post by:
Michael Goldstein
If you have worked hard and managed to get your e-commerce store up and running, it’s great to start seeing those sales come in. For a while, you’ll likely be happy with a handful of sales each day. Then you’ll be even happier as this increases to double-figures of sales each day. Eventually, though, this organic growth will probably settle down and it will take more effort to grow your e-commerce business.
It’s at this point that money becomes much more important. Considering that 90% of e-commerce businesses fail within 120 days and 32% of those that do fail blame financial issues for their downfall, having enough working capital to keep your business afloat and growing has never been more important.
But how much working capital do you actually need if you want to grow your e-commerce store? While the answer is probably a bit different for everyone depending on your niche, your target audience, your location, and your goals, there are some common things to think about that can help you work it out.
What Is Working Capital And How Can It Help Your E-commerce Business Grow?
Before you start trying to work out how much working capital you need, it’s important to fully understand what it actually is and how it can be used to help keep your business operational and growing.
Working capital is effectively how much money you have available to spend at any given point for business purposes. For example, you’ll need money available to purchase stock and maintain inventory, any marketing costs will need to be paid, and you may need to pay freelancers or contractors to do some work for you from time to time. Obviously, any sales you make put money back into your business but working capital keeps your business running when costs go above your sales figures.
To work out how much working capital you currently have available in your e-commerce business, you need to work out the value of your assets (such as cash, accounts receivable, and inventory) and then take away your current liabilities (such as accounts payable and debts). Once you have done this, you should have a clear idea of how much working capital you have available to you and whether it could be enough to help you grow your e-commerce store.
Now you know how much working capital you currently have in your business, you might want to take a bit of time to think about how it can be used to support business growth.
It Makes Your E-Commerce Business More Resilient
Perhaps one of the most important things working capital can do for your business is to increase its resilience. Things may be good for you and your business for a while before something completely out of your control happens and you need to spend money to get through the situation.
Let’s take an e-commerce store selling pet products as an example. The store has lots of repeat customers, a well-stocked inventory, hundreds of positive reviews, and a strong social media following too. The business is doing well and seems to be on the way to achieving great levels of success. However, the computer the business owner uses to do the majority of work for the business breaks down and they are unable to get anything done until it is repaired or replaced.
If the business has a good amount of working capital available, the business owner can get their computer repaired or immediately go and get a new one with little issue. Without working capital though, any emergency situations or unexpected events could result in big losses for the business as you may not be in a position to resolve them effectively.
Growing businesses usually need to be resilient as it can be challenging to predict exactly what’s going to happen even a few weeks into the future. Working capital can go a long way in increasing the resiliency of your business and can keep it moving forwards and growing no matter what challenges it has to face.
It Makes Your E-Commerce Business More Adaptable
When it comes to running a business, you need to be able to keep up with current trends. For example, more than 20% of all global retail sales are currently made through e-commerce websites. This looks like it’s only going to go up in the future so it’s important to be able to adapt to this increase.
It’s not just changes in the number of customers and sales your business gets though. Changes in operational processes, new rules and regulations, and even changes in customers’ behaviors can all impact your business if you’re unable to react appropriately to them. If things change, your business needs to be able to adapt to them as quickly as possible in order to stay ahead of your competition and to keep your e-commerce store moving towards successful growth.
Let’s go back to the e-commerce store selling pet products. As the business owner keeps a close eye on emerging trends through their subscriptions to relevant newsletters, having a good network of other pet-related business owners, and through watching how people are behaving on social media, they realize that a new type of dog food seems to be getting lots of interest within the industry.
If they want to take full advantage of this new trend, the business owner will have to place an order with a supplier very soon. They will also have to meet minimum order quantities and any other conditions the supplier places on the new food. Unless enough working capital is available, the business owner won’t be able to jump on the emerging trend and they might slow down or even stop their business from growing as a result.
Working capital goes hand in hand with adaptability. If your e-commerce business can’t adapt to changes quickly, it will be much harder for you to grow it successfully, so having good amounts of working capital available will make growth more likely in this situation.
It Can Help With Effective Inventory Management
There could be peaks in the sales your e-commerce store makes. For example, if you sell stationery, back-to-school time can result in quite a dramatic increase in the sales made on your website. You might expect this and know about it in advance but, unless you’re able to react to the expected peak, it can cause issues for you, your business, and your customers.
