When you start a business, the risk of failure is high. One out of every five businesses fail in the first year, and of those, over 80% fail because of cash flow issues. No matter how fashionable your product or in-demand your services, maintaining a consistent—and adequate—cash flow should be your priority.
There is a wide variety of strategies and resources businesses can use to accomplish precisely this, whether you primarily focus on lowering expenses, increasing revenue, or finding multiple sources of cash that keep your business financially sound. In fact, most companies can benefit from a combination of all three to ensure their business is as protected as possible and in an excellent position for growth.
Competitive eCommerce stores are particularly vulnerable to cash flow issues. Shops can quickly overextend themselves by purchasing too much inventory or investing too much into lackluster marketing campaigns. Even having a highly successful conversion rate with a customer acquisition cost that's slightly too high can topple your burgeoning empire.
In this article, we discuss how you can orient your business towards better preservation of your cash flow above all else. Read this guide to learn:
- Why building processes is more important than just growing your sales volume
- Why cash flow is such a critical business necessity
- Six strategies for optimizing your cash flow for long-term business success
High-Volume eComm Businesses Prioritize Great Processes Over Trendy Products
Every business aims to grow by acquiring a healthy and increasing number of customers. Rather than simply doubling your marketing efforts or increasing your inventory—which typically results in linear growth—evaluate your processes themselves. Look for ways you can change your operations from linear to scalable. For example, you can:
- Select bulk options that have a cheaper per-unit cost, thereby increasing your profits as your business grows.
- Build your brand presence across multiple storefronts so you can expand your audience instead of just competing in one arena.
- Create a solid foundation for your fulfillment, warehousing and inventory, and customer service business aspects so you have efficient, repeatable processes.
- Have analytics tools in place for your sales and marketing efforts so you can assess what works and what needs improvement.
Creating these cornerstone elements and standardizing your business processes is an investment of time and effort, but developing them is essential for a healthy business. You then have a baseline of expenses and revenue you can measure, data that you can comb through to reduce expenses, and information to fill financial forecasting models with. These resources combined help ensure you have enough cash flow on hand during peak and off-peak seasons.
Why Protecting Your Cash Flow Should Be Your #1 Focus as an eCommerce Business Owner
On the face of things, cash flow can seem beneficial—it's extra funds set aside in case you have to make unexpected purchases or payments. But it may also seem like it doesn't have to be a priority, as you might be tempted to put all of your money into a trending product or new influencer relationship month after month until cash flow slows to a trickle.
Regardless of how tempting it can be to slim down your cash flow margins, ignore this impulse. Here's why businesses must always optimize and prioritize cash flow, especially if you're operating at high sales volumes:
- High sales volumes mean high monthly expenses. Even if your business is profitable, a fast-moving business that's pushing out a lot of inventory will have much higher monthly expenses than a slower business. Be sure your store has enough capital on hand to keep that engine moving without shrinking or giving ground to competitors.
- Cash flow is more important than profits to most investors. Whether you have investors, are putting your own money on the line, or are thinking you might need a business loan in the future, lenders and investors care about cash flow more than profits when they're weighing the viability of your business. Having weak and inconsistent cash flow is often considered a sign of an immature business, and that matters in your professional networking endeavors.
- Cash flow lets you seize new opportunities. If you don't have capital on hand, you can't build more relationships with influencers, start campaigns on a new marketing channel, or expand into a new niche. It's also more difficult to scale with the seasons. Before the holiday sales season ramps up, for example, you might want to preorder big sellers and hire marketers to create content. Without cash, your options are limited—you have to wait for that holiday sales revenue to kick in, at which point, you're already far behind the competition.
- Cash flow is how you grow your business. Whether you want to expand your market share, develop new product lines, or carry more product variations in your existing niche, doing so requires cash that you're willing to lose. These attempts are experimental phases, and they may not be immediately profitable. If you don't have money ready, you have to put your growth goals on hold or make cuts elsewhere.
- A sudden dip in revenue immediately hurts your business. Ultimately, if you don't have cash flow, your business operations are always at risk. Failing to meet sales goals could mean not paying employees or defaulting on a past loan. This quickly puts your company in the red and is often unrecoverable.
Protecting and optimizing your cash flow is business-critical. Not only is good cash flow a great resource for your business (as you can grow, operate with less risk, and stress less), but not having it is a tremendous detriment.
