post by:
Carmen Marks
There always seems to be a shortage of two vital assets when running an eCommerce business: time and cash. While we would love to tell you exactly how to find more time in the day, we are all limited to the same 24 hours. So instead, we will settle for helping you figure out how to improve your cash flow.
A positive cash flow allows you to reinvest your money into your business by paying daily expenses, acquiring materials and equipment to increase your inventory, and attracting potential investors to grow your company.
What is Cash Flow?
Your cash flow is one of the greatest measurements of your business’s health. Cash flow is the money that comes in and goes out. Your bookkeeping transactions are the literal report of your cash flow, which is why keeping accurate bookkeeping records is so important..
Three are three types of cash flow that you need to track: net cash flow, operations cash flow, and investment cash flow.
Net Cash Flow
Your net cash flow is the difference of your total expenses versus the total incoming money. The calculation is simple; subtract the outgoing money from the incoming money. (Revenue/incoming money – expenses = net cash flow)
A positive net cash flow (more money coming in than expenses) means your marketing, pricing, and customer experience is on point.
Operations Cash Flow
The day-to-day costs of running a business fall under the umbrella of expenses in your net cash flow calculations. However, to see your cash flow dedicated to your operations budget, you need to perform the calculation.
(Net cash income + non-cash expenses – working capital change = Operating Cash Flow)
The operations cash flow shows you the financial health of your business. This is the amount of money you make from your daily operations.
Investment Cash Flow
Your investments should be paying dividends or interest. Investments such as real estate, savings, bonds, and shares on the stock exchange will have a variety of risks and rewards. For example, a high-interest savings account may fluctuate in interest rates, but you will never lose your original investment. Whereas trading on the stock market means your shares can gain or lose value – meaning you could sell your shares for less than you originally paid for them.
The equation to calculate your investment cash flow is as follows:
(Cash flow coming in from equity or debt – (dividends from investments + repurchases of debt/equity) = Investing Cash Flow)
A positive result means your investments are performing well, whereas a negative outcome means you may need to rethink your assets.
How To Increase Positive Cash Flow
Now that we understand the different types of cash flow, it’s time to think about how you can improve your cash flow.
- Improve Inventory
Frankly, if you are not turning over inventory, it is almost impossible to generate revenue, let alone improve cash flow. The inventory sitting on the shelves collecting dust is actually costing you money. When you factor in the cost of storage, additional marketing, and discounts to try to move the stock, you lose money until the inventory is not valuable anymore.
In order to improve your inventory, you need to evaluate your best sellers and focus on your core demographics. The ABC structure of inventory management shows that the majority of your marketing and inventory should be geared toward your best sellers in the A-category. Your less popular sellers should be grouped in B-category, and below that should be your C-category.
The C-category should still be prioritized, but not as heavily as A- or B- category inventory. These items typically make up 5% or less of your overall revenue. So you do not want to spend too much time or effort in renewing or marketing this stock. C-category stock could be old A- or B-level stock that no longer trends well and can be purged at discount rates to make room for new inventory.
The idea of ABC inventory management comes from the Pareto Principle, or the 80/20 rule. The 80/20 rule states that only 20% of your inventory makes up 80% of your sales. Or, think of it this way: only 2 out of every 10 of your customers want your B- or C- level stock.
Reorganizing your inventory to prioritize items that sell not only helps your inventory control and management, but improves your net and operations cash flow.
2. Adjust Pricing
Pricing your products accordingly is a delicate balancing act that requires market value research compared to your costs associated with producing, acquiring, and delivering the product. Prices that are too high will result in fewer sales and while prices that are too low result in decreased cash flow and stock outs. You have to find the happy medium. There are five main pricing models to help you find what works best for your eCommerce business: value, cost-plus, competition, product pricing, and price skimming.
3. Value Pricing
Customers are willing to pay more for a product that they see has value – this is the rule of value pricing. If the consumer believes the product is special, more aesthetically pleasing, or has features that outweigh the competition’s product, they will buy it. Even if your product is not different from the competition, if the consumer sees your business is more trustworthy, sustainable, or green you have added value that cannot be overlooked.
4. Cost-plus
Cost-plus pricing is pretty simple: determine the cost of the product and add your profit margin on top. Many retail companies use cost-plus pricing in eCommerce stores where they sell a variety of products.
Each product should have its own calculation to determine profit margin. Here’s how to figure out cost-plus pricing:
((costs of producing, acquiring, and distributing the product) x (1 + desired profit margin) = cost-plus price)
Products that are in high demand and have a strong market can be priced with a higher profit margin because customers are willing to pay more. However, products with low demand or a weak market do not fare so well.
5. Competition Pricing
A popular pricing option is competition pricing. With this strategy, you set your prices competitively against other eCommerce businesses selling the same or similar products. While it seems like an easy strategy, you could come up short changed. Competition pricing does not take into account the costs associated with producing, acquiring, and distributing the problem because it focuses on having the most aggressive pricing to attract customers to your business.