If you know that a sales peak is coming, you can increase the amount of inventory you hold. You can prepare extra packaging, and temporarily increase the number of courier collections your business has each day too. While all of these things can be extremely beneficial, they don’t come cheap.
Inventory management is key to achieving successful business growth. You need to make sure you have enough stock to meet the demands of your customers but not too much where you’re holding it for too long without making any money from it.
The back-to-school example for an e-commerce stationery business is helpful in explaining this further. During the time when parents are preparing for their children to return to school after the summer break, school stationery sales will very likely increase. If your e-commerce store sells stationery, it would make a lot of sense to hold more inventory during this period of time to ensure you can meet the increased demand.
Obviously buying more stock costs money. This means that you’ll need working capital to be able to manage your inventory to ensure you have the amount of stock you need when you need it most. Working in this way can actually save you money too as you may be able to order enough to hit the bulk order discount limits that many suppliers have in place.
If you want to be able to grow your e-commerce store, effective inventory management will be extremely important. Without enough working capital, you could very well struggle to hold the appropriate amounts of inventory during peak sales time.
It Can Help With Marketing And Visibility Campaigns
More than 35% of e-commerce businesses fail due to a lack of online visibility. If your business is based entirely online, without enough people seeing it or being able to find it, you’ll probably face some big challenges when it comes to trying to grow your store.
This is why effective marketing and visibility campaigns are so important. One of the common ways to grow your online store is to get more customers to visit and ultimately buy from your business. You can do this in many ways but one way that seems to be extremely successful for some business owners is to run highly-effective marketing campaigns.
While some marketing campaigns can include some free methods such as social media posting and similar, if you want to make a real impact on your visibility, the chances are that you’ll have to spend quite a bit of money to help get your business name out there. Without sufficient working capital, this can be too costly for some businesses.
Working capital can make increasing your brand awareness much easier (and quicker) to do. If you think about it logically, greater brand awareness is probably one of the most important aspects of growing your e-commerce store. The more people that know about your business and the more people that visit and buy from your business, the more growth it will experience.
How Much Working Capital Do You Need To Grow Your Online Store?
There isn’t really a definitive answer to this question as, in reality, every e-commerce store will need a different amount depending on multiple factors.
One of the first things you will probably want to do when beginning to work out how much working capital you’ll need to grow your e-commerce business is to think about your growth goals. Maybe you want to increase your sales by 10%, maybe you want to move into a new market, or maybe you want to build a new storage facility so you can hold more inventory. Obviously, each one of these goals will need a different amount of money to implement so this is an important first step to think about.
Once you have a better understanding of your business growth goals, you can then begin to think about how much money will be involved in making them happen. If you want to increase sales by 10% over a set period of time, you may already have enough working capital available to you to run some social media marketing campaigns, to start selling a new product on your website, or to ramp up some of your other marketing campaigns. However, if you want to build a new storage facility, this will likely need a larger financial commitment which may not be able to be spread out as much as marketing campaign costs. With a larger initial outlay of cash, much more working capital will be needed for this type of growth goal.
If you break down each element of your business growth goal, you can begin to put together costings of how much money each stage will need to be successful. Once you get to this point, you are getting close to being able to work out how much working capital you will need to grow your e-commerce store.
Ultimately, the total amount of working capital you need might not match the amount of working capital you currently have. If this is the case, you may need to look at ways of increasing your working capital.
How To Calculate How Much Working Capital Is Needed To Grow Your E-Commerce Store
This is where it can get a bit more confusing and more challenging for some e-commerce business owners. While there are calculations that can be done to help you work out your working capital requirements for business growth, each calculation will need to be adapted to suit your business growth goals.
To get a good understanding of your working capital requirements, you first need to know how money currently flows through your business. If this is called the working capital cycle, the cycle contains two stages. The first is how quickly your assets such as accounts receivable and your inventory can be turned into cash. The second stage is how quickly this cash is used to pay your liabilities (accounts payable). The money left over at the end of this cycle is your working capital.
For example, let’s say that your e-commerce business has $12 000 in the bank and accounts receivable totaling $5000. Your business also holds $8000 of inventory. This means your business has $25 000 worth of assets. If your business has accounts payable totaling $20 000 then your liabilities come to $20 000. Therefore your working capital (current assets minus current liabilities) is $5000.
