Retail SMBs: Managing returns, credits & cash flow in the new year

Published Thursday 2 July 2026

Table of contents

• What is retail cash flow and why the new year matters
• How returns and store credits affect cash flow
• What to forecast weekly in January and February
• How to improve retail cash flow quickly
• Tools to track returns and cash
• Get ahead of cash flow with Xero
• FAQs on retail cash flow and returns

Key takeaways

• Refunds and gift card redemptions can make the beginning of the year busy, but these transactions don't bring in any cash. Surviving the slow season requires strategic cash flow management.
• To protect your cash reserves, pull back on ordering inventory, negotiate better terms with suppliers, shift from refunds to store credits, and cut unnecessary expenses to make sure you can cover the essentials.
• Use accounting software to keep an eye on the numbers so you know what to expect: track gift cards as liabilities, run cash flow forecasts, and calculate exactly how long your cash will last.

What is retail cash flow and why the new year matters

Retail cash flow management is the process of tracking and controlling the money coming into and going out of your retail business. When cash inflows exceed outflows, you have positive cash flow; when outflows exceed inflows, you have negative cash flow that can put your business at risk.

You need to manage cash flow carefully to make sure you have ample reserves to cover your bills. That's hard for all businesses, but it's especially challenging for retailers during the new year.

Most retailers see their highest sales in November and December, as people shop for the holidays, while January, February, and March tend to be the slowest months. Cutting back on staff helps keep costs down during Q1, but you can't always cut hours right away as January typically tends to be labor-intensive due to returns and gift card redemptions.

Plus, you've got to keep on top of overhead costs and make sure you're stocked and ready for the springtime rush. This reality creates unique challenges with retail cash flow management, but the right strategy can get you through.

Want to learn more? The Small Business Administration has resources on small business accounting and financial literacy.

How returns and store credits affect cash flow

Post-holiday returns directly reduce your available cash if you issue refunds, while store credits preserve cash on hand but create a liability you'll need to track. Understanding how each option affects your bottom line helps you make smarter decisions during the busy return season.

Returns are very common at the beginning of the year, and they can drain your cash reserves if you're not careful. According to the National Retail Federation, retailers estimate that 15.8% of annual sales are returned, totaling nearly $850 billion in merchandise. Issuing store credit instead of refunding cash can help to preserve your cash, but if you do that, you need to track the credits carefully, along with gift cards.

Refunds vs store credits

If a customer returns an item, you can refund it or give them store credit. Here's what to consider.

• Refund: instant drop in cash but no need to manage a liability or deal with a future sale. They return the item. You return their money. It's done.
• Store credit: preserves cash on hand, but requires more work. You process the return and issue the credit. Then, you create a liability account in your accounting system to track the credit. Eventually, you handle another sale and give up inventory when the customer redeems the credit.

Gift cards and liabilities

Gift cards and store credits have similar impacts on cash flow, and you account for them the same way in your records.

• Increase in cash: cash payment when you sell a gift card or inventory (even if the item is eventually going to be returned).
• Liability created: when you issue a gift card or when someone gets store credit for a return, you now owe them money.
• Liability paid: you clear the liability when the customer redeems the gift card or store credit.

With both gift cards and returns for credit, you get the cash right away, but you don't incur all of the expenses right away. You must pay staff to redeem the gift card or the store credit, and of course, you must pay for the inventory that the customer buys with the gift card or credit.

What to forecast weekly in January and February

Cash flow forecasting is a balancing act, and the new year is the toughest part. To thrive in January and February, use your retail accounting software for weekly forecasts and watch these metrics.

Cash conversion cycle

The cash conversion cycle (CCC) measures how long it takes your store to turn inventory into cash. A lower CCC means you're converting inventory to cash faster.

CCC = days inventory outstanding (DIO) + days sales outstanding (DSO) + days payable outstanding (DPO)

Most brick-and-mortar retailers collect money from customers on the day of the sale, meaning their DSO is 0. But you'll need this number if you invoice customers and receive delayed payments.

CCC typically gets higher during the new year or any other time when sales are slow. Shoot for the lowest number possible; a lower number is better, and retail businesses often operate under 30 days. Track CCC throughout the year so you know what to expect when sales drop during the new year. Consider calculating CCC for different types of inventory, so you can focus on your fastest sellers when reordering.

Return rate and refund ratio

Return rate is the percentage of sales that get returned, while refund ratio is the percentage of those returns that result in cash refunds rather than store credits. For context, the NRF reports that 19.3% of online sales are expected to be returned, compared to a lower rate for in-store purchases.

return ratio = returns / sales * 100

refund ratio = refunds / sales * 100

Track these numbers annually so you know what to anticipate at the beginning of the year. Then, make sure you have enough cash on hand to cover refunds.

