How eSellers Can Overcome Cash Flow Challenges
A company’s cash flow is the crux of its success. However, the global economy has taken an undeniable beating thanks to the COVID-19 pandemic, with smaller businesses hit particularly hard. Predating the crisis, 61% of small business owners admitted to struggling with cash flow with almost a third of them (32%) unable to pay their vendors, pay back loans, or pay themselves or employees. In light of the pandemic, it’s estimated that this number will likely surge.
Without steady cash flow contributing to a company’s overall success and growth, they risk becoming one of the millions of small businesses facing permanent closure. eCommerce companies that have waning profitability and low or unstable cash reserves thanks to the crisis are especially vulnerable. Even businesses that appear to be in a decent financial standing need to learn to predict damages to their business during this volatile time, as the crisis progresses — with no end in sight.
Pierre Garnier, Head of Trade Finance at Currenxie, says that cash flow management should form an integral part of all small businesses’ overall COVID-19 risk assessment and near-term action plan. “Despite the fact that the eCommerce industry is booming due to a change in enforced human behaviour, eSellers are still at risk due to a number of cash flow challenges. That’s why it’s essential that they actively evaluate their cash flow requirements so that they can develop appropriate strategies to overcome their biggest challenges, in-turn mitigating the potential risks to their customer base and supplier network.”
Biggest Cash Flow Challenges
According to recent research, 50% of small businesses have less than 15 days’ worth of buffer money on-hand to cover costs in the event that their sales stall. According to Pierre, here are a few of the greatest cash flow hurdles eSellers face:
- The Long Wait for Cash: The delay between the point of sale, and when eSellers are paid by certain marketplaces may seem endless when cash reserves have all but dried up. In fact, nearly 31% of small business owners say they wait more than 30 days for payments, with over half of them (66%) revealing the greatest impact to their organisation’s cash flow is the amount of time it takes for them to receive their money after payments have been processed. During the same time, they still have to cover inventory costs, marketing, fees and delivery for weeks before the cash reflects in their bank account.
- Waiting to Buy More Inventory: Because small businesses don’t have the same purchasing power as big corporates, coupled with the lag in cash received, buying new products can be difficult. Some eSellers may successfully sell their products, however, they won’t be able to buy more until they see their hard-earned cash. Most merchants need to pay their suppliers the full cost upfront before the shipment is sent to an inventory facility. As a result, they’re unable to keep up with demand due to a lack of funds — and could potentially end up losing their ranking on marketplaces like Amazon as product interest wanes.
- The Detriment of Overtrading: When organisations expand too quickly without having the necessary resources to support their expansion, or when they place too many orders, they risk overtrading. The cash flow shortfall comes when these businesses need to purchase materials before getting paid for fulfilling a job, or when they make significant capital investments for operations before owed amounts are settled. When this happens, they would need to rely on loans and overdrafts when they spend more than they have in the bank. If invoices aren’t subsequently paid on time, this can leave business owners scrambling to pay invoices, forcing them to take out high-interest loans and overdrafts.
- Advertising Costs: Most successful business owners know that advertising is a necessity, however, it can end up costing 20% of the organisation’s turnover. While spending money on advertising is a risk-reward situation where there is no guarantee of a return on investment, some companies take an all-in approach before testing several placement and platform strategies. Others may forget to take into account the costs of marketing their business altogether, tapping into cash reserves when they realise they desperately need exposure to bring in prospective customers.
How to Ensure Stable Cash Flow During a Crisis
Getting past cash flow challenges swiftly to avoid a credit crunch during a black swan event like the COVID-19 crisis is essential to ensuring small business survival. Here is what Pierre recommends when it comes to better managing your cash flow until conditions improve:
- Short-Term Forecasting
It’s essential that eSellers manage their store like they would a company. A short-term cash flow forecast can aid business owners in identifying irregular revenue flows, finding the cash low point, and driving decision making and action. This can be done by preparing financial statements, maintaining up-to-date accounts, and analysing margins and the viability of the business model over a 13 week period. Doing this will adequately forecast whether your business has sufficient cash flow, and help identify any potential shortfalls, opening up the avenues that need the most liquidity.
- Diversify Marketplaces
It’s become best-practice for eSellers to use payment gateways that are cost-friendly, and better catered for their business. Pierre suggests that you study the best ones for your jurisdiction, as well as investigate more niche marketplaces over more mainstream ones so you can tap into a different audience and make a better profit. Smaller and more exclusive marketplaces could mean less market saturation and faster payouts. He also recommends that you build personal relationships with the various marketplaces that showcase your business, so you can obtain VIP status faster.
- Meet the Shift in Demand: A primary issue for eSellers is not being able to identify their best-selling products as they have created too many SKUs because they didn’t necessarily follow eCommerce trends. This, coupled with the COVID crisis shifting consumer behaviour means it’s essential that companies become more agile if they want to streamline their cash flow in a hostile environment. By pivoting your products and services towards priority orders like at-home gym exercise equipment, for example, you can better meet consumer demands while simultaneously keeping your company afloat.
- Try to Reduce Expenses: Cost-saving is a given during the crisis, where expenses should only cover essential activities and structures. Review the amount of money you’re investing in the finance portion of your business and pull back the reigns if you realise you’re trying to expand too fast. Finding innovative ways to make the most of existing materials, consolidating your production or office space, going paperless, and adopting agile and remote working styles (extending the option of working from home (WFH), smart working, distance working, etc.) are all ways you can reduce your overall costs.
- Optimise Your Inventory: Excess stock can be detrimental to your cash flow. By optimising your inventory to make it as lean and beneficial as possible, you can ensure that you have the supply you need. Get rid of stock you don’t need by offering slow-moving inventory as free gifts to your customers when they purchase other items or sell them at discounted rates. Conversely, due to disruptions in the supply chain, you may be waiting on stock to be delivered. Companies who placed large orders before the pandemic took hold have efficiently stretched their stock until it can be replenished. Pierre says that if there is something all business owners can learn from the pandemic, it’s to order more stock of your best-selling products than you expect to need in order to avoid supply chain disruptions. However, it’s imperative that you only spend what you can on stock, to ensure you don’t deplete your cash reserves.
- Consider Increasing Prices: Increasing your prices during times of economic unrest may seem daunting, however, if you have a stable business with loyal customers, they may not be deterred by a slight price increase. Moreover, you could consider offering early-bird discounts, get customers to sign up to a waitlist and pre-order new items and make the payment upfront, or issue gift cards if you’re waiting on the arrival of stock. Incentivising customers with referral discounts and temporary customer appreciation promotions can help boost your cash flow.
- Make a Deal with Your Suppliers: If it’s taking longer for you to pay suppliers because of a lag in cash flow, but you desperately need more stock so you can bring in revenue, then try and prioritise your existing relationships with manufacturers while holding onto your capital, whereby you come to some sort of mutually-beneficial short-term agreement. Pierre says it’s also imperative to be clear with factories on delivery expectations so you can negotiate a price and commit to a set delivery time. As your business grows, you could also consider using a third-party logistics provider to save costs. This allows you to have a buffer in the form of your inventory.
- Consider Financing: With light balance sheets, fast growth and slow inventory turnover, eSellers need short term financing to cover supplier payments. If possible, utilise government rescue packages (such as government-backed guarantees for bank loans). Also use this opportunity to actively engage with your financing partners to ensure your available lines of credit remain disposable, and to explore new or additional options should you require them.