Being an e-commerce seller on Amazon or Shopify, cash management is something like handling a ship. This is where it is similar; you have to maintain the course but tweak it when the winds blow differently. Without cash, otherwise profitable businesses can quickly experience a fall from grace, which is why cash flow is so important…
In this blog post, we’ll provide a series of practical cash flow planning tips to enable you understand how to achieve your goals without having to burden yourself with many problems which aren’t central to business advancement.
1. Know The Cash Cycle
The cash cycle is the length of time it takes to convert your investment (product) into cash from sales. The cycle above can be more or less adjusted to the specifics of individual selling and warehouse lead times, the frequency of payouts from the chosen platform, and shipping.
- Amazon: Amazon retains payments for 7-14 days before processing them for payments. If you are not managing this, you may find yourself short of cash at some point more so when sales are high.
- Shopify: The payout time of Shopify varies with the payment gateway you employ, but it is usually quicker than Amazon.
Strategy:
Chart out your cash flow plan right from the start to end. When money is going to be available as opposed to when the checks need to be written, the situation can be managed. For example, you might make more sales in December and have a boost in your revenue for the fourth quarter; however, you are paid by Amazon only in the beginning of the following year.
Will you be able to make your living expenses in the mean time?
2. Maintain a Cash Reserve
A cash reserve is your safety net. In e-commerce, unexpected expenses pop up all the time—whether it’s a return surge, a supplier issue, or sudden ad costs. If your cash flow takes a dip, a reserve ensures you can still pay the bills.
Strategy:
Set aside 10–20% of your profits into a reserve fund. Keep this fund liquid and easily accessible. Even if times are good, maintaining a cash buffer is essential to weather the storms.
3. Optimize Inventory Management
Inventory can be a cash flow killer if you don’t manage it right. Too much inventory ties up cash, while too little means lost sales and unhappy customers.
- Amazon: Consider using Amazon FBA’s Inventory Performance Index (IPI) to avoid overstocking and storage fees.
- Shopify: Use apps like Stocky or other inventory forecasting tools to optimize your reorder points and quantities.
Strategy:
Use demand forecasting to make smarter purchasing decisions. If you’re investing in bulk, make sure you’re not depleting cash that could be used elsewhere in your business. Try to align inventory orders with expected sales, especially around peak times like the holidays.
4. Negotiate Payment Terms with Suppliers
Your suppliers want your business, and you have more leverage than you think. Stretching your payment terms (e.g., net 30, net 60) allows you to hold on to cash longer, helping bridge the gap between when you pay for inventory and when you get paid by your platform.
Strategy:
Negotiate with suppliers for extended payment terms or even discounts for early payment if you’re flush with cash. If your supplier isn’t flexible, consider spreading your orders across multiple vendors to stagger payment obligations.
5. Leverage Financing Options
In a perfect world, your business would always be cash-flow positive, but there may be times you need financing to bridge the gap. Fortunately, Amazon and Shopify offer financing options.
- Amazon Lending: This program offers short-term loans specifically for Amazon sellers to help with inventory or other business expenses.
- Shopify Capital: Shopify provides cash advances to eligible sellers based on your sales history.
Strategy:
Only borrow if the financing will directly contribute to revenue growth—like buying inventory ahead of peak season or increasing ad spend for a campaign you know will convert. Also, factor in the cost of borrowing and ensure you can handle repayments without strangling your cash flow.
6. Monitor Key Metrics
Keeping track of key metrics can give you the insights you need to make informed decisions about your cash flow.
- Days Sales Outstanding (DSO): This tells you how quickly you’re getting paid. If DSO is creeping up, it might be time to revisit your pricing or customer payment terms.
- Days Inventory Outstanding (DIO): This measures how long your stock sits before being sold. The longer inventory is sitting, the more cash is tied up.
- Accounts Payable (AP) Days: This shows how long you’re taking to pay suppliers. Extending this period can help free up cash.
Strategy:
Use accounting software like QuickBooks or Xero to track these metrics. By monitoring them regularly, you can spot issues before they become cash flow crises.
7. Cut Unnecessary Costs
We all love shiny tools and apps that promise to make our lives easier, but many e-commerce sellers subscribe to software they don’t even use. This adds up.
Strategy:
Regularly audit your subscriptions and software expenses. Cut what you don’t need or use minimally. Streamline your processes, whether it’s marketing, shipping, or inventory management. Every dollar saved is a dollar that can help with cash flow.
8. Maximize Payment Gateways & Currency Management
For Shopify sellers in particular, optimizing payment gateway fees and currency management can improve cash flow. Certain gateways charge high transaction fees, and if you’re selling internationally, fluctuating exchange rates can eat into your profits.
Strategy:
Consider using a payment gateway with lower fees or one that offers better currency conversion rates. Shopify Payments, for example, is competitive for sellers in eligible countries. For international transactions, you can use multi-currency bank accounts like Wise to reduce conversion costs.
Managing cash flow isn’t glamorous, but it’s essential to the health of your e-commerce business. By understanding your cash flow cycle, optimizing inventory, and using the right tools and strategies, you can keep your finances stable and position yourself for growth.