Weeks of cash on hand

Weeks of cash on hand measures how many weeks you can pay the bills based on your current cash levels. It's a particularly important metric to know at the beginning of the year when you may just break even or lose money.

weeks of cash on hand = current assets / weekly cash outflow

But keep in mind current assets include inventory. To check how long your cash will last, without making any sales, only include your cash and cash equivalents, not all of your current assets.

Gross margin after returns

Gross profit margin shows you which portion of your revenue is gross profit, and it always takes returns into account.

gross margin = (net sales - cost of goods sold) / net sales * 100

If your gross margin is 75%, for example, that means you use 25% of revenue to buy inventory, and the rest is available to cover expenses. If you earn $10,000 in revenue, you have $7,500 available for expenses.

Keep in mind that gross margin only takes into account the money you spend on inventory (also known as cost of goods sold), not other expenses. To figure out which portion of your sales are profits, after all operating expenses, interest, depreciation, and taxes, you need to look at your net profit margin.

How to improve retail cash flow quickly

Improving cash flow is always tricky, but if you need quick strategies to boost cash on hand at the beginning of the year, consider these approaches.

• Turn old inventory into cash. Offer discounts to move old inventory, even if it means selling at a loss.
• Try bundling. Bundle slowly moving inventory with top sellers to boost sales.
• Train employees to upsell. A few well-timed suggestions can drive sales.
• Cut expenses. Limit employee hours, cut back on ordering inventory, ask vendors for more time to pay, and find other ways to reduce costs.
• Review prices. Look carefully at where you can increase prices to boost profit margins and where you should lower prices to accelerate sales.
• Negotiate payment terms. Extend your accounts payable deadlines with suppliers while tightening accounts receivable terms to collect from customers faster. Even small shifts in payment timing can free up cash.
• Track numbers for each sales channel. If you have multiple retail locations or use both online and in-person sales, track the numbers separately for each sales channel. Then, focus on the techniques that work best for each one. For example, you might want to use different prices, promotions, or cost-cutting strategies at each location or channel.

But sometimes, you can't boost cash flow enough on your own. You may need to use a loan or line of credit to get through the slow months. The SBA has resources on small business loans and other funding programs.

Tools to track returns and cash

You don't need anything special to track returns and cash, but you do need to track them. Most modern point-of-sale (POS) software handles returns easily, even at the most basic service levels. Store credits and gift cards are also easy to generate and track, but may only be available with higher service or subscription levels.

Once you get your POS set up, sync it to your accounting software. Then, you can generate real-time reports on sales, refunds, returns, store credits, and more.

Get ahead of cash flow with Xero

When you think of accounting software, you might just think of a basic tool that tracks income and expenses, but Xero goes way beyond that. It gives you insights to help you track cash flow and make smart decisions all year long.

Sync Xero to your POS for streamlined reporting of returns, refunds, and gift cards. Then, use Xero to generate cash flow forecasts and track important metrics so you can plan for the beginning of the year and any other slow months.

The busy seasons are great, but the right software can help you thrive during the slow seasons as well. Rather than struggling through the beginning of the year, use that time to relax, reset, and make a plan for the busy months. Get one month free.

FAQs on retail cash flow and returns

Here are answers to common questions about managing retail cash flow and handling returns.

How do gift cards impact cash flow?

Gift cards increase your cash on hand when sold but create expenses for inventory and labor when redeemed. Selling and redeeming gift cards has the same effect on your bottom line as making any other type of sale, but the cash flow is timed differently. You get the cash before you give up inventory, so you need to manage it carefully.

Do processors always return fees on refunds?

No, most payment processors don't refund processing fees on refunds. Check with your payment processor for their policy, and keep this cost in mind when setting your refund policies. For example, if a customer charges $200 and your processor charges 3%, you pay a fee of $6. If the customer returns the item, they get a $200 credit, but you don't get the $6 back.

How do returns affect sales tax?

You should refund the sales tax the customer paid when accepting a return. Then, check your state's rules to see how to report the refund on your sales tax return. If the sale and refund happened during the same reporting period, you may just need to reduce the taxable sales on your return. Otherwise, you may need to amend a previously filed return to get a refund of the sales tax you paid.

What is a good cash reserve for retail?

Aim for enough to cover 3 to 6 months of expenses. That way, even if sales drop, you know you have enough cash on hand to cover payroll, operating expenses, and inventory. However, the right strategy also depends on your specific business; seasonal retailers may need to keep more cash on hand to get through slow seasons. If you have high-interest loans or credit cards, you may want to reduce your cash reserves to limit your interest expenses.

How do I reduce chargebacks after the holidays?

Start by contacting your payment processor about its anti-fraud technology. Use the most up-to-date payment processing tools; for example, dipping a chip card has lower fraud risk than swiping a strip. Also, update software regularly. If selling online, use 2-factor authentication to minimize chargebacks on card-not-present transactions. To reduce "friendly fraud" (when customers dispute legitimate transactions), track shipments and post clear return policies. Dispute chargebacks if you disagree.