Cash Flow Challenge 2026
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Rising costs will require defined strategies in 2026 to maintain margins, cash flow productivity, and company health.
Since COVID, the furniture industry has become accustomed to constantly increasing costs of goods sold, resulting from rising raw material, freight, manufacturing labor costs and tariffs. It’s affecting both domestically and internationally sourced goods. Because of this, home goods retailers need to be extra vigilant in managing these costs to preserve proper cash flow productivity to keep their organizations healthy.
Why Cash Flow Matters More Than Ever
Inventory Spikes: For most home furnishings operations, inventory is by far the biggest current asset on their balance sheets. Yet, despite being classified as “current,” inventory is not truly liquid. If inventory spikes but sales fail to increase enough to cover, cash flow suffers. Likewise, if the cost of goods rises and gross margins shrink, profitability declines. Unless there’s a simultaneous and significant increase in volume — which is unlikely — cash flow will tighten.
Cost Spikes: That’s why managing costs, pricing, and inventory with precision will be critical in 2026. When costs increase across the board, the first and most immediate impact is a decrease in cash flow. Retailers may argue, “We’ll just raise our prices by the same amount as the increase.” That sounds good in theory, but, in practice, retailers pay for inventory long before it sells. Except for online retailers that do 100% special-order business and don’t carry showroom inventory, cash flow dips whenever costs rise.
Increasing Margins: To recover the decrease in cash, retailers must not only increase margins to cover higher costs but also enough to offset the time lag between supplier payments and customer sales. During COVID, this wasn’t as noticeable because the shift in consumer demand created a temporary cushion. Sales increased significantly during this period, offsetting higher inventory costs in most cases. But as the stay-at-home economy faded and demand retreated, costs continued to climb. Cash flow turned negative, leaving many retailers with more inventory at higher costs and lower sales volumes.
"Retailers must not only increase margins to cover higher costs but also enough to offset the time lag between supplier payments and customer sales."
A Familiar Dynamic: Today, with international inventory taxes (tariffs) and domestic wage pressures, costs have been pushed higher. Without a clear sign of a demand upswing, the same dynamic is reemerging. Unless interest rates drop and housing activity rebounds — which could boost furniture demand — retailers must proactively protect cash flow and profitability.
“Retailers could benefit from a new metric to help them understand and control the levers that influence businesses, beyond just base-level and advertising traffic."
Strategies to Reduce the Impact of Rising Costs
There are many ways to mitigate the adverse effects of increasing inventory costs. Most of them point back to the fundamentals of effective inventory management, but they require renewed discipline and analytical focus.
Reduce Risk. Be Cautious with New, Untested Merchandise: When inventory costs are expected to rise, it’s not the time to take big risks on unproven items. Focus buying on best sellers and proven performers — products that turn quickly and can be replenished with short lead times. Reduce or eliminate non-productive SKUs on the floor. When these slow items sell, consider delaying their replacement. If the cost per SKU is rising, you may need to have fewer SKUs overall to maintain the same total showroom investment.
Watch Price Points. Tighten Your Warehouse Inventory: Apply the same inventory management-thinking to your warehouse. Stock only your best sellers — the items that consistently produce the lion’s share of gross margin dollars, typically 20% of your SKU base. Limit quantities of back-up untested merchandise, especially items not displayed on the floor. Even with the best sellers, avoid going too deep unless you are able to negotiate volume discounts that genuinely lower your landed cost.
Pay close attention to your price points. If a top-selling item’s cost increases significantly, pushing it out of favor with customers due to price point changes, be prepared to substitute comparable styles or categories at more acceptable consumer price levels.
“Retailers could benefit from a new metric to help them understand and control the levers that influence businesses, beyond just base-level and advertising traffic."
Price Special Orders for Profit & Collect Payment Upfront: Special orders and relevant value-added design services should always carry strong margins. To protect cash flow, collect full or substantial payment at the time of sale. That up-front cash helps offset the drag caused by higher inventory costs and longer lead times.
Re-Evaluate Private Label and Vendor Strategy: Retailers selling branded products with weak consumer pull should consider replacing them with non-branded or private-label alternatives. In today’s environment, sourcing private label goods has never been easier. AI technology, design software, and global manufacturing allow retailers to potentially develop exclusive product lines that meet their target price points and margins. Private label and exclusivity not only enhance profitability but also protect against competitors driving prices down on comparable SKUs.
Maintain Exclusivity in Your Lineup: Home furnishings retailers cannot sustain profitability when costs increase, and competitive forces necessitate matching lower prices. Whenever possible, secure exclusive products or lines for your market area. Exclusivity protects margins, reduces price-shopping friction, and supports salesperson confidence. It’s an effective hedge against rising costs and downward pricing pressure.
Avoid Implementing Across-the-Board Price Increases: When vendors announce a 10% or 20% increase, don’t simply mark up all retail prices by the same percentage. Across-the-board increases can backfire. Some items will move into price ranges that make them less appealing, while others may have room for greater flexibility.
Instead, perform a price-point analysis. Review each category and SKU individually. Ask: Where does this item fit within our price lineup? What will likely happen to its competitiveness and value perception at the new price? Sometimes, raising a price slightly — or not at all — makes better strategic sense than a flat percentage adjustment.
Understand the Real Math of Inventory Tax/Tariff and Cost Increases: Here’s a potential mistake: Simply “passing on” the tax or tariff or “adding it to the price” may not produce the gross margin percentage that you expect and require.
For example, adding $200 to the sales price of an item when a vendor increases their cost by $200 doesn’t make sense. If the former cost was $1,000 and the retail price was $2,000, the margin is 50% ($2,000 – $1,000) /$2,000.
Let’s say their cost increases by 20% to $1,200. If $200 is added to the retail sales price, the new margin drops to roughly 45% ($2,200 – $1,200) / $2,000. That’s a 500-basis-point decline. A 5% margin loss is huge. Many retailers only earn around a 5% net bottom line. Losing that margin across all inventory could be catastrophic.
Instead, price your new cost to maintain the same target margin. Treat cost increases (including added tariff costs) as you would any other part of your cost of goods increases. To keep a 50% margin, the correct new price point in the above example would be $1200/50%, approximately $2,399. Anything less will erode profitability and, ultimately, cash flow.
“Retailers could benefit from a new metric to help them understand and control the levers that influence businesses, beyond just base-level and advertising traffic."
Increase Your Investment in Analytical Capabilities: The time to rely on gut feel has passed. Increasing inventory costs demand detailed, data-driven decision-making. Allocate people and technology resources to analyze inventory by vendor, category, and SKU. Evaluate what your salespeople are actually selling, where margin erosion is happening, and how costs are shifting across your product mix.
Technology that integrates sales performance with cost and margin tracking — whether internal systems or advanced ERP & CRM analytics — helps you react quickly to cost changes and preserve profitability.
Pulling It All Together
To sum up: be extra vigilant. The home furnishings business is capital-intensive, and inventory is where most of that capital lives. Rising costs, if unmanaged, quietly drain cash flow even when sales appear steady. Protecting your operation means:
- Buying smarter and safer, focused on best sellers.
- Maintaining tighter control of the showroom and warehouse inventory.
- Pricing with surgical precision rather than broad strokes.
- Ensuring margins — not just sales — remain strong.
- Leveraging data and analytical insight to guide every major inventory decision.
Retailers who pay close attention now — who analyze, adjust, and act early — will weather rising costs far better than those who rely on blanket price increases or outdated buying habits.
When you price, buy, and manage with precision, you don’t just protect cash flow — you strengthen the foundation of profitability for your entire business.
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See initially published articles by David at Furniture World