Optimize Cash Flow for Ecommerce Businesses

Ecommerce businesses run thin margins in a cutthroat environment. Most of you have to sell on Amazon, and then if you do well, you have to worry about Amazon competing with you with its AmazonBasics brand. I’ve seen this happen. 

Cash flow is critical for every business, but for the above reasons, it is especially critical for Ecommerce. 

The golden rule here is: increase sales and control expenses. I know, I know –– you’re thinking, “Tell me something I don’t know.”

This has to be underscored as a starting point.  

How to increase sales

Increase Inventory Turnover

This implies that you know what your inventory turnover rates are. Then, you can develop strategies for how to increase those rates. For an Ecommerce company, this is the number one way to improve cash flow. It’s the strongest lever you can pull.

There are three ways to increase sales in any business:

• Pricing - either Increase prices or discount them to generate more volume
• Get more customers
• Increase the number of times a customer buys from you 

Pricing

The first one is risky unless you have a unique item with plenty of demand. 

Get more customers

This can be done with marketing dollars and good SEO. For example, you can list the same product on a sales channel multiple times with different descriptions optimized for different segments of potential customers. 

This option costs money and takes time. You should do it, but you’ll need to evaluate your current cash flow to ensure you can sustain the cost for long enough to produce a return on your investment.

Increase the number of times a customer buys from you

This is often the most overlooked, lowest-hanging fruit in terms of how you can increase sales. Good product bundling, accessories, and of course suggested products as in, “customers who bought this also like these items...” 

Build your email list! 

To many of you, this might sound like an “old school method,” but the reality is that it is still very effective. If you can send out a weekly email that offers “real” value (not BS) and then you weave in updates about products you are selling, you have the best possible distribution channel. Amazon can shut you down overnight (I’ve seen this happen too); all you’ll need to do is email your list, let them know, and let them know where they can go instead. 

I know you can’t email your Amazon customers directly, so you collect email addresses on your website and send out your business card with every order that ships. Make sure your website is on there, and make sure you have an annoying opt-in pop-up on your site. 

Annoying works!

As long as you don’t overdo it.

Let’s say you are these guys.

There are so many logical/related subjects you could write about with “productivity” at the center of it all. You can write about tech products, software, the list goes on.

Or maybe you are these guys.

Send really useful tips about taking better care of my pets and ensuring they live a long and healthy life. I will read your email every single week and I will most likely click your links!

Make it useful and people will want to read your email every week. Most emails people send are boring at best and outright spammy at worst. 

How to control expenses

The first part is easy. Assuming you have some history and a good set of books, run a monthly expenses by vendor summary. Look for anything you are spending money on that you don’t absolutely need. Software subscriptions are often the number one offender here.  

Manage your inventory

Technically, inventory is not an expense. When you first buy it, it goes into an asset account. It doesn’t hit your profit and loss until it’s sold. Then it moves from inventory to cost of goods sold.

First, you want to see if you can negotiate pricing with your suppliers. Obviously, you can usually get a bulk discount, but buying larger quantities may hurt you in terms of carrying costs, so that isn’t always the answer.

Segmentation of inventory will help you manage inventory better. To learn more about this read “3 Pro Tips for Ecommerce Accounting Success” 

 Once you clearly understand your product mixes, you can better plan your purchasing. The goal here is to achieve the right balance between stockouts and overstocking inventory. Stockouts will cost you sales, overstocking will cost you money in carrying costs.  

Watch your COGS (Cost of Goods Sold) % like a hawk!

I’ve had clients who saved themselves from very costly mistakes (we’re talking $100K+) by keeping an insanely close watch on this number. Sometimes, you will catch an accounting error that is easily fixed. Other times, you will catch things that will prove much more costly if you don’t catch them early.  

Review your financials

You can’t improve what you don’t measure; the only way to measure your performance is to review financial reports.

I would go as far as to argue that you may want to get obsessed with these reports. You should constantly question their accuracy and constantly analyze what they tell you about where you are today compared to where you need to be.

A few basic analyses you can do weekly if not more often:

Review the Balance Sheet First

All bank and credit card accounts are reconciled monthly with 0 tolerance for plugged numbers. This is how you know you have almost 100% accuracy in terms of everything that should be recorded being recorded on the books on the right date (in the right period), and so on.

Watch Your Inventory Assets

Run a balance sheet totaled by month and look at inventory assets. They should cycle up and down based on some expected pattern consistent with, if not slightly offset from, your sales cycle. Your inventory should increase just before a high sales period (e.g., holidays) and decrease during that high sales period. 

Set your expectations first, then analyze the inventory. Going into the analysis with a well-defined expectation will make it much more obvious when what you are looking at is not as expected. 

After reviewing and verifying all of the amounts on your balance sheet, move on to the Profit and Loss.

COGS Percentage

As discussed above, look at this monthly. 

The formula is simple: 

COGS ($) divided by Total Sales ($) = COGS %. 

This brings up the question of how COGS is calculated. Of course, the cost of the inventory itself, but there are other costs like logistics (freight in). These costs theoretically should be absorbed into your inventory cost based on weight, but it is not often practical to do that. The best way to normalize this is to use an assumption based on your inventory turnover rates. 

If you know that it takes 60 days to turnover your inventory on average, then you book your logistic bills to an asset account (e.g.) Inventory WIP (work in process). Then you amortize that cost over 2 months, booking it to a COGS account. 

Think about any other costs necessary to prepare the goods for sale (they happen before the sale is made) and how and when they are recorded as COGS.

Any expenses (e.g. sales commissions) that happen after the sale is made are not COGS. 

Your monthly COGS percentage should be pretty even, so you are looking for significant fluctuations in the percentage. If you see that, dig in and get to the bottom of why.

Spending time doing analysis like the above can save you a ton of money, which means better cash flow. 

The bigger picture: Now that you have a framework for increasing sales and controlling expenses for your ecommerce business, start setting up a plan for a weekly review of the numbers. Identify what information you have vs. what you need, and start scrutinizing it like crazy. Assume it is NOT accurate and prove otherwise or make it accurate if needed.