7 Rules of Inventory Cash Flow for Amazon Businesses
In the Amazon world, there's a lot of talk about listing optimization, PPC, full-funnel marketing and product sourcing. Fundamentally, however, Amazon businesses won't survive if they don't take care of the core component of inventory cash flow. Inventory cash flow is so important because Amazon businesses are all inventory-based, which can be very cash intensive.
Cyndi Thomason’s story:
I founded a firm called bookskeep. We do accounting for ecommerce businesses. Based on that experience, I started consulting around cash flow management, and wrote the book Profit First for Ecommerce Sellers to help ecommerce businesses understand the relationship between inventory and cash. Right now we have a team of about 20 people who do ecommerce accounting and advising on profitability for ecommerce businesses.
Today we are going to talk about how inventory cash flow is crucial for Amazon businesses.
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1. One of the biggest pitfalls of Amazon sellers is being undercapitalized for success.
When starting, you can spend months researching products and hope that product will be a winner. But too often, people invest all of their free capital in that first inventory order. Even if things go perfectly and sales are higher than expected, then you immediately have to place a second order, and you've got to have the funds to be able to do that.
However, if things take off quickly, the timing of getting your money out of Amazon can be delayed. This potential delay can mean that placing that order, and getting it in (from possibly an overseas supplier) means that you need to have cash available for at least two rounds of product replenishment on Amazon.
Too often, people make the mistake of putting everything into the first product order, expecting that the money off of that order will be used to pay subsequent orders. So they just do not have the funds in the bank to reorder. It's a frustrating situation, because they've been successful and they've picked a great product, executed a launch strategy, yet they have to borrow money to go continue to grow that product's sales.
To be successful with Amazon you need to plan for success and a plan to have the money available to reorder or launch that second product.
2. It's best to separate inventory cash flow from operations.
Typically, your operations costs (payroll, insurance, software subscriptions, etc.) are going to recur month to month, and you're going to get billed for those things on specific days of the month. They're very easily planned for because you know when in advance when those expenses will occur.
However, your inventory has a different flow:
● Forecasting: You want to anticipate when you will need to reorder and how that affects your current cash flow.
“When am I going to need to reorder, and how much?” As you get more experience with suppliers, oftentimes you can negotiate better terms and better price points. As you develop more experience around accurately forecasting your inventory you can lowerer your overall costs.
Depending on where in the world you're ordering from, you may have a manufacturing lead time of weeks or months. This may include weeks or months time on a boat in addition to the time for manufacturing. This means you have got a very long window to try to plan out having your inventory arrive without stocking out of your item at Amazon.
● Cash Outlay: The other piece is that there is typically a large cash outlay. The operating expenses I see with private label clients are fairly small. However, their inventory expenses monopolize a majority of their expenses.
These inventory expenses tend to require large amounts of cash. These large spends need to be monitored and managed to make sure that your cash flow remains positive while you are waiting for your items to start selling on Amazon.
If inventory cash flow and operations expenses are put in one bank account, it can be easy to lose track of your cash position. This can lead to moments of desperation and high-interest loans to help you bridge cash flow shortfalls.
Especially for products with low margins, the cost of high-interest loans can significantly impact your overall profitability.We have found that our most profitable clients split out their operating expenses from their inventory expenses by designating bank accounts for each purpose.
This allows you to better plan for those large inventory expenses without having a cash flow shortage. Having your money split into at least these two accounts helps you to notice potential cash flow issues before they are a problem. This method allows you to better understand where you money is going and how to be able to keep more of it at the end of the day.
3. Negotiating is the way to optimize capital and manage it better over time.
Few things will affect your profitability as an Amazon seller more than how well you negotiate with your manufacturing vendors.
When dealing with vendors, the things that we encourage people to look at are:
● What kind of terms can you get?
● How much capital do you have to put down?
● How much when the product ships?
● How much when you receive it?
● What is the minimum order quantity?
Sometimes something as simple as negotiating better payment terms can be the difference between having the additional cash flow to launch more products and ending up in a stressful cash shortage.
Reducing the amount of time that capital is out of your business can allow you to grow your business faster, even without taking on debt.
Minimum order quantity can be a common pitfall for Amazon sellers. There can be a temptation to increase your orders to get a better cost per unit. However, this can backfire. If your product doesn’t sell as well or as quickly as you anticipated you can end up with out the cash you need to pivot your business to new products successfully.
As you are researching potential vendors, make sure you compare their ability to be flexible on terms and produce smaller orders in the beginning while you are first launching your products.
4. Account for financing and shipping in your cost of goods, and how that works into your margins.
Unsecured loans and payment factoring companies are very popular among Amazon sellers. There is nothing inherently wrong with using debt to grow your Amazon business.
However, before you apply and accept that loan or other finance offers you need to consider the cost of that money. For many Amazon sellers, margins are so slim that when you've taken out the fees from Amazon, there's not a whole lot left over to dedicate towards paying interest.
Look at what financing terms are out there. In addition to the total cost of the interest compare the payback schedule as well. There are some innovative things now that give you a couple of months before you have to pay, so consider the kinds of terms that might work for you if you do have to finance.
