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Expert cash flow management tips for maximizing profits on Amazon

By Lorea Lastiri | February 28, 2024
Expert cash flow management tips for maximizing profits on Amazon

For every business, cash is king, even more so for an Amazon seller. Cash flow refers to how money moves through your business. It’s a critical measure of an eCommerce business’s health. Unfortunately, many Amazon sellers often misinterpret or give minimal attention to cash flow management, often leading to many avoidable issues. As with most things in eCommerce, the trick is striking a healthy balance, particularly between short-term cash commitments and long-term business goals. In this article, we outline eight strategies that provide a strong foundation in cash flow management, particularly pertaining to inventory.

Overview of cash flow on Amazon

Every business aims to have positive cash reserves and avoid a feared stockout. However, cash can also be stuck in inventory. The longer the inventory turnover is, the bigger the opportunity cost. When that is the case, an Amazon business is losing money.

As such, you can’t order new in-season inventory to expand the product range, pay for critical business expenses like web hosting and warehousing costs, or take advantage of brewing opportunities.

Inventory management is a vital component of proper cash flow management because keeping and maintaining profitable inventory on Amazon is cash-intensive. Moving inventory faster helps you realize profit quicker.

As an Amazon business, you want to ensure that your cash flow is predictable, stable, and mostly positive. Although positive cash flow is always preferable, experiencing negative cash flow will likely happen occasionally.

However, consistent and protracted negative cash flow may stifle growth and ultimately cause operations to cease.

Factors to consider in Amazon cash flow management

There are multiple layers to managing cash flow on Amazon, including sales, inventory, time, Amazon’s payment terms, and expenses.

Paying proper attention to and delicately balancing these elements will put your eCommerce business in a healthy position.

Let’s explore these factors in detail.

Inventory management

Keeping adequate inventory enough to meet customer demand is imperative for Amazon businesses. However, you must balance this by avoiding overstocking.

Overstocking may lead to dead stock, which means having a batch of goods in your warehouse selling at a slow rate, or not at all. This means a business is losing money on storage costs instead of bringing in profit.

Amazon’s payment terms

Payment cycles may vary from seller to seller, with most eligible for receiving deposits every 14 days.

On top of that, it’s unlikely that you’ll get full payment for every item sold during the 14 days. Why? Because the company bakes a “7 days from the latest estimated delivery date” buffer into its payment terms.

So, say you may make a sale on the 1st of October. However, your payout date is the 5th of October, and the latest estimated delivery date for the item is the 7th of October.

The rule means the value of the transaction won’t appear in your Amazon cash balance till the 14th of October. Effectively, the Amazon disbursement funds system won’t release the money for that item till the 19th of October, your next payout date. You also have to factor in delays in payment processing.

Seasonal patterns

Some industries, niches, or products experience peaks and troughs. Thus, it’s vital that you check up on the seasonal trends for all the products you stock. Something innocuous, like plastic cups, can see a big surge right before the Super Bowl, especially if they are marketed accordingly.

Expenses

Note all expenses you make, irrespective of how small they appear.

Some examples of typical eCommerce expenses include subscription fees for tools and software you use, marketing and advertising, refunds and returns, Amazon standard selling plan and referral fees, insurance, permits and licenses, shipping, storage, taxes, and more.

Time

We discussed time from the perspective of receiving payments, but there’s also the flip side of your commitments to your partners.
This refers to the business terms with your suppliers, particularly the buffer they give you for staggering payments. As inventory takes up most of your expenses, having more wiggle room with your suppliers can be a lifesaver.

You must also consider supplier lead time—how long it will take manufacturers to produce the product and for the inventory to arrive.

Effective Amazon cash flow management strategies for sellers

Striving for positive cash flow is a goal every Amazon seller must pursue. Some of the effective cash flow strategies you can adopt right away include:

1. Never go all in on product orders

It may seem tempting to make bulk purchases when you get great deals from your suppliers. However, going all in any product order is not exactly prudent.

Let’s illustrate this with an example. Suppose you go all in on a product B based on market research. The product is a resounding success, and within a few days, you’ve quickly sold a big chunk of your inventory.

You realize you need to place a new order with the supplier to avoid a stockout. Stockouts can seriously hamper your store’s performance on Amazon.

Of course, you’re being proactive, but the challenge is that you’re yet to receive full payment from all the sales you made due to Amazon’s payment schedule.

Now you’re stuck. You can’t capitalize on the momentum you’ve created. It’s, therefore, best practice to have cash in hand to replenish your Amazon inventory at least twice.

2. Have a comprehensive overview of the cost of goods sold

With strict competition, Amazon sellers are already dealing with slim margins. You don’t want to eat into your profit margin further by underestimating the total cost of goods sold.

