough cash on hand for their families’ financial needs.
Villa’s 2024 research article, “Supplying Cash-Constrained Retailers: Understanding Shopkeeper Behavior at the Bottom of the Pyramid,” published in the Manufacturing and Service Operations Management journal, examines the relationship between supplier and business owner to help maximize each side's benefits.
He shares that “the research can apply to many small businesses that sell small products to customers, such as souvenir shops and small liquor stores, to those selling hygiene items like shampoo and soap, as well as food items like milk, yogurt and crackers.”
Understanding Nanostore Operations
He completed a two-part study that looked at the number of supplier visits, a shop's available budget, and how each affected the shopkeeper’s decisions on ordering stock.
Villa used real-world data from a multinational corporate partner that supplies millions of nanostores in Latin America. The data included information from over 220,000 small stores across 39 distribution centers, which included more than 29 million transactions. He learned that suppliers visit nanostores typically one to two times per week, but these numbers can change without notice due to issues at the distribution center, like a growing customer base or new management decisions. He also considered that the suppliers sell many products at different profit margins.
By tracking changes in visit frequency over four years, Villa found that when suppliers reduced the number of visits, shop owners ordered 32% fewer products due to the uncertainty in supplier visits. Yet, when visits increased, orders went up by 47%.
In the second part of the study, he conducted two experiments in which his participants made purchasing decisions based on budget and supplier visits in an online business scenario mock-up over six seasons.
In the first experiment, he asked shop owner participants to decide how much to order based on a budget and varying visit frequencies with one supplier. He found that these participants would order less when visits decreased, regardless of whether they were buying high-margin or low-margin products. In the second experiment, he introduced a second supplier. He found that the participants shared their budget across both suppliers, even if focusing on one supplier made more financial sense.
By combining the two research methods, Villa confirmed his findings from the first study: He found a way to help small-business owners increase efficiency in their daily business decisions. This directly impacts their profits and immediate cash flow.
Suggestions for Suppliers of Small Business Owners
The key takeaway is that shopkeepers increase their purchases when suppliers visit more often. This strategy reduces restocking uncertainty. This encourages suppliers to visit low-budget stores more frequently, which also increases their sales.
“This study can help support hundreds of families in our country,” said Villa. “Many right here in Albuquerque. Our findings help small-business owners increase profits through more informed operational decisions, essentially helping them understand why they make certain choices. This can lead to increased profits and ultimately meet their families’ needs.”
Most studies on business operations have focused on large organizations that do not face cash limitations. Villa’s study is innovative because it highlights small businesses in a way that can benefit millions around the world and positively impact people’s lives.
Sebastian Villa is an assistant professor of at The University of New Mexico Anderson School of Management. His research focuses on nanostores and understanding how small business owners can better manage their inventory and the interactions with their suppliers to increase the nanostore’s profitability.
Anderson offers more than a dozen concentrations at the bachelor’s and master’s levels and is accredited by the Association to Advance Collegiate Schools of Business in the top 20% of business schools in the nation.