Many entrepreneurs flock to e-commerce because of the opportunity it presents to scale a business efficiently without having to hire hordes of employees. But one of the most interesting and frustrating things about being an e-commerce business is that the cash cycle is notoriously long.
What is a “long” cash cycle?
The time between when you’ll spend money on inventory and when you actually get paid is called the cash cycle.
The e-commerce cash cycle is considered “long” because it often takes a long time to get your money back while it is tied up in inventory. This is especially true for brand owners or private label sellers (as opposed to resellers and wholesalers).
E-commerce owners have to buy relatively large runs of product and usually don’t have the negotiating power to wait to pay factories and suppliers. Because of this, they have to fund those inventory purchases before sales channels like Amazon or Shopify pay them back for units sold.
Why is the e-commerce cash cycle so long?
The e-commerce cash cycle is long for two main reasons, and the first we discussed above: brand owners have to buy inventory before they can sell it.
The second reason for the extended cash cycle is the typical sales channel payout schedule. Amazon pays out on 14-day cycles, and many wholesale accounts pay out 30 days or even 60 days after sellers send them inventory.
Simply put, having to pay early and having to wait to get paid puts pressure on cash flow by extending the cash cycle.
How to Improve Your Cash Cycle
So you know what affects the cash cycle, but what can you as an e-commerce owner do about it?
First, develop better relationships with your suppliers and ask for relief on payment terms. If you can get your supplier partners to give you an extra week or two to pay them, it can make big difference in your cash cycle. Every extra day of payment flexibility makes a difference.
The second thing you can do is work to manage your inventory better. Think of your business as a big boat: you’ve got sensors and depth finders to keep you from running your ship aground. The more accurate your equipment, the more you can afford to operate close to the shore. But if your machinery isn’t very accurate, then you have no choice to live in deeper waters.
Inventory is the same way. If you have good inventory data, then you can carry less stock and never stock out. But if your system for measuring inventory is inaccurate, you have to carry more inventory which means you’ll need more cash in the business.
Finally, if you can find a way to get paid more quickly, do it. Sometimes you can request more frequent payouts from Amazon than may accelerate your cash collections. You may even be able to negotiate 30-day payouts from your wholesalers instead of waiting two whole months to get your cash back.
Some of our CFO clients have even done a deep dive into their sales and decided to stop selling on channels that take forever to get paid.
In sum, know your cash cycle and invest some of your time into trying to shave days off of your turnaround. That way, your precious capital will go further, and you can grow more quickly.
Work With Us
Interested in consulting with e-commerce experts on how to improve your cash flow? Get in touch with us for a free 15-minute discovery call.