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Misti Mussatto and her husband Gary own Toy Jungle and Toybox, Vancouver-area independent shops with a big stake in the holiday season.

Ben Nelms/The Globe and Mail

Misti Mussatto is making her stock list, checking it twice – and hoping it has the right mix of toys for this holiday season.

The co-founder of Toy Jungle and Toybox, two Vancouver-area independent shops, hopes that her stores will be go-to stops for children compiling their wish lists for Saint Nick – not to mention weary parents trying to find the hottest gifts.

For a small to medium-sized retailer such as Ms. Mussatto – whose stores will generate much of their $2-million in annual revenue over the holidays striking the right balance between the season's hottest sellers and traditional items can be as much art as science. Miss the mark and it can spell doom for a store's bottom line.

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"In our 18 years in business, it's a question we've been working hard to come up with better answers to," Ms. Mussatto concedes.

An even more pertinent question for independent retailers is how to make sure their often limited cash flow can deliver the inventory that customers want, while ensuring strong return on investment by the end of the year.

Those critical decisions are often made in the face of overwhelming competition from Amazon.com, Wal-Mart, Indigo Books & Music and other large-scale retailers – both online and off – that have the industry clout and deep pockets to acquire large quantities of the year's must-have items.

"The biggest challenge we see in our industry is that every year some toys become hot because they're well-advertised," Ms. Mussatto explains. "But the big companies don't always ship to us first. So if they're short on something, Wal-Mart and Toys "R" Us will get it all, or we won't get it at a competitive price."

It's a scenario that plays out across retail categories, from toys to electronics to apparel. The larger competitors also have the capital to restock inventory or pivot and introduce new items if their preholiday product-picking gambit falls flat – all while obtaining more favourable payment terms from suppliers.

Indeed, managing cash flow is just as important as carrying the right merchandise at this time of year. This is where smaller players need to think creatively, says Ken Morris, principal at the Boston-based retail consulting firm Boston Retail Partners LLC.

"Small retailers have something their competition doesn't: the theatre of the shopping experience," explains Mr. Morris. "You can't compete by selling brand-name merchandise that people can buy anywhere."

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Instead, smaller operators should stock unique products or focus on high-touch customer service as a differentiator, says Mr. Morris. They should stock merchandise so they can satisfy demand for colours, sizes and the varied preferences of a retailer's often diverse customer profile.

In the toy business, for example, sales are often driven by the top 10 most popular items, which are usually stocked by big-box stores. To overcome that challenge, Ms. Mussatto developed a top 10 list chosen by her young customers via online voting throughout the year. One lucky child wins a prize each month for his or her submission.

In essence, Toy Jungle fuels its own product demand with the help of its pint-sized clientele, at the same time creating a more immersive online and offline experience.

Ms. Mussatto is also careful to consult with suppliers for their take on the year's hot sellers. That's critical, says Maureen Atkinson, a senior partner with J.C. Williams Group, a Toronto-based retail consultancy.

"The problem with asking customers what they think they're going to want is that they don't really know," she says. "It's important to look for suppliers you can really depend on for good information, not just to push their goods, but somebody who has the experience and can help you sort through whether products will really sell."

Securing the right items still requires adequate cash flow, however.

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As Ms. Atkinson notes, retailers need to build relationships with their suppliers to secure favourable payment terms – often 60 to 90 days – to help them build cash flow, while considering other tools such as inventory financing, a tactic that allows retailers to leverage purchased inventory to provide cash flow.

Some store owners rely on more traditional methods.

Paula Conning, the owner of Clerksons Home Store Ltd., in Collingwood, Ont., about two hours north of Toronto, uses a bank line of credit and a credit card to purchase inventory once she researches popular furniture and home accessory trends for the season.

"This year we're stocking about $30,000 more in inventory over last year to prepare for extra Christmas business," she says. "I like to buy [stock] with my Visa card upfront because that makes my vendors happy. You can sometimes get a 5-per-cent discount if you do that, or take 90 days to pay."

Ms. Conning says maintaining strong business relationships with her suppliers – in part by paying them promptly – has helped her secure balance-sheet-boosting terms since she first purchased Clerksons with her husband in 2013.

She also offers unique merchandise and has an interior designer on staff who can help customers select furniture or decor for their homes or those of loved ones.

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This personal touch helps differentiate her store from big-box competitors. It also delivers strong sales and helps move inventory in a season when wallets open and generosity can trump financial prudence.

"People forget their budgets and buy what they want to buy [at Christmas]," she says. "It's a terrible time to run out of things that customers want."

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