‘Cash is king’ is a popular saying, and rightfully so.
When it comes to running a business, you need to have liquid cash available in order to finance day-to-day operations. If the cash well dries up, your employees and suppliers most likely won’t wait around an indefinite amount of time for you to eventually pay them - they also have bills to pay. To avoid these types of problems, proper cash flow management is key. It starts with identifying some basics. Namely, where your cash goes during each cash conversion cycle.
The 2 largest expenses any ecommerce business faces are usually the cost of goods sold (i.e. inventory) and marketing. That’s typically closely followed by delivery costs and storage. One of the ever-present challenges for selling online is that almost the entire cost base is incurred before items are sold, so there’s a lag between costs incurred and revenue, which needs to be financed. In addition, there are product returns which, especially during busy periods, can strain your cash flow, as you have to refund revenue which you have already banked.
When it comes to cash flow management, there are a number of things you can do to improve your situation:
Understand your finances
A solid approach to cash flow management should always be based on a wider cash flow projection. Shopify has created this handy ecommerce cash flow template, which is a great starting point.
It's also worth considering that most ecommerce businesses have fairly complex financial stacks. With banks, cards, payment gateways, advertising accounts, accounting software, and more to consider, the danger is that your finances become siloed. Luckily there are financial management platforms which address this type of admin complexity, caused by the ever-growing financial stacks that are used by companies today. Juni was founded with the purpose of making every day easier for ecommerce businesses, by reshaping and innovating the way financial management is done. Their dashboard, for instance, integrates with each of those stack elements to give you a full overview of your current financial situation in one place.
Close the gap between spending and earning
One of the reasons returns can cause big problems is that ecommerce businesses are often already at full stretch. You pay for manufacturing or wholesale, you pay for shipping, you pay for marketing, and then you wait. Wait for sales to come in, then wait a bit longer for the funds to hit your account. You've covered almost all of your costs before any revenue comes in. That's a bit of a tightrope walk even before you start losing sales to the return process. Create a safety net by reducing the time between spending your money on inventory and ads and recouping it through sales. Let's look at how to achieve that.
Delay paying your suppliers
Build strong relationships with your manufacturers and suppliers to negotiate better payment terms. Be a good customer deserving of their best agreement by:
- Accurately forecasting upcoming orders
- Sharing your plans at an early stage and sticking to them
- Ordering frequently and consistently
- Placing bigger orders
- Always paying your invoices on time
- Showing you have cash in the bank or good lines of credit
Delay paying for your ads
You can also talk to your account manager at your main ad networks to see if there's anything you can do to improve your payment terms. You can usually secure invoicing terms with Google Ads if you're spending more than £5,000 per month. It's the same with Facebook Ads if you've spent more than $10,000 over the last three months. Being billed via invoice will give you more time to pay, which means more time to make sales in the meantime.
Pay with credit
Don't tie up your cash at the point of settling your invoices. Pay using credit to give yourself more breathing space before your account balance takes the hit. Juni offers interest-free credit lines of between £10,000 and £ 2 million to eligible UK companies*. With 37 to 60-day payment terms, there's less pressure on cash flow. It's far less stressful than all the funds leaving your account on the day payment is due.
Talk to your payment gateways
Depending on which payment gateways you're using, you might have to wait a week or more to get revenue from sales paid into your bank account. Get in touch with your account manager to see if this is negotiable or if there's a payout figure you need to hit to secure better terms. It's worth looking at different gateways, as well as tiered accounts with your existing payment partners, to see if there are better options for your business.
Use payment financing
If you have a proven sales record, revenue-based financing will help you navigate a busy returns period. Companies like Wayflyer offer credit for ecommerce companies on the strength of projected earnings. You'll get early access to money from future sales to cover the cost of inventory and marketing and ease cash flow worries in the meantime.
Forecast your returns
To get your finances in a position to withstand busy returns periods, you'll first need to have an idea of what that's going to look like. As a starting point, data from the National Retail Federation shows that 20.8% of online purchases made in the US were returned in 2021. The figure was roughly the same in 2020. Take a look at your current returns rate and see if that 20% figure is about right. If it is, you need to prepare to absorb the costs of losing 1 in every 5 of your sales.
It's not just about understanding how many returns are likely. A reliable returns forecast also improves cash flow by stopping you from over-ordering inventory and preparing for any return costs ahead of time. If 1 in 5 products will come back, can you cut your inventory accordingly?
Inventory management tools like Veeqo and QuickBooks Commerce optimise stock levels to keep your cash flow healthy. Invent Analytics' demand forecasting includes AI-powered returns forecasting. The probability of each item being returned is calculated based on customer, product, and shopping cart data.
The returns forecasting algorithm factors in things like:
- A customer's past return rate
- A product's past return rate
- Purchases of similar products differing only in size or colour
- The total number of products in a shopping cart
Once your return rate has been forecasted, you can proactively work on reducing it and ensuring that when a return does occur, it is a smooth return experience. This is essential if you're going to retain customers and have them buy from you again in the future. An automated return management platform like yayloh can help with this.
Issue store credit instead of refunds
Depending on how high your return rate is, having to issue refunds can negatively affect your cash flow. To avoid this, you can opt for issuing store credit instead of a monetary refund. This way, your customers are more likely to purchase something else from your brand, meaning your already registered revenue won’t take a hit. yayloh saw that their best customers managed to retain 50% of their revenue this way. A good strategy for implementing this approach is to offer an additional discount code, like ‘get 10% off your next order’, which acts as a value trade-off for not getting a monetary refund. It can even increase the customer's total order value when they go through the return process and place a reorder for new items.
Improve your cash flow management for even smoother returns
Get started on boosting your cash flow today to make sure your ecommerce business isn't left counting the cost of a busy returns period:
- Get the full picture of your cash flow at all times
- Close the gap between money going out and revenue coming into your business
An easy way to do this is via financial management platforms. Juni, for example, is tailor-made for ecommerce and provide an at-a-glance overview of your cash flow, which you can keep in the green with their interest-free credit lines of up to £2 million*, offered at 37 to 60-day payment terms.
This article is written by Juni, the financial platform built for ecommerce. It gives give you a unified view of your finances, with cards, multi-currency accounts, and banking, accounting and advertising integrations - all in one place. It can even help boost your cash flow with working capital, cashback and more.