If you now take this and think about how you want to grow your business, you can see how much working capital you will actually need to reach your growth goals. Let’s take the $5000 the e-commerce business in question already has in working capital. The business currently only has $20 000 worth of liabilities in the form of accounts payable. If the business owner wants to grow the store though, they may need to increase the amount of inventory they are currently buying. If this comes to a total of $10 000, the additional working capital requirements can be calculated by taking the current working capital ($5000) and subtracting the money required to purchase more inventory ($10 000) leaving the business with -$5000 in working capital.
In very simple terms, this e-commerce business owner would need to have $5000 more in working capital to reach the $10 000 required to grow their e-commerce store. This is obviously a very basic and very simple example but it is probably a very good starting point for working out how much working capital you might need to grow your e-commerce business.
How To Increase Working Capital To Meet Your E-Commerce Store Growth Goals
If you need to increase the amount of working capital in your e-commerce business in order to grow your store, you may have to look into multiple options to find a potential solution.
Reduce Your Inventory
This made sound counter-intuitive seeing as you are trying to grow your business but holding a lot of inventory can actually put more pressure on your business to sell. The problem with this means that you become more likely to implement business practices you might not have otherwise done so.
For example, if you’re sitting on inventory that cost you $3000 with a resale value of $5000, this initially looks like a very good position to be in. However, if the inventory doesn’t sell, you’re then holding inventory that has done nothing other than cost you $3000. In a bid to recover your costs, you may end up selling the inventory at heavily discounted prices. This then results in less money being made and less working capital being available to you.
By holding less inventory, you not only spend less on buying it in the first place but you also have less pressure to get it sold as soon as possible. If you think about it logically, a $1000 investment in inventory is much more manageable for most e-commerce businesses compared to a $3000 investment. Once you start selling through your inventory quicker, you might then decide to increase the amount you buy slightly to increase working capital further.
Consider A Different Business Model
There are quite a few potential ways that you could change your e-commerce business model to help increase your working capital. This would obviously depend on the niche your business operates in but there are certainly potential options to explore in a bid to get your hands on more working capital.
One business model that can work well for some e-commerce businesses is dropshipping. The reason dropshipping can be so effective is that there is no requirement for your business to hold any inventory at all. You actually get paid by your customers before the supplier of the product has even received the order in the first place. As good as this model sounds, there are some drawbacks to keep in mind. The main one being shipping times. Usually, when using a dropshipping business model, the actual supplier of the product takes much longer to ship orders to customers. This could be because they are in another country or a different timezone so there are delays in communication, but it could also be as simple as they ship so many items out that there is a delay in orders being placed and orders being shipped.
That being said, running an e-commerce store using a dropshipping model can significantly reduce your operational costs resulting in more working capital being available to be used for growing your business.
Another option for a change in business model could be that you switch to a made-to-order model. While this obviously won’t work for e-commerce stores that sell products they don’t manufacture themselves, it can be extremely beneficial for those that do. Rather than making bulk loads of your products, you offer each one as a made-to-order product. This means that each customer can have an input into the design and overall look of the product they receive. While this will obviously take more work on your part and will slow down shipping times and alike, you can charge higher prices for each product sold as it is effectively a bespoke product.
If you’re selling your products at higher prices, your working capital will increase as a result. This extra money can be put to good use in growing your e-commerce store very effectively.
Re-Negotiate Supplier Terms
You may not be getting the best terms from your suppliers. This is particularly more likely if you have been with your supplier for a while but are still working to your initial agreement terms. While it’s not guaranteed, you might actually be able to get better prices, better shipping times, or better bulk buy discounts simply by re-negotiating with your suppliers.
Even saving a little bit of money can go a long way in increasing the amount of working capital you have available in your business. Small increases in working capital can result in the growth of your e-commerce store speeding up quite considerably.
Look At Funding Options
It could be that your best option for increasing working capital by enough to help you grow your e-commerce store is to look at business loans or other funding options.
Financial restraints tend to be the biggest factor in whether an e-commerce business is successful or not so there are lots of funding options out there. It can be difficult to get approved for some of these options though but there may be some realistic possibilities out there for you.
Increasing your working capital by external funding won’t be the best solution for some e-commerce business owners but it could be exactly what some are looking for to assist them in their growth plans.