Cash flow can be the strongest indicator of an ecommerce business’s success or failure, and properly managing your accounts payable and receivable can be the difference between success or insolvency.
Years ago, I read an article that described cash flow as the difference in time between when you get paid and when you pay. This very pragmatic definition has stuck with me. Unfortunately, cash flow can be one of the consequential challenges that online retailers face.
That challenge lies in the very nature of the retail business. For the majority of retail operations, the proprietor (a) purchases goods (products) from a variety of suppliers, (b) warehouses those goods in inventory, and then (c) sells those goods at retail prices to individual consumers over time. Suppliers want to be paid when they make a sale, but the retailer does not get paid until a customer buys the product days, weeks, or even months later, putting a huge strain on the merchant’s cash flow.
Tips for Better Cash Flow Management
In this edition of “eCommerce Know-How,” I want to share three tips for improving your ecommerce business’s cash flow.
Take More Time to Pay
Recently, I had a conversation with a long time supplier. This supplier, who had been very “hard nosed” about terms in the past, was, in the face of harder economic times, amiable to net 30 day payments. I was very quick to accept and place an order. Remember our definition of cash flow as the difference in time between when you pay and when you get paid. By pushing out my supplier several additional weeks, I reduce the time between when my customers pay me and when I have to pay my bills.
As an added benefit, I get to keep my funds in a bank account earning interest (meager as it may be) rather than having those funds head out when I place a new order.
This also means that if you already have terms with a supplier, don’t prepay. For example, if a supplier has given you 30 day net terms, don’t pay the bill in 10 days, 17 days, or even 28 days. Wait until the last possible moment.
And remember, once established, I can keep my longer terms even as the market comes back.
Pay With a Credit Card on the Date Due
I have a friend that operates a small ecommerce business, but hates credit cards. Oddly he is happy to accept them on his site, but personally likes to pay for everything with cash or a check. But using a credit card to pay suppliers can give a merchant as many as 30 days of additional cash flow.
After waiting until the last day on your terms, call the supplier and pay with the company credit card. Just like when a customer makes a purchase on your store and the funds don’t really show up for four days, paying by card means that you delay payment for the goods until your credit card payment is due.
As implied above, the goal of good cash flow management is to minimize the time between paying a bill and selling an item in your store.
Remember that Sometimes Flexibility is Better than Price
Finally, know that a lower price or free shipping is not always better than flexibility. Many suppliers are now offering shipping discounts or even price discounts. In some cases, these offers are a real deal, but stockpiling inventory is not usually a good strategy for continued solvency.
When these offers come, consider them carefully. Is the discount really worth the hit your cash flow will take.
Better Cash Flow Equates to Better Business
These three tips will help you keep your cash longer, and keeping cash longer can be a contributing factor to your business’s success.