As an Amazon seller using Sponsored Products campaigns, probably one of the biggest reasons why you became a seller on Amazon was because it afforded you the opportunity to utilize a scalable business model that could be streamlined by automation and strategic PPC software platforms like PPC Entourage.
The road to creating a successful and steadily growing Amazon business is often defined by a series of unexpected twists and turns. But by combining educational resources like the Blueprint 3.0 and Fundamentals Guide, with diligence in work ethic and implementation, the consistent growth of your Amazon business will occur.
However, with new growth, comes new challenges.
One of the most common challenges cited by Amazon sellers experiencing persistent or rapid growth is cash flow.
The sales cycle of a product in an online marketplace like Amazon is usually considerably faster than that of an item in a traditional brick and mortar retail store. As an Amazon seller taking advantage of this phenomenon, you need to have at your disposal, the necessary funds to replenish inventory at a faster pace.
Why Cash Flow is So Important for Amazon Sellers?
Cash flow, along with being a primary metric in the solvency of your Amazon business, also determines your ability to scale your business at the speed you’d like, as well as whether or not you can protect it against the unexpected occurrences that are part of the Amazon landscape.
Lack of cash flow becomes an issue that can prevent you from taking advantage of better pricing from suppliers and vendors, or proactively investing in your business – two crucial components in staying in the buy box.
One of the most important facets of having cash on hand is that it allows you to always be in a position to pounce on an opportunity.
For example, during the fall, retailers and wholesalers often move tons of unsold inventories to make room for their seasonal selections. For Amazon re-sellers, that means a massive sourcing opportunity. But you must have enough capital on hand to take advantage of these inventory deals.
Another advantage of having sufficient cash flow on hand is that it can help you to reduce the cost of the product(s) that you stock.
For those Amazon sellers who are sourcing from a wholesaler or distributor, they may be able to get products at lower costs, or in some cases, receive special bonuses when they make larger purchases or pay faster.
For example, if your supplier will give you a 30% discount by purchasing 300 items instead of 200, then the cost of capital to make this additional purchase should be more than covered by the discount you’re receiving. Looking for and taking advantage of money saving options like this one will have a positive effect on your overall cash flow.
Similarly, ordering larger quantities as a private label seller allows you to negotiate a lower cost per item.
Can’t afford to replenish inventory...you’re in trouble
Amazon’s focus is entirely upon the end customer’s experience, so they hate sending customers to listings that can’t turn into sales.
Having to wait for funds can result in slow sales as you can only have items listed that you can afford to buy. Being out of stock on an item can be a major blow to your sales because it will cause your listing to show as out of stock and your organic search ranking will take a hit after a stock-out.
Once you run out of a product, it will take time to get the listing back up, increase impressions and appear in Amazon search results.
Here’s a quick rule of thumb to figure out when you need to purchase new inventory if your cash flow is not positive. Compare your average daily sales with your current inventory levels and your best estimate for days remaining until you are out of stock on a product. If your remaining inventory is only sufficient for a few days (<10 days), then your sales are likely outpacing your inventory reserves.
If cash flow is not an issue, then you should be utilizing inventory turnover calculations to order more inventories ahead of time, factoring in such costs as freight and shipping, to ensure restocking is never an afterthought.
What exactly is cash flow?
Many Amazon Sellers confuse profits with cash flow.
Cash flow is the amount of money that moves in and out of your Amazon business each month.
Profit is the total earnings after all expenses are subtracted from revenue.
It is an easy mistake to assume that just because you may be generating a profit on each sale, that you’ll have a sufficient amount of cash flow to invest in and grow your business.
Unfortunately, this is not always true. You can make money on each sale, but still have your cash tied up in inventory and outstanding receivables.
The advantages of sufficient cash flow...