How to Optimize and Protect Your Cash Flow
Now, you've started establishing a foundation of more consistent business processes, and you realize the importance of cash flow. But what else can you do to optimize cash flow in your eCommerce business? Read through the following six strategies, and choose one you can easily implement within your business today. Gradually add more and more strategies until you know your cash flow can protect your business through months of potential growth experiments or slow sales.
1. Create Strategies for Customer Retention, Not Just Customer Acquisition
Acquiring a new customer costs five times as much as retaining a current one. On top of that, repeat customers are likely to make bigger purchases—and make them more frequently and reliably. With that in mind, one of the biggest things you can do to protect your high-volume eCommerce business is to create marketing campaigns focused solely on retention efforts. You can email past customers coupons and special offers, touch base with them if it's been a while since their last purchase, and reach out with content tailored to their interests and purchases.
This strategy benefits your cash flow by:
- Creating a consistently reliable source of revenue
- Reducing expenses per purchase or customer interaction
- Giving you data and insights you can use to further optimize your efforts
2. Select Inventory Management Systems That Reduce Costs and Provide Efficient Fulfillment
Depending on where you do business, you'll have access to different fulfillment options. If you have a Shopify store, you can use third-party 3PLs. If you have an Amazon store, you might use FBA to streamline all your Amazon sales. Similarly, your Walmart marketplace store might utilize Walmart's partnering fulfillment system.
Depending on your service partners, it might make sense to use multiple providers, including the platform-specific Amazon and Walmart options. Alternatively, your business might do best handling the majority of your operations through a single trusted fulfillment service.
With inventory management, use the core processes you've developed for your business and start testing different options to see where you can save money without jeopardizing customer service.
3. Be Wary of Financing Options With Strict Repayment Schedules and Direct Access to Your Accounts
One invaluable tool for increasing your cash flow is through financing, loans, and growth capital arrangements. You can apply for funding through Amazon or Walmart programs or through third-party services. Many growing eCommerce businesses use financing at every stage of the lifecycle, from preparing for the holiday season to covering a rough patch to powering up a growth opportunity.
However, financing options are only as valuable as the repayment terms are flexible. If you sign up for strict repayment terms that demand principal and interest payments every month regardless of your store's performance, you could significantly jeopardize your cash flow and tie up your revenue in debt repayments. Opt for financing sources that peg your repayment amount to your sales volume so repayment never outstrips its allotted portion of the monthly budget.
4. Find Flexible Growth Capital You Can Use for Every Aspect of Your Business
Similarly, you don't want financing options that are overly restrictive. While capital from a third-party financier can boost your spending options, some services carry strings. For example, money from Amazon and Walmart financing programs can only be used on Amazon or Walmart, respectively, and only for select expenses. If you have funds from Walmart but need to pay your freelance marketer or analytics service, you can't use the funds for those purposes.
Instead, look for third-party financing options that let you decide how to use the money. This makes those new funds a real part of your overall cash flow.
5. Prioritize Profits Over Revenue
While cash flow is king, profit is second. Any efforts that increase your overall business revenue but do so while lowering your ROI or decreasing your marginal gains are bad for business. Carefully assess new business ventures and existing streams of income by their profit potential, not just their revenue.
6. Plan Ahead for Dry Spells and Seasons That Require Upfront Investments
One of the most important mindsets you can have regarding cash flow is knowing that you'll have rough patches. You might have a very profitable holiday season that's followed by an abrupt winter slump. If you sell summary seasonal goods, you'll see peak and off-peak buying seasons. By accepting this, you can structure your business to save extra money during your most profitable months and lean on it during slow points so you can consistently pay for staff, marketing campaigns, subscription services, and other business expenses.
Optimize Your Cash Flow With Financing Options From Onramp
Every store can benefit from a cash flow management plan and backup options ready to fund unprofitable months and experimental growth projects. High-volume eCommerce businesses especially need to prioritize this because the cost of business operations is so high—as is the cost of failing to plan.
At Onramp, we provide growth capital and financing to eCommerce businesses of all sizes. Our platform will assess your business's potential by the metrics that matter most in the eCommerce world, and we'll give you flexible financing that you can spend as you see fit and repay based on your sales volume. Reach out today to make third-party financing a key pillar of your cash flow management plan.