In the second half of 2015 my eCommerce business was really taking off.
Our sales doubled every month from 2k in June to finish the year at over 100k in December! This was a very thrilling time for the business. However, while the top line growth numbers were exciting, this was a very challenging time for us from a cash flow perspective.
I still remember maxing out my credit cards to pay for inventory orders and worrying at night if our deposits would hit the bank in time to pay off our suppliers.
The growth was exciting, but also stressful.
Cash is king and cash flow is the lifeblood of any business.
Now, with SellerPlex, we’ve identified a handful of the levers you can pull as an ecommerce business owner to cut expenses, improve cash flow, and increase the enterprise value of your business.
Let’s dive into them and see how many you can apply to improve your own business.
1. Improve eCommerce Business Value by Negotiating Lower COGS
When it comes to cutting expenses, it makes sense to start with the biggest line item on your Profit and Loss Statement (P/L).For most eCommerce businesses, the Cost of Goods Sold (COGS) line would account for highest loss. At Sellerplex, we work with some experienced eCommerce business acquirers, and this is usually the first thing they attack to cut costs and improve the value of their new acquisition. If effective, this can lead to some quick wins and quick value boost to your business.
A good strategy to lower your COGS is to buy in greater volumes. If you are buying in greater volumes, often your factory will be agreeable to giving you a lower price per unit.
For investors, this often looks like buying 3-6 months of inventory right away when they purchase a business which gives them better leverage in price negotiations.
If you are cash strapped and can’t afford to just buy extra months of inventory, that’s OK too.
Instead of approaching your supplier with a one-off purchase order, explain to them your 6 or 12 month order plans. Then, ask for pricing based off of your 6 or 12 month expected orders.
For example, instead of placing an order for 1,000 units. Explain to your supplier that you’ll be ordering 12,000 units this year and that you’d like your pricing to be based off of the 12,000 units you will order this year.
That doesn’t mean you have to pay for all the yearly inventory at once. But it does give your supplier better insight into your purchasing plans and future expected volume which will often enable you to get lower prices.
Lowering your COGS can be a huge cost saver for your business. It can help cut your biggest expense, improve your cash flow and lead to a higher business valuation.
Sometimes it can help to bring in a third party to help you negotiate with your suppliers. Our team is very experienced with supplier negotiations so send us a message if you’d like our help.
The more on top of your inventory management the better you will be able to project out your future orders and avoid ordering too much or too little.
Which leads us to our next way to improve cash flow: efficient inventory management.
2. Efficient Inventory Management
The next way to improve your eCom cash flow is by holding efficient inventory.
This means having the ideal amount of inventory needed to run your business. Not too much. Not too little.
To optimize your cash flow, you want to hold the least amount of inventory necessary. Of course, keeping in mind what your inventory needs are to avoid going out of stock.
Holding efficient inventory will allow you to minimize your capital invested in inventory so you can use it in other parts of the business and avoid the need to take on outside financing.
So how do you hold efficient inventory?
Get in front of your supply chain management.
This means having a good reorder tracker and models in place to project your future needs. You want to have good trackers that show you how much inventory you currently have, the velocity that your inventory is moving, days left in stock, how long reorders take etc.
That will provide you the insight you need to make orders when you need to to stay in stock yet not have cash tied up with excess inventory.
Holding efficient inventory will not save you money per say, but it will free up cash flow and allow you to put that money to work and reinvest that in other areas of the business to help you grow.
Like we said earlier, cash is king and whatever you can do to be more efficient with your capital will help you run a better business.
If your supply chain is a mess it can be good to consult with some experts to help you get on the right track.
Next cashflow saving tip is to negotiate better payment terms with your suppliers.
3. Negotiate better payment terms
Standard payment terms are 30% down and 70% upon completion.
This can be challenging for you as a business owner because you need to pay for your inventory before you actually sell it.
If you build up some history and good rapport with your suppliers this can allow you to negotiate better payment terms to free up more cash flow for your business.
A good place to start after the standard 30/70 is to ask for 30/40/30. So, 30% down, 40% at completion and net 30 for the remaining 30%.
Getting the additional 30 days for the last payment chunk can allow you to start selling your inventory and generating revenue to pay the final balance payment.
That being said, you can push your payment terms further depending on your relationship with your factory.
We’ve worked with businesses that were able to initiate orders with no money down, and the balance paying coming 60 days after the order was completed.
Those payment terms aren’t usual, but are an example of what is possible.
Anything you can do to improve from the standard 30/70 will boost your cash flow and allow you to deploy to other areas of your business to help you grow and not need to take on outside financing.
4. Leverage new credit cards and financing options
There are a few new credit cards and payment methods that have been launched in the last few years that you can leverage to improve your cash flow.
These won’t improve the value of your business, but they will reduce your need to take on outside capital.
Check out the Brex Card that gives you 60 days no interest payment terms! This can be huge and when used in conjunction with better payment terms with your suppliers can really improve your business cash flow.
But what if your suppliers don’t take credit cards?
I’m glad you asked 🙂
Sign up for Plastiq which allows you to pay almost any bill with your credit card, for only a 2.5% fee!
The combination of the Brex Card and Plastiq can really be game changing for your ecom business cash flow. I wish they were launched when I was scaling my ecom business a few years ago!
Go check them out and sign up and improve your cash flow today.
5. Optimize Supply Chain
Last, but not least, you can find more cost saving opportunities by optimizing your supply chain.
You can do this by getting multiple freight quotes before you send a shipment and making sure your third party logistics contractor (3PL) provides the most cost effective warehousing solutions for your needs.
Most eCom businesses rely only on one freight forwarder. That can be OK if you have shopped around and know you are getting the best rates.
But many eCom businesses use the first FF that they started working with and never compare prices. This can be a good opportunity to save money on every future shipment.
If you want help price comparing FF, send us a message. Since we manage a large volume of freight for our clients we have been able to get preferred rates that we can pass on to you.
In addition to shopping around for the best FF quotes, you want to make sure your 3PL is the best for your needs.
Each 3PL is unique and has its own business model. For example, some 3PL have lower storage fees and higher pick and pack. Others have high storage fees and low pick and pack.
Some are experienced with and can label your Amazon inventory for cheap. Others, more expensive.
Depending on the nature of your business, a different 3PL will make more sense for you. So shop around and find the best one to fit your business!
If you are selling primarily on Amazon FBA you can further save money by holding excess inventory in a 3PL vs the FBA warehouses which have very high storage fees.
Managing a 3PL can add additional complexity to your business but can also save you a lot of money.
If you are the kind of person who hates dealing with this stuff then send us a message and our SellerPlex team will be happy to help. Our experienced supply chain team has a deep network of freight and 3PL partners that allow for efficient supply chain and cost savings for your business.
So there you have it.
Five ways for you to cut costs and improve cash flow for your eCommerce business.
Pick one (or more) and get started and improve your business today!