Contrary to conventional wisdom, cash flow is the lifeblood of your e-commerce business. Not net income. I have seen too many profitable e-commerce businesses fail because they overextended themselves and could not pay their suppliers on time.
We know that the economic reality of e-commerce is different from most small businesses. So, we created a guide tailored to helping e-commerce businesses manage and improve their cash flow.
I have seen too many profitable businesses fail because they had poor cash flow management and could not pay the bills. They focused all of their attention on the bottom line because they thought that was all it took to run a successful business. In reality, small business owners need to focus on the money coming in and going out the door if they want to grow their business.
This article will discuss seven easy strategies to improve your cash flow.
1. Form a Buying Cooperative
This is one of the few times you will hear someone recommending you to work with your competitors. However, many industries have found great success in forming a buying cooperative to reduce the cost of raw materials.
If your e-commerce brand is doing less than $2M in revenue each year, odds are you are not getting the best price from your suppliers. By forming a buying cooperative, you will receive more favorable rates from suppliers that offer more significant discounts to companies that buy in bulk. As a result, you will benefit from cheaper materials without the risk of taking on extra inventory.
The disadvantage of this strategy is that it takes longer to implement and forces you to rely on a competitor. However, when implemented correctly, this saves companies the most money of the options discussed.
2. Reduce Lead Time
You cannot improve your cash flow if your lead time is longer than the payment terms with your suppliers. However, you can reduce your lead time by reducing your manufacturing time or storage time.
To reduce your manufacturing time, you may need to build your products closer to the shipping hub and find a smaller manufacturer that will prioritize your orders.
To reduce time in storage, you need to have adequate procedures to forecast demand for your products. You also need to take into account the seasonality of the products you are manufacturing.
3. Align Expenses with the Revenue Pattern
Always pay your suppliers as late as possible. This may allow you to manufacture and sell products to use cash to pay off your suppliers. Additionally, plan any major purchases for equipment, supplies, or inventory when you expect to receive cash. For example, if you make most of your sales in the summer, begin ordering your supplies for next year during that summer period when you are generating the most revenue.
4. Clear Out Your Inventory
Suppose you are paying significant costs to store inventory that is not moving. In that case, it is time to think about liquidating this excess inventory. You can offer sales to rid yourself of unwanted inventory while also generating cash you can use to invest in more profitable areas of your business. Additionally, you can approach liquidation companies to clear out any excess stock.
5. Cut Unnecessary Expenses and Overhead
Go through your expenses and list the mandatory versus the nice-to-have expenses. Then, you need to go through each expense and ask yourself if it adds value to your business. Some questions to ask yourself are:
- Are there any recurring expenses you completely forgot about?
- Can you consolidate any of your tools and subscriptions?
- Does this product or tool help your company make more money?
- Are the returns on my ads justifying the expense?
- Do I have an employee doing something I can do myself?
6. Increase Your Average Order Value
One of the best ways to improve your cash flow is simply convincing your customers to order more. For example, let’s say your average order value is $50. Then, offer free shipping if they order more than $75 worth of product. Or, offer a slight discount on an additional product they order. You can use these tricks to help clear out excess inventory.
7. Increase Your Prices
When was the last time you raised your prices? It is wise to continually update your prices to keep in line with inflation. Fortunately, customers will often ignore these small increases and will not reduce your total paying customers.
However, be careful not to increase your prices dramatically. Although this may temporarily improve your cash flow, you may face the consequences of losing customers that feel they can get a better price elsewhere.
Conclusion
To improve your cash flow, you will need to increase your average order value, decrease your expenses, and reduce your lead time. It sounds easy on paper but can be challenging to implement yourself if you are inexperienced.
At Windstone Financial, we have helped numerous e-commerce brands improve their cash flow and grow their businesses. If you would like to learn more about how we can help you, click the button below to speak with a CPA today!
