Amazon’s FBA (Fulfillment by Amazon) services are an effective way to streamline much of the heavy lifting required to operate a successful online retail business – but in exchange for outsourcing your inventory and shipping processes to Amazon comes a host of cash flow issues. As the access to cash is essentially held hostage every two weeks, Amazon sellers cannot operate at the real-time speeds eCommerce demands.
To make the most of FBA, you need to leverage the time and resources it saves to overcome its drawbacks in the form of more complex cash-management demands. Read on to learn more about the cash-flow challenges inherent to FBA and how industry-specific financing can help you meet and exceed these limitations for maximum advantage and minimum drawback.
Amazon FBA, Cash Flow, and More
Before we take a deep dive into the impact Amazon FBA cash flow can have on your business, it’s essential to understand what it is and how it works.
What Is Amazon FBA?
When businesses sell via Amazon, they choose between two distribution methods: Fulfillment by Amazon (FBA) or Fulfillment by Merchant (FBM).
With FBA, sellers ship their products in bulk directly to Amazon warehouses for storage. When a customer makes a purchase, Amazon handles shipping for the product and manages related customer service. Customers can also take advantage of their Amazon Prime benefits, which is a big draw for many sellers. As a result, Amazon takes on all risks, assuming full responsibility for delivery and logistics issues. Likewise, the risks for sellers are reduced.
As a result, the following supply chain links are facilitated, for a fee, on their behalf:
- Customer service
By almost wholly reducing one’s involvement in these services, sellers can optimize efficiency and focus on other aspects of their business.
With FBM, the online seller stores their inventory, ships purchases directly to customers, and provides customer service. This is much more labor intensive, and the merchant must heed strict standards to remain in good standing. However, the seller maintains complete control over inventory management, carrier selection, and shipping methods.FBA is by far the more popular method. According to Jungle Scout, 68% of Amazon’s third-party sellers rely exclusively on FBA, while only 11% are entirely FBM. 21% use some combination of FBA and FBM – meaning nearly four-fifths of all Amazon sellers use FBA in some capacity.
What Is Cash Flow?
Cash flow is a critical financial metric for any business. The Harvard Business School defines it as “the net balance of cash moving into and out of business at a specific time.” It’s critical to measure the health of any business, and in eCommerce, it can shift on a dime.
Since businesses receive and spend cash, cash flow can be positive or negative. Positive cash flow means more money comes into the business than leaving it, primarily by selling products and services or securing other financing resources. Negative cash flow signals that the company is expending more than it’s taking in as it pays bills, makes payroll, purchases inventory, invests in new equipment, and meets other operating expenses.
Maintaining positive cash flow as much of the time as possible is essential. However, negative cash flow doesn’t mean a company is losing money in the long run or having financial problems. Nor do positive cash flow spikes always imply healthy profits. Nevertheless, thorough cash flow management is something all eCommerce SMB owners should keep at the top of their list when reviewing their financials.
To do so, eCommerce managers must keep accurate cash flow statements to reflect the cash movements of a business within a specific timeframe. Automating this as much as possible is important, and it’s essential to help your business overcome Amazon FBA cash flow issues.
Related: Financing Options for Amazon Sellers
Steadying Amazon’s Inconsistencies
It’s no secret that Amazon increasingly interferes with the ability of third-party sellers to operate, facing increasing antitrust scrutiny as a result. For now, seller dependency on Amazon fulfillment services subjects merchants to continually shifting business practices that are not under the merchant’s control.
Still, many merchants take these conditions as one of the veritable costs of doing business in exchange for a reduction in other operating expenses. As it increasingly cuts into merchants’ ROIs, many FBA merchants must contend with thinner margins (typically after they’ve invested considerable time and resources into it). The reasons for this are multifaceted and perpetually in flux, which makes it hard for online retailers to plan.
Here are just some of the commonly reported issues that create cash flow issues for FBA sellers:
- Inventory storage limits
- Changing inventory limits
- General FBA rules that shift unexpectedly
- Being forced into continually securing new products (Amazon has a habit of copying and undercutting successful third-party sellers – and they have full access to FBA merchants’ sales history and performance indicators)
- Amazon buying out vendor supplies before sellers can restock
- Significant delays between sales and payment receipts
The last two issues are mutual in that Amazon has control of a significant portion of FBA merchants’ funds and the ability to purchase the inventory FBA merchants rely on before most FBA merchants can afford to do so. This makes FBA-specific financing solutions advantageous, as we’ll discover later.
Of course, both Amazon and their third-party merchants are continually weighing these pressures against the fewer, albeit impactful, benefits of enduring the above difficulties, like having:
- Higher brand visibility
- Access to Amazon’s immense market base
- The ability to leverage Amazon features, such as ultra-fast shipping and Prime deals
- Much less day-to-day involvement in your business operations
Next, we’ll discuss the effect these factors have on sellers – followed by the most strategic financing method for making the most of Amazon FBA services while mitigating as many drawbacks as possible.
How Cash Flow Affects Your Amazon Seller Business
As a critical indicator of the health of your merchant account, it’s no surprise that cash flow can significantly impact performance. A lack of funds presents significant challenges for maintaining inventory, investing in growth initiatives and new resources, and making regular payments.