Cash-on-hand allows you to reinvest and grow by:
- replenishing fast-selling and profitable inventory
- expanding product lines with new items
- hiring labor
- purchasing automation software to expedite operations and streamline tedious tasks
- marketing and advertising with Amazon Sponsored Products
Cash flow lets you know whether you need to take action to improve your monthly income and reduce expenses by:
- negotiating better payment and/or credit terms from suppliers and manufacturers
- paying closer attention to inventory stock levels to avoid over-ordering
- trying to increase your average order value
- attempting to cut costs wherever you can
How to Position Your Amazon Business for Increased Cash Flow
Diversify Sales Channels
Often, Amazon sellers do not know how to turn their sales into cash without a waiting period. It has become a standard practice for Amazon to withhold the funds paid to sellers for up to 14 days. This makes it difficult for sellers to access the funds they need for restocking inventory and paying expenses that are crucial to growing their businesses.
Establishing multiple sales streams provides Amazon sellers with the safest pathway for keeping their online business growing, instead of relying on one channel to keep the business afloat.
While you may be familiar, comfortable and successful in the Amazon marketplace, don’t put all of your eggs in a single basket. Consider diversification of your sales channels to possibly include eBay, trade fairs, brick and mortar outlets, industry trade shows and web stores.
Create a Monthly Budget for Expenses and Business Operations
Develop a budget strategy that will allow you to manage and grow your Amazon business.
As you allocate money for inventories (from the profits generated from Amazon sales) and other business-related expenses, funds should also be earmarked to cover the days when Amazon keeps funds pending for up to 14 days for sellers and as many as 90 days for vendors. Because you have prior knowledge of how Amazon operates its payments, as a prudent seller you should factor this situation into budgeting for your business.
Use Payability – Income Factoring to Maintain Cash Flow
Income factoring is the process of giving your owed invoices to a 3rd party factoring company, who will then collect funds on your behalf. So if waiting to be paid on invoices is impacting your cash flow, then factoring could be a solution worth considering.
Payability is a service that allows Amazon sellers to speed up payments and get paid out daily for their Amazon sales. With Payability, Amazon’s standard practice of withholding the funds paid to sellers for up to 14 days does not have as great of an impact on positive cash flow.
Payability provides financing specifically designed for Amazon Sellers utilizing factoring powered by technology.
Here’s how it works.
An Amazon business owner agrees to have a factoring company (like Payability), buy the accounts receivables from their services or sales listed on the invoice. The factoring company in turn gives the business owner the money in exchange for the accounts receivables, which the business owner receives the next day, rather than having to wait weeks to get paid.
Factoring enables sellers on the Amazon marketplace to have quick access to a huge percentage of their sales.
Explore External Financing
Taking on external financing comes with a number of risks. In addition to the obvious act of taking on a new debt and paying new fees, an Amazon seller might still have cash flow issues and stockouts, if that person does not have in place a comprehensive growth plan for the new capital.
For example, investing your capital in Sponsored Products campaigns, PPC software platforms like PPC Entourage, or PPC management services like Entourage Management Services, can lead to a much-desired increase in sales for an Amazon business.
When determining if an Amazon business owner can afford external financing, they should look at their gross margin. Gross margin equals sales minus the cost of goods sold divided by sales.
An Amazon business owner should only seek external financing if they are positive that they can afford it. This means that their ROI will be greater than the cost of financing and once again, they must have a detailed plan that outlines how they intend to use the capital that has been acquired.
It is important that the business owner have reliable metrics to help determine whether they should seek financing and how to invest it for the maximum return.
Conclusion
Cash flow is important for any Amazon business, especially one that is seeking to grow, thrive and scale. It is also a vital component for any Amazon business wishing to avoid running out of inventory, while maintaining a healthy level of average daily sales revenue.
Some Amazon businesses struggle with this at the beginning, or may run into some difficulties during a period of growth or expansion into new products or marketplaces. In these circumstances, diverse sales channels, external financing and companies that offer inventory factoring are options that can be considered.
Having cash flow in your business allows any Amazon seller to promote growth in their business with Sponsored Products, use cutting-edge Amazon PPC software, have effective inventory management and have the flexibility to quickly adapt to the shifting currents of the Amazon landscape.
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