Editor’s Note: This post was originally published in February 2017 and has been revamped and updated for accuracy and comprehensiveness.
Cash flow is a measure of your business’s liquidity and ability to pay its debts from sales revenue. Cash flow management can be one of the most challenging aspects of being an online business owner. Your business can be profitable but still have a negative cash flow because profit calculation takes into account assets like inventory that you can’t use to pay bills.
E-commerce businesses have an edge in cash flow management by virtue of the immediacy of the transaction, but that doesn’t mean online retailers are immune to cash flow problems. The customer has to pay you before you ship the item, so that means you don’t have to deal with an accounts receivables ledger full of aging accounts. But you still have operating expenses that can deplete your bank account, and you might end up having a lot of cash tied up in inventory before being sold. Fortunately, there are some things you can do to smooth out the turbulence and keep your cash flow – and your business – on an even keel. Read on to see our cash flow management tips to keep your eCommerce business sailing smoothly.
If your inventory is sitting on the shelf for more than 30 days, you have too much. You can’t afford to have that much cash tied up doing nothing. Use stock-keeping units (SKUs) to track the sell-through rate for each item in your inventory. The sell-through rate is the ratio of inventory sold during the month to new inventory added. If you see that an item’s sell-through rate is too low, you need to dig deeper and find out why. Are you producing too much of it? Is demand for it falling? Maybe some of the cash tied up in that product can be shifted to a more popular item that’s selling better, or it might even need to be discontinued. Don’t be lured in by bulk discount offers from suppliers unless you know for sure the item will move quickly. The right inventory management software can help you make sense of what is going, out, coming in, and just sitting there.
Get Creative with Sales
At the risk of stating the obvious, one of the best ways to keep a positively manage cash flow is to get more sales from your eCommerce business. The big question, though, is how to do that. What’s the best way to drive traffic to your site and increase the conversion rate of your visitors, and maybe even do a little upselling in the process? Here are a few ideas you can try for driving website sales.
- Offer free shipping on larger orders to encourage bigger quantities
- Create a loyalty program for repeat customers
- Offer Buy One, Get One (BOGO) on items with a high margin
- Bundle high-margin products with best-selling products
- Cross-sell by offering related add-ons at check-out
- Offer a recurring purchase option for consumable products
- Offer incentives to “abandoned cart” visitors
- Use a human or automated chatbot to engage with visitors
- Implement a Search Engine Optimization (SEO) strategy to improve your site’s rank in search results.
If each of these strategies can increase your site’s average order by just 1 or 2%, that can quickly add up to 10% or more extra revenue coming into your bank account to help ease the cash flow. If you do go the free shipping route, make sure to read our tips on how to reduce shipping costs.
Manage Your Payables
The other side of cash flow management is what’s going out to your accounts payable. You need to maximize the amount of time the cash stays in your bank account instead of going to your suppliers. When you set up contracts with suppliers, try to negotiate the terms. Standard terms will typically be 30 days, but some suppliers may be willing to go as far out as 60 or 90 days if you ask. Whatever the terms are, you should generally wait until the end of the term to make the payment so you can hang onto the cash as long as possible. Watch out for late fees, though. However, if your supplier offers discounts for early payment, they may be worth taking advantage of.
Consider an Inventory Loan
If you’ve done your best but still find yourself in a cash crunch and need to restock inventory, an inventory loan may be an easier option than a traditional bank loan. Lenders will look at more than just your credit history and will take into account your sales history and the stability of your business. Inventory loans can be either lump-sum loans or lines of credit with the bank that you can use over time. You won’t be able to finance the entire cost of your inventory, but you can expect to be able to cover around 50% of the cost through a loan.
Managing your cash flow wisely can be the difference between success and failure for your eCommerce business, even if you’re showing a profit on the books. Xendoo’s suite of products and bookkeeping services for small businesses can help you know exactly where your money is going so that you can manage it more effectively.