The Importance of Borrowing and Spending Only What You Need to Maintain Healthy eComm Finances

The Importance of Borrowing and Spending Only What You Need to Maintain Healthy eComm Finances

Careful buying and spending strategies are essential for success in any eCommerce endeavor. Most importantly, a well-informed plan protects your business from overspending or accumulating debt — an oversight that amounts to a staggering $100,000–250,000 for nearly one-fifth of SMBs. Growth also hinges on wise spending habits as investment opportunities can come out of the blue. Only folks with enough cash on hand can spend wisely. But spending wisely is heavily dependent on borrowing wisely.

Ensuring healthy spending and borrowing is not as complicated as many aspiring eCommerce champions think, yet it requires careful expense management and responsible borrowing. Even if you're getting by with debt or poorly defined cash flow strategies, financial health is almost guaranteed for those who align borrowing with expenses and real-time sales performance.

Generate Profits With Smart Spending

Maintaining healthy finances requires keen oversight to ensure expenses go into services and products that continually improve your company's competitive edge.

At its finest, expense management can be like a second engine running alongside your main revenue generators. Together, effective spending and revenue operations lead companies towards unbeatable profit momentum. While expenses indirectly support revenue growth (which depends almost entirely on sales), intelligent spending strategies can single-handedly boost company profits.

Keep your end goals top-of-mind during any discussion about spending strategies. Frequently remind those in charge of expense management that they hold the keys to increasing company profits just as much as those tasked with growing revenue. Shift the narrative of your spending strategy away from reducing loss. Instead, treat every expense as an investment toward healthier margins.

Your company's revenue generation and spending strategy are more than the sum of their parts. The only missing piece is an intelligent borrowing strategy, which improves your ability to enhance revenue streams and spending strategies simultaneously. Cohesive borrowing and spending will create momentum to reduce expenses and boost revenue.

Balancing your borrowing and spending habits is also a surefire way to stay out of debt while securing access to the cash needed for things like:

  • Daily operations (payroll, web services, shipping, etc.)
  • Inventory replenishment
  • Competitive price controls, promotions, and other purchasing incentives
  • Expansion into new markets — both geographically and via new product lines
  • Business efficiency tools
  • Marketing campaigns
  • Utility-reduction measures (such as facility maintenance and improvements)

Making smart spending choices loosens up funds for all of the above and more — and those spending choices immediately open up with low-risk, incremental borrowing.

How Expenses Impact Cash Flow

Protecting company assets often means protecting margins. For many companies, however, doing so comes at the expense of long-term wealth. You can try to turn this around but when cash flow is tight, your options are limited.

If this sounds familiar to you, it’s okay, you can still turn it around. The good news is that it’s never too late to reorient and establish better borrowing practices!

More on this below—but first, how can available cash be applied most effectively?

The core benefits of careful expense management include the following:

  • Operating expense reductions
  • Ability to reinvest and expand more quickly
  • Wider, more comfortable margins
  • Improved cash flow

Improved cash flow is itself the gateway to many other benefits. It creates a liberating flexibility that ripples outward throughout your company and further on to your suppliers, distributors, and customers.

Incoming and outgoing resources become balanced, and expenditures take on more sharply defined purposes. Your company can weather longer delays between sales and actual cash receipts (just be sure to maintain tight collection protocols, even if fast reimbursements are no longer required for your company's basic survival).

Greater Cash Flow Agility

Having a handle on your expenses will also equip you with the liquidity necessary to replenish stocks immediately or fund game-changing business investments. Vital business improvements won't require convoluted financial planning that can come with risks. Each expenditure has much less domino effect on every other financial matter.

For instance, you'll be able to capitalize on sudden deals from suppliers and other relationship-building opportunities. Doing so won't require "robbing Peter to pay Pau. All too often, companies think loosening up cash requires bootstrapping other departments. The intention is for a temporary fix, but if the gambit doesn't pay off, they'll realize too late that it was their first misstep toward lasting cash flow crunches.

Tightly controlled spending practices maintain cash flow health at its most basic level, so inventory management stabilizes. Even if expansion is not in the cards, maintaining what already works is much easier with healthy spending habits.

