One year ago I wrote a blog post about eCommerce cash flow and it’s been a very popular post over the year. Let’s revisit this topic and expand on it as well.
I find this to be a critical topic to understand and manage for eCommerce sellers because cash flow is the life blood of your business bringing oxygen to your business “Cells” and sustaining life.
Is your cash flow clogged up? Is it not flowing quick enough? Do you just not have enough?
Let’s talk in greater detail about the having a clogged up cash flow situation and possible solutions for you to fix your clogged cash flow problem.
Before we dive into solutions for cash flow, I want to let you know I also created a 1 hour training course for this exact topic and have it available in my online store where you’ll see how I break it down and show you ways to increase your eCommerce cash flow in greater detail.
Here’s the link to my 1 hour crash course on eCommerce cash flow. If this is a hot topic in your business, I promise this DVD will help you out.
having a clogged up cash flow is a very typical problem I see all the time with my coaching clients and gaining a better understanding of how this happens helps you fix it.
Having a clogged up cash flow in eCommerce is when your money is sitting in one area of your business or another and “Not producing” more cash for you while being stuck in this area of your business. The #1 cause for having a clogged eCommerce cash flow is having too much inventory sitting on the shelves. How much is “Too much” inventory, you ask? Well that depends. It mostly depends on the size of your business. Don’t focus on the quantity or the dollar amount. Focus on what inventory professionals call “Days supply”. This is simply a forecast of how many days will it take to sell out of that particular item in stock.
Days supply offers you the ability to view your inventory against TIME and if you’re focused on building an eCommerce Money for Nothing Lifestyle, TIME is the most important resource you have. Do you have 3 day’s supply or 30 day’s supply or dare I say, 300 day’s supply? The obvious conclusion is the longer the day’s supply you have on hand, the more clogged your cash flow is sitting on the shelves.
Get this…I’ve had coaching clients where they feel cash poor but have $100,000 in inventory. Yup, no joke. And the sad part is the entrepreneur feels so poor like they can’t pay their next bills and feels like they’re at the end of the line. I also find many sellers wishing they had this problem…..you?
There are many other ways to clog your cash flow besides inventory. Sometimes it’s how you buy inventory or how you sell it. For example, if you pay cash for your inventory (like most sellers) you have an outflow of inventory before an inflow. The longer it takes to sell, the longer your cash flow cycle.
If you sell on Amazon, you may have a 1 to 2 week delay getting your cash back into your hands before you can deploy it again. Or if you’re just starting off selling on eBay, selling on Amazon or other marketplaces you may find an even longer delay or “hold” before you get your money maybe up to 30 days. These are all causes for a clogged up cash flow that will have serious impact on your company health and growth.
Here’s a question for you. Is it worse to sell out of an item or have too much inventory?
My answer may shock you but I prefer to sell out instead of having too much inventory. Selling out and having “Lost sales” is what they call an
“Opportunity cost” in the business world. However having too much inventory not selling is what I call having a “Real cost”.
I love selling out of stock. It tells me I have more demand than supply. It tells the customer to hurry up and buy before we sell out. It gives the buyer confidence other people are buying my items. Of course I don’t love selling out of stock for a long period of time, because that’s liking having another clog in my cash flow.
As one solution to selling out, I have built great relationships with my factory suppliers to sell and ship to me on a weekly cycle. I said weekly not weakly….ha! What this does is minimize the “out of stock” time to a maximum of only a few days.
More importantly is my other tip….Are you ready? I pre-sell when I run out of stock on a particular model or color. It’s very simple. I trained my virtual assistants to change the item to pre-sell mode on my website and any future customer that visits the item will get a message that we just sold out but we’re getting more in stock on “this date” and they should pre-order to reserve their stock.
This simple approach is extremely powerful!
a) It reduces the “lost sale” impact.
b) It significantly increases my cash flow by selling the item before it’s even in my hands.
Ideally, I like to sell out at the exact same time I get new stock in. Ideally at the exact same hour. That’s my “Optimization goal”. Not a minute overstock and not a minute out of stock. However, I know this is an unrealistic goal because we use forecasts to predict future sales and forecasts are ALWAYS WRONG! As a real life note: as I create this post, I am selling the last stocking unit of a particular model/color for an item I have and I also have more stock coming tomorrow. That’s pretty darn close to my optimized goal. if you have a goal, pursue it, measure your success, adjust your approach and you’ll continue to get closer and closer to your objective.
So, If you’re sitting on TOO MUCH INVENTORY and NOT ENOUGH CASH find ways to reduce the cycle time from buying the inventory to selling the inventory. Find ways to sell out more than never sell enough. Find ways to creatively reduce “lost sales” when you sell out like I did by pre-selling whenever I sell out on a sku. Finally, know your cycle time from cash out to cash in. It will vary from product to product, supplier to supplier, marketplace to marketplace and even with seasonality month to month. Know this number. Is it 30 days, 60 days or even more. My personal goal is to have a 7 day cash cycle time.
I explained this in greater detail on my eCommerce cash flow training DVD how I achieve my cash flow cycle time goal of 7 days and how I’m able to re-deploy this “SAME CASH” multiple times per month so the exact same dollar bill basically works 4 times more than say if I was at a 30 day cash flow cycle. I hope that makes sense.
Because if your money works 4x more over the course of a month, technically you can accept a lower ROI on each transaction and still achieve a HIGHER TOTAL ROI with your working capital (your cash). This is assuming your “transaction costs” are not eating up this smaller ROI of course. Something we’ll have to dive deeper into another time.
So in summary:
Are you experiencing an eCommerce Cash Flow Heart Attack? How do you know? What are the symptoms? Most importantly, what’s the solution?
- KNOW your cash flow cycle. Set a goal to pursue. Mine is 7 days.
- Reduce your inventory cash flow cycle to a point where you sell out exactly at the same time you restock. Ideally of course.
- Know your “Day’s Supply”.
- Buy my ecommerce cash flow training DVD to help you better understand these principles and I’ll coach you to a healthier eCommerce business.
Finally, share like and tell your friends to help my “visitor flow” HA!
Cheers to selling smarter,