Poor cash management can cause headaches and unwelcome surprises, halting growth and resulting in an unprofessional image to your customers if left unchecked. With FBA services, cash flow issues can jeopardize your performance, including being de-platformed (or at least losing visibility amongst the competition).
Problems Paying Staff
Even before you have the luxury of focusing on your brand’s market reputation, meeting payroll is essential to keeping your staff’s morale high – and without consistently positive cash flow, doing so detracts from vital growth opportunities.
Payroll challenges could even press you into taking on unanticipated debts, such as merchant cash advances with notoriously one-sided terms. You’re then treading water, scrambling to get your entire operation out of the red. You’ll likely become habitually frustrated and less optimistic, which could easily cost you your most talented employees and strain vendor relationships. From there, it’s a slippery slope to losing ground within Amazon’s third-party seller ranking system or even losing your business.
Unexpected Cash Troubles
If you’re a new FBA seller, you may still be learning the ropes regarding managing finances around their two-week delays in obtaining access to your earnings. Cash flow issues can also spring up out of the blue if you’re not tracking your finances skillfully. This is a common challenge, as over 60% of small businesses surveyed in a worldwide Quickbooks survey reported experiencing significant cash flow issues – and for 44% of them, those cash flow issues came as a surprise.
Inability to Purchase More Inventory
Without adequate cash flow, you can’t purchase the necessary inventory without going into debt, initiating a negative trend of cutting profits before you even earn them. Soliciting credit urgently and from a place of desperation inevitably results in unfavorable terms – and even if you simply accept slim margins instead, you’ll lack the ability to:
- Access critical inventory during high-volume sales periods
- Take advantage of deals requiring bulk inventory purchases
- Expand your customers’ product selection
- Establish new vendor relationships
Inventory Issues Impact Sales
Sold-out products can interrupt your ability to sell on Amazon and reduce customer confidence in your brand. It will also negatively impact your Amazon keyword ranking, which sellers often must cultivate for years. You’ll then lose out on customer reviews, and previously loyal customers will begin purchasing from someone else – requiring significant marketing resources you don’t have to regain their favor or replace them with new customers.
Impact on Regular Business Operations
Marketing, research, and innovation are crucial for consistently staying on top of your market niche – but during a cash crunch, these become “extras” that are usually the first to go when margins tighten. It creates a catch-22, where getting back on top requires loosening up funds to expand, just when you are contracting. Amazon FBA cash flow issues can motivate you to slash many first-line items that, if you could hold on, would help your business grow. Factors necessary for long- or even medium-term growth suddenly become non-essential when the short-term gain is threatened.
Putting Personal Finances at Risk
According to the QuickBooks survey referenced above (the QuickBooks State of Cash Flow Report), 46% of small businesses have once used their private funds to keep their business running. Considering the notoriously bad lending options from legacy institutions, the temptation to dip into your personal finances is understandable – but it needlessly jeopardizes your and your family’s financial security. Should your business fail to right its course, family estate issues will distract you from managing your business and divert focus away from your business when it needs it most.
High-interest, one-size-fits-all personal loans are too expensive for long-term sustainability, and they aren’t made with the immediate cash flow shifts inherent to eCommerce in mind. The solution requires more advanced and modern lending strategies that correlate cash advances with real-time sales – something only possible with the automated financial reporting techniques primarily made possible by eCommerce.
Since eCommerce has spurred much of the finely honed, data-intensive financial strategies now widespread for businesses in general, it’s only natural that these same advantages be fully leveraged for superior cash flow management amongst the independent online retail community. Fortunately, doing so has never been easier.
Financing for Amazon FBA Cash Flow Issues
If you’re feeling a cash crunch due to your reliance on FBA and its ingrained cash-access delays, you will best serve your multi-faceted needs by securing an alternate financing arrangement that works with you, not against you. Without being dependent on central financial institutions, online merchants everywhere are maintaining their competitive edge by turning to private eCommerce lending strategies explicitly built for eCommerce business models and the most urgent needs of online sellers.
This industry-specific financing solution is an efficient and modern way to access the cash needed to function fluidly during the delays between FBA purchases and the distribution of profits. Unlike a traditional bank loan, private financing options send funds directly to your account, with repayment terms associated precisely with your actual sales performance.
This is now possible thanks to plug-and-play fintech systems that allow your financier to correlate funds allocation directly with your Amazon (or any eCommerce) account’s real-time sales. This is radically distinct from traditional lenders such as credit card companies and centralized banking institutions because eCommerce cash advances don’t require monthly payments or charge late fees. Instead, they automatically draw when the online seller makes a sale.
Securing a Better Way
With eCommerce-specific financing, the merchant can access the cash they need right when they need it – without the headaches. For experienced and new FBA merchants alike, any Amazon seller looking to grow will find a precisely customized solution tailor-made for them from Onramp. We plug directly into your Amazon Seller Central account to know exactly how much cash you need and exactly when you need it, minimizing costs and enabling you to optimize your business needs quickly. Call Onramp today to get started – and discover the advantages of interest-free, on-demand funds synced to real-time sales.