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If you’re thinking about starting an ecommerce business or are currently running one today, you need to think about how you’re going to manage your cash flow. It’s one of the most critical parts of growing a thriving business that doesn’t go bankrupt.
One of the main reasons most people go out of business is because of poor cash management. It’s not even necessarily because they aren’t making sales or even being profitable. The main reason is they run out of cash.
Here are some of the ways to maximize your cash strategy for your ecommerce business.
The best way to maximize cash is by not holding any inventory at all. That means you don’t tie up cash in a bunch of products that are sitting in a warehouse.
And the best way to do that is to use manufacturers or wholesalers that are willing to drop ship your products. Drop shipping is where a supplier will ship an order for one of their products for you, right when the order comes in.
Let’s say you list a flashlight on Amazon. A customer orders the item. Then a notification goes to your drop shipper, and they ship it directly to your customer. You never touch the product.
Not only does it keep you from having to run a warehousing operation, but you also don’t have to pay your supplier until you get paid by your customer.
One of the biggest costs you’ll have as an ecommerce entrepreneur is going to be software. You have a couple of options. You can build the software yourself, or you can subscribe to one of the many ecommerce platforms available.
If you build the software you need, you’re going to have to put down a ton of cash up front. You have to hire developers or consultants to build it for you. That takes a lot of money up front, and it will require you to pay for ongoing maintenance costs anyway.
If you look at things like Enterprise Magento pricing, for example, it really doesn’t cost that much to get started versus building something so robust from scratch.
The ecommerce platforms will also provide upgrades, tweaks, security patches, and other maintenance requirements automatically. You don’t have to pay for any of it. It’s included in your monthly pricing.
Renegotiate Payment Terms
If you don’t want to drop ship or the products you want to sell aren’t available for drop ship, you can renegotiate payment terms with your suppliers.
If you’re doing small orders on a place like Alibaba Express, you may have to pay cash for your orders. But if you find a direct supplier or are doing large volume orders, you may have the leverage to be able to get better payment terms.
Simply renegotiating from a net 30 to a net 60 payment term can make a huge impact on your cash flow. It gives you an extra 30 days to be able to sell your items, generate cash, and pay the vendor.
In addition to getting your suppliers to agree to better payment terms, you can also work on optimizing your inventory. The longer your inventory sits in your warehouse, the longer it’s tying up your cash.
This can be tricky, but if you look into your reports or analytics in your ecommerce platform, it should be able to tell you the velocity at which your products are selling. That way, if you know exactly when you’ll be running out of inventory, you can time it so you make the order to your supplier at the exact time where you’ll get the shipment you need to continue selling that product.
How Amazon and Walmart Masters Cash Flow
The greatest examples of this come from Amazon and Walmart. They are big enough retailers that they can optimize inventory management and cash flow, but even small ecommerce merchants can take some lessons on how they do it.
Let’s say Walmart buys a shipment of diapers. The negotiate terms with the supplier require payment in 90 days. They can do that because they’re Walmart.
They put the diapers on the shelves, and they sell out of that shipment in 30 days. Many of the customers at Walmart pay in cash for those diapers.
Walmart is now sitting on cash for another 60 days, when the payment to their suppliers is due. They take that cash and they invest it during that time, get interest on it, etc. They’ve cracked the code on cash flow management.
Cash Is King
Whatever strategy you come up with, cash flow should always be on your mind as a business owner. Find creative ways to manage and optimize your cash, and you’ll have a much higher chance to succeed.