From shipping to packaging and subscription fees, track and record all expenses and bake them into the product price. There are multiple benefits to doing this, including:

  • To accurately price the product
  • To know how much should go into the bank accounts set up for operations and inventory purchases (more on this below)
  • Making cash flow prediction more accurate

3. Separate inventory cash flow from that of operations

Operating expenses like software subscriptions, shipping costs, and storage fees are recurrent and predictable. This makes it easier to plan for these expenses than inventory since you’ll typically pay for the former on specific days of the month.

So, having separate accounts for inventory and operations ensures you do not lose track of your cash position.

Remember the expenses you baked into the product price? You can easily deduce what percentage of the overall sales should go into the operations, inventory, and profit margin buckets or accounts.

Aside from helping ensure you’re never lacking funds when placing inventory orders, separate accounts provide visibility into your current cash flow status. You can easily see how much runway you have and if you need emergency funding before issues become disastrous.

4. Streamline and finetune planning with cash flow forecasting

Amazon cash flow forecast serves three core objectives, including:

  • Growth planning: Ensures your business has enough cash to fuel expansion or revenue-growing initiatives.
  • Liquidity risk management: Provides visibility into potential cash flow issues that may hamper operations in the future.
  • Liquidity planning: You can forecast cash inflow, ensuring there are funds to meet your day-to-day obligations.

Accurate cash flow forecasting will combine Amazon sales forecasting (the bulk or your only source of cash inflows) with estimates of all cash outflows during the forecasting period.

5. Optimize your inventory

One of the leading tips for successful Amazon FBA management is choosing the right products.

You must eliminate products that hardly sell, irrespective of high profit margins. Nothing stifles an Amazon business quicker than unsold stock.

Additionally, just because a product is popular doesn’t mean it’s profitable. The margins may not add a worthwhile income to your purse.

Also, certain products require careful packaging and handling. Be sure you can handle such products; otherwise, returns and refunds will consume your profits.

6. Reduce expenses

Reducing expenses is one of the surefire ways to improve cash flow and maximize profits. There are probably tools you’ve signed up for that you hardly use or need.

According to a survey by C+R Research, “consumers underestimate their monthly spend on subscriptions by $133 on average.”

The automatic nature of subscriptions can make many slip through the cracks. Ensure you’re constantly reviewing your bank statements for deductions that can be eliminated.

7. Create an emergency fund

One of the risks of selling on Amazon is that you’re subjected to abrupt policy changes that may impact your business. Having an emergency fund can help you respond better than your competitors.

Additionally, a supply chain or cash crunch may force you to review your partners, which might require new investments.

Over the course of every year, there’ll be unexpected expenses that you must attend to. Reserve funds help prevent panicking and having to dip into your personal funds to resolve emergencies.

8. Negotiate with suppliers

There’s always room to get better deals with favorable terms. Negotiations help you optimize capital usage per time.

For example, paying a larger chunk of product costs to suppliers after you have sold them can provide additional short-term cash to pay for marketing or launch more products. Rather than sending all that money to the supplier right away, part of it has been used for growth initiatives.

Moreover, avoid the pitfall of minimum order quantity. You may be tempted to increase the number of units ordered because of a more favorable cost per unit.

However, this may significantly lengthen your cash cycle and unnecessarily tie up capital in inventory.

You may also like: 11 dos and don’ts for efficient eCommerce cash flow management.

Why you should manage your cash flow as an Amazon seller

Some of the benefits of paying close attention to your cash flow include:

Cash is essential for survival

The world of eCommerce is uniquely volatile. A shipment of inventory can get lost or delayed or arrive with faulty products. Businesses that don’t have cash on hand to quickly resolve this issue will find themselves with lost sales and reduced profit margins. Several such incidents can kill a company.

Through smart cash flow management, businesses can make themselves more nimble to adapt to disruptions, lessening their overall cost. A well-run business is able to invest in growth avenues while also having cash reserves for when they are needed.

Facilitates better planning

Having visibility into your business’s cash flow movements can help you make better plans, either towards short and long-term goals or simply alerting you to the need for additional funding.

Helps maximize opportunities

We suggested keeping a reserve fund for rainy days and taking advantage of new trends and opportunities. However, tapping into new opportunities may be more difficult if your money is tied up in dead stocks.

Clear oversight

Cash flow is a greater metric for measuring an Amazon business’s health than profit. Profit may mask many inefficiencies in the business, but cash flow beams an X-ray on operations.

Takeaway: Amazon business growth and survival depends on cash flow

Surviving and maximizing profit as an eCommerce business requires flexibility and adaptability. Cash is one of the key facilitators of this.
Amazon cash flow management for sellers is a competitive advantage that makes planning more