When people see that they're going to stock out on a product, they can get really eager to restock as quickly as possible. This causes many sellers to look at shipping products by air versus by boat.
This can significantly increase your overall costs and reduce your margins. While it may get your product back on Amazon quicker, it may have been at the sacrifice of your margin. This points again to why inventory forecasting, cash flow, and profitability are so closely tied.
5. Integrate the advertising spend into your inventory forecasting.
Advertising is a key aspect of product launch and growing revenue. However, it is important to not only be looking at how your advertising spend affects your overall margins but also how your inventory sell-through rate will be changed with increased advertising spend.
This means adjusting your advertising to adjust for potential stock-outs as well as drive revenue.
For example, if you're in a situation where you may stock out of a product. Knowing that stock-outs can hurt your organic performance on Amazon - and that's something you don't want to do. Simply ramping down your advertising spend the 2-4 weeks prior to a stock out can increase your profitability per unit and reduce or eliminate the time your product is completely out of stock.
If you continue to run those ads you are increasing your total out of stock time and not maximizing your margins. In many ways, you're actually contributing to your own problem.
Slowing your ads gives you time to be more profitable on those products that you are selling at a slower rate, and allow for that product to arrive from your supplier.
People tend to think about advertising and decouple that from the flow of their inventory cash. But those two things really should be tied closely together. Whatever is happening with your inventory, take it back a step and look at what you're doing in your advertising activity to either speed things up or slow it down.
Have an account to set aside funds for inventory.
When a seller gets their deposit or their settlement from Amazon, and that money goes into one big bucket, there are so many demands on that money. Paying for operating costs, advertising, inventory, subscriptions, and payroll. When those kinds of things all get put in one big bucket, it's hard to see what is really going on in your finances. It gets very tempting to start thinking of ways to use those funds.
It is also easy to under estimate what you need to keep in your account for operating expenses and your next inventory run. What we recommend is to have multiple bank accounts with specific purposes. This methodology is outlined in both Profit First by Mike Michalowicz and in my book Profit First for Ecommerce Sellers.
We can oversimply this methodology by, at a minimum, having:
● A banking account for their operating expenses.
● A banking account for their inventory.
● A savings account to start putting some money aside for profit, or for a rainy day.
With just these three bank accounts, you are able to separate out that inventory. Think of it as the envelope system for business. This methodology is especially helpful for those that find maintaining a complicated cash flow sheet or using the cash flow reports in Quickbooks or Xero overwhelming.
I recommend to my clients that when they get a deposit from Amazon, they calculate how much of that deposit relates to the cost of the inventory so they can set aside the funds to replenish it. If they get a deposit for $10,000, and they know that the product that they just sold to replace it would be $5000, they just send that money into the inventory bank account.
This allows you to set aside those funds so that you know how much money you have to spend to buy your next round of inventory. It also makes it clearer how much money you have to invest in additional products.
Just by separating it out in a separate bank account, you have the visibility to be able to forecast how you're doing in capturing those funds to make the next purchase. When people do that they kind of become their own bank – they protect that money so that they can make those purchases to keep the inventory flowing.
Often when sellers don't do this, those funds get frittered away. Then they end up typically having to use some kind of debt to buy their next round of inventory. Once you get into that debt cycle, it is really hard to break it.
Our most successful clients are the ones that are able to set aside their inventory from their sales. Oftentimes, if they're wanting to grow, they move the replacement costs - plus some percentage - over so that they can increase the amount they can spend inventory the next purchase.
7. Be able to adjust your business to Amazon policy changes, supply chain changes, low seasons, or unexpected expenses.
If businesses are in a negative position, typically, they have used borrowed capital to keep things going. The first thing we do with new clients is to help people get their cash flow under control is to work them out of debt, and build up their bank account to the where they are their own bank. Meaning, they are less reliant on debt to grow their business.
It’s interesting. When the Amazon policy changes happened in March, I had two kinds of emails. One was from clients that were not working within this methodology, and they were panicking. They didn't know how they were going to make do until things sorted themselves out, and so we went into a very traditional 13-week cash flow planning methodology with those clients.
The other kind of emails I got were: “thank you so much, we've got our reserve, we've got inventory money set aside, and we're going to be fine.” And then after a few weeks, when things started really going crazy, and everything was selling 3X or 5X on Amazon, we started getting emails saying: “I am so grateful I had this money set aside, because I can really now take advantage of the opportunity that's out there.” So those are the kinds of results that we're seeing with people that are putting this in place.
Have reserve funds in the business so that you don’t have to come up with personal money, or negotiate how you're going to get your mortgage paid. Those kinds of things - having the business have a backup - really can protect your personal credit in a downturn.
If you're curious about how to start managing your inventory cash flow better, there's a whole chapter called ‘Inventory Insanity’ in the book Profit First for Ecommerce Sellers. You can also read the blog on the bookskeep website.
If you're trying to grow your business on Amazon, it's not enough to just focus on making sure that you're up to date on current marketing technologies or the most current marketing techniques and tactics. It's also really important that you have a strong foundation in understanding not only your overall cash flow, but the way that your inventory and your cash flow relate to each other.
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