Every successful business must properly manage its cash flows, regardless of the industry. However, businesses in the e-commerce space face some unique challenges and considerations to ensure the timing of cash inflows and outflows is just right.
Healthy cash flows enable e-commerce businesses to purchase more inventory, pay employees, rent, and utilities, and cover inevitable customer returns. Thus, any cash shortages–even temporarily–can limit your ability to meet these obligations and compromise your relationships with suppliers, employees, and customers.
Of course, no e-commerce seller plans to mismanage cash flows and have a short-term pinch in liquidity. However, it can happen for a variety of reasons, including after a large inventory order, a sudden drop in sales volumes, or investing in a large marketing campaign.
It can be difficult to find the right balance between pursuing growth opportunities and ensuring you have enough cash reserves to cover outgoing payments. So, throughout this guide, we’ll share some expert tips and best practices to help optimize your cash flows.
It might go without saying, but one of the best ways to optimize your store’s cash flows is to cut back on unnecessary spending.
As your business grows, it’s easier to justify increased spending on subscriptions, office perks, and hiring. However, if you’re not careful, you could quickly overextend yourself and have more cash flowing out than in.
Make switches that improve your cash flows but don’t detract from your team’s productivity. Specifically, look for unnecessary spending that doesn’t support operations. This might include canceling unused software subscriptions or buying standard-quality office supplies rather than top-tier brands.
If you can’t find any more cost-saving opportunities that limit your cash outflows, the other end of the equation is to increase cash inflows.
One way to do so is to increase your prices. If you just can’t make ends meet at current price levels, it might make sense to impose a slight price increase to give yourself some extra cushion.
Of course, this might not be the right move for all e-commerce sellers. You may raise prices more than your customers are willing to pay, and your sales volumes will suffer as a result. Thus, it’s important to pursue this strategy carefully and back any price changes with detailed analysis.
Let’s say you need to increase cash flows more immediately. In this case, you can run temporary sales promotions to encourage higher sales volume in the near-term. This might include a two-for-one discount, a bundle deal, price discounts, and more.
Promotional activity generally means you’ll earn a lower margin on each sale. However, it can be an effective way to bring in more cash on merchandise that would have otherwise gone unsold.
Promotions should still be done strategically, as you don’t want to diminish the value of your merchandise or get customers accustomed to waiting for a discount to make a purchase.
Many e-commerce stores' cash flows are tied up in inventory. You need to purchase enough units to meet customer demand and take full advantage of sales opportunities. But you should also avoid being overzealous and investing too much capital into inventory without justifying it with anticipated demand.
Otherwise, you could end up with valuable inventory sitting on warehouse shelves, collecting dust, and not producing any sales. This is why it’s highly important to be realistic with sales forecasts,
It can also be beneficial to re-negotiate payment terms and conditions with your suppliers. These terms are not set in stone, and you may have some bargaining power with your long-term partners to secure more favorable terms.
Specifically, see if you can secure a longer payment term, giving you more flexibility to pay suppliers for optimal cash flow management without incurring late fees or penalties. Common payment terms are Net 15 or Net 30, meaning you must pay it within 15 or 30 days. However, you may be able to negotiate Net 60 or even Net 90 terms, depending on your circumstances.
You should approach these conversations delicately, as you don’t want to put a strain on your vendor relationships. For example, it may not make sense to request this from a new supplier or vendor that you haven’t built much rapport with.
Lastly, a key way to optimize the cash flows of your e-commerce business is to maintain a healthy cash reserve.
You never know when unexpected expenses, supply chain disruptions, or changes in consumer demand will impact your operations. So, it’s important to give yourself a healthy cushion to weather the storm during a downturn.
Slowly build up your cash reserves over time by setting aside a portion of your monthly profits. You don’t want to sit on so much cash that it keeps you from pursuing growth opportunities. However, you should have enough cash on hand at any time to cover a few months’ worth of expenses.
Looking for more expert financial tips on how to manage your e-commerce store? Contact the expert team at Bob’s Bookkeepers for customized guidance tailored to your financial needs and goals.
