If resources were unlimited we wouldn’t have to manage them! But since scarcity is indeed a thing we will only be successful to the extent that we can learn how to manage our limited resources. Today we will talk about how to better manage cash for your e-commerce business.
By the way, I’d love to learn from your experiences so please chime in with war stories, pro-tips and feel free to call me on any unintended BS (I can take it)! Let’s dive in!
Driving sufficient cashflow is one of the top reasons that businesses fail. Again, if resources were unlimited you would have plenty of cash saved up for any potential disaster AND you would have the firepower to invest in all key growth strategies but since resources are limited we have to manage what we have.
Ideally, you want to manage your cash in such a way as to have margin in the event that things don’t go as well as you want them to while constantly investing in growth, R&D, system creation, scalability, etc… Many businesses miss the mark by running out of cash (most common with small businesses) or hoarding cash.
Hoarding Cash Can Be Dangerous (But normally isn’t)
You may be thinking that hoarding cash could never be a problem (and it normally isn’t) but there are businesses that fail because they hoard too much cash and miss critical opportunities. They are too conservative and don’t have the courage and vision to take the needed risks. For a classic example look at how Kodak handled the digital camera. A Kodak employee invented digital cameras in the mid 1970’s. This should have been great news but management shelved the project for almost 15 years to avoid cannibalizing its massive profits in the film industry.
During those “head in the sand” years several competitors popped up, cornered the digital market and ultimately killed Kodak’s. They needed to take bold and expensive steps but they didn’t. While missing the a key opportunity is a risk that business owners need to be aware of it isn’t the one that kills most businesses. Running out of money kills more businesses than hoarding money. So let’s talk about how to increase reserves but first a question:
Don’t Run Out Of Cash!
If your revenue stopped today, how many days of working capital (available cash) do you have to cover expenses that you couldn’t cut in an emergency? Since Amazon can freeze your account even for suspected TOS violations, this is a critical question. I have spoken to several sellers who would be in major trouble if Amazon shut them off for more than 3 days. This is no way to live!
Save toward always having access to 4-6 weeks of needed cash and view this as a minimum. As your company matures build your war chest to equal 3-6 months of all non-variable expenses to give you protection in the event of an emergency.
Great But How Do I Manage Cash?
Ok but HOW do I build some financial margin? Here’s the psychological trick that can hurt you or help you. You will spend all available funds. You will I promise. If you don’t believe me or if you want a full defense of Parkinson’s Law when it comes to managing money in a business check out the book Profit First by Mike Michalowicz. Great book. Funny guy. Check it out.
Here’s how understanding Parkinson’s Law can help you manage cash better. You are currently spending 100% of whatever your allotted budget is to cover expenses in your company. Use your creative juices to hide a few percentage points in a “rainy day” fund and force yourself to operate on 95% of your current budget. You can do this!
Michalowicz argues that businesses that successfully cut unneeded expenses often experience growth in sales instead of the feared stifling! He says that this happens because getting creative often leads to understanding and meeting the needs of your customers better than your were.
Cut the little stuff like unnecessary month subscriptions and consider downsizing your office if you can’t find other creative ways to lower your expenses by 5%.
Build up a few months of margin and then continue being frugal in an angry effort to get completely out of debt. You will be amazed at how profitable your business can be with way less stress!
What has worked for you? Have you ever lost sleep at night praying that one more check would come in so that you can make payroll the next day? I know I have and I’d love to hear your stories.
Check out our other post, “5 Financial Mistakes Amazon Sellers Make“.