Responsible Spending Through Simpler Borrowing

After taking care of operational expenses, profits should be consistently used for things that either cut expenses, boost revenue, or both. This creates an impactful feedback loop that results in a cash flow balance, where calculated costs more reliably improve revenue which means more cash on hand to spend growing your business.

Truly smart spending should make more spending possible. That's not to say expenditures must consistently increase, but the ability to invest more in your company, when appropriate, should go up over time. Like well-balanced borrowing and spending, cash flow inputs and outputs should align toward similar or identical goals. It's critical to apply cash reserves where they'll do their best while reducing the friction that prevents them from replenishing faster and more efficiently.

Doing this is hard if you don’t have a finance background. Many times, you’re wearing multiple hats and just getting by on the finance side of your business. But there is help. 

The first step to well-balanced borrowing and spending is incredibly easy with adaptive, extremely low-fee borrowing solutions that automatically operate in the background.

Creating a healthy cash flow and then using it well is an entirely separate topic— but as far as borrowing goes, cash flow often depends on the ability to borrow only as much as you need. In an effort to fulfill these needs, modern eCommerce lending practices have become incredibly simple and accessible.

Related: Everything You Need to Know about ECommerce Cash Flow

Mutually Aligned Spending and Borrowing Strategies

Securing low-interest funds is crucial to improving your spending habits. Take inventory replenishment, for example, where getting the best deal on inventory requires spending more upfront. Assuming you have sufficient warehouse space, there's no reason not to secure the lowest price per unit and buy in bulk.

You can calculate this quickly by looking at your latest purchase order and bumping up select line items into the highest-quantity tier, where you achieve maximum inventory savings. It may appear out of reach in the context of a monthly budget — but then also take into account the following:

  1. Greater profit margin per product
  2. Reduced medium- or long-term inventory expenses

Try this exercise with a certain number of your top-performing products. Consider the Pareto Principle, which holds that 80% of your income will derive from 20% of your clients or product catalog.

However, most companies adjust their budget to secure the most essential products as cheaply as possible. Most expense management approaches consider inventory budgets fixed. No matter how much business sense it might make to flex that budget, doing so often requires incurring debt.

Interest payments can eclipse any initial savings, and even though it's a rock-solid investment, it remains out of reach for most eCommerce SMBs. Yet this is only true with the typical borrowing choices available, which weren't designed to serve the specific needs of eComm entrepreneurs.

This is one of the most common financing difficulties eCommerce businesses face daily. The difference between smart spending aimed at more significant profit margins versus slow, linear growth is whether simpler, more effective borrowing options are available.

Related: What is inventory funding? Your key to eCommerce success.

Suboptimal Solutions

Eventually, companies determined to break free of tight margins and reach the next level will be tempted to take significant expenditure risks. Temporarily overspending may seem like a decent gamble when the means for expansion is a sure bet, but rigid financing options can quickly eliminate the gains.

It can easily result in a net loss once you account for:

  • Accumulating interest
  • Added administrative labor
  • Complex and confusing financial relationships
  • Potential fees and credit score reductions
  • Reduced cash flow

These risks and expenses only make sense for large-scale, high-stakes lending and spending strategies. Most eCommerce companies, however, operate at a different scale. Their needs are less elaborate, and committing to far-reaching loan terms or taking out giant credit lines usually isn't worth it.

Most traditional lending options, such as banks, credit cards, and government loan programs, are built for major expenses associated with running storefronts or franchises. Moderate, or even small-scale business expenses, by contrast, haven't historically been accommodated — but that changed with private, industry-specific eCom financing aligned with actual sales performance.

Adaptable Borrowing for Smarter Spending Practices

A partnership with a knowledgeable eCommerce lending expert is one of the most effective ways to immediately maintain an inventory with cash injections based on actual sales. Compared to traditional loans, your most important resources—your time, attention, and energy—are available for what matters most: running your business. In contrast to other financing options, available only if you borrow much more than needed, flexible financing doesn't pressure you to alter what's already working or fit into a different mold.We want you to keep doing what you do best, and have the capital to do it with peace of mind. To learn more, reach out to Onramp, and get an offer for low-rate inventory financing built for eCommerce today.