6. Product-Based Pricing / Penetrating Pricing
This method is used when introducing a new product to the market. Usually it is priced relatively low and increases as demand and market increases. Ideally, those introductory prices will drive traffic to your site and you can recommend other products or services to new customers.
7. Price Skimming
Price skimming is quite the opposite of penetrating pricing. Price skimming is a strategy where you set a high price point initially when you introduce a new product to the market. The idea is that with a brand new product on the market, you can charge a higher price point because there is no competition. Once competitors enter the market and your customer demand is met, you will be able to reduce your prices to reach the next level of customers. You can continue to lower your prices until you meet your predetermined low price point.
Collect on Invoices
This seems like a no-brainer. When you sell a product, you deserve payment. If you are sending out invoices and not following up on them, that is negative cash flow. How far you go to collect your money is up to you and your ability to do so.
How do you collect on unpaid invoices?
- Set clear expectations. Outline the terms of your invoices and let the customer know what to expect if they choose not to pay their bill on time. This could mean revocation of services or subscriptions. Additionally, the customer should be subjected to late fees – after all, if they do not pay, you may be subjected to late payments as well. If you are willing to offer a payment plan, be sure to include that as well. All of this should be explained in your FAQs and contracts that you sign with the client.
- Friendly reminders. Reminders are a good thing and forgetfulness happens from time to time. Sending an email or text message to your customer reminding them of their upcoming due date will incur more on time payments without wasting your time. These emails and text messages can be automated with preset dates – so you are not pulled from other responsibilities to follow up.
- Overdue notices. In addition to friendly reminders, it is important to follow up once the payment is officially late. Whether you offer a grace period or not, payment becomes officially delinquent once it is 30 days past due. Within this 30 day period, send regular emails, text messages, and make the occasional phone call. This process can be uncomfortable and potentially damaging that particular customer relationship (we will talk more about this in the next section: Vet Your Customers).
- Repossess the product/cut off the service. By this point, the likelihood that the customer is going to pay their debt has dwindled. The last ditch effort not to lose any more money or waste anymore time is to repossess the product or remove the person from the subscriber list. If you are unable to repossess the item, or the value of the product is lower than the cost to obtain it back, you may have to write it off (or see step 5).
- Send it to collections. If you choose to do so, you can sell your outstanding invoices to a collections agency for a fraction of the value. You can do this within 120 days of the late due date. While you might only get pennies on the dollar for your invoices, it is a little compensation for what you lost.
Vet Your Customers
Let’s face it, there are some unsavory people on the internet. Scammers, credit card fraud, hackers – they all pose a threat to your business and cash flow. For example, if a credit card is stolen and used at your site, the credit card company will revoke the charges and you are left with the consequences. Too many of these will cause your cash flow to plummet because you will be making up for the difference out of your profits.
Verifying your customers are who they say they are is something eCommerce businesses try to tackle immediately. Most sites will use two-factor authentication or instant bank verification.
The two-factor authentication (2FA) is specifically designed to require the credit card number and the CVV code. Additionally, the customer will be sent an authorization code to their phone or email to prove they are the ones approving the purchase. The code is time-sensitive to avoid allowing scammers to hack into other accounts to access the information.
Instant bank verification (IBV) is a simple-to-use API you can install on your site to immediately authenticate the bank account linked to the card used to make a purchase. This process takes seconds and does not interfere with the check-out process – unless the card is fraudulent.
For your invoice customers, it is important to obtain the necessary information to ensure they can and will pay when the bill is due. You may need to pull credit checks or credit histories, verify bank accounts, or request a downpayment.
Generate Passive Income
Passive income is not that difficult to come by these days, but the dividends may vary. Today, you can’t click on any website without seeing advertisements. Selling ad space on your site will generate some money, but you run the risk of your customers deviating from their intended purchase.
Affiliates and affiliate sites are a great way to generate revenue without having to do a lot of extra work. Affiliates – such as social media influencers, advisors, and people who have a high following – are people who recommend your product or service. They usually receive a percentage or small fee for their service based on how many sales are made from their promotion.
Subscription services offer another form of some-what passive income. Yes, there are costs associated with providing the product or service on a regular basis, but it is income you can count on and factor into your cash flow.
Consider dropshipping for extra cash. With dropshipping you basically take and fulfill customer orders without having to store the inventory on-hand. You order the product from the supplier and arrange for delivery to the customer. It’s kind of like middle-manning the supply-chain.
Raising Capital
Raising capital is attainable when you are looking to improve cash flow. Capital can be obtained from traditional bank loans and credit cards, or through multiple alternative eCommerce financing options. Inventory financing (taking out a loan specifically for inventory), revenue-based financing (paying back your loan based on a percentage of monthly revenue), and merchant cash advances (paying back the loan with a daily percentage of credit/debit card sales) can help you improve cash flow and take a load off your shoulders when it comes to obtaining the things you need to elevate your business. To see more financing options, check out our article on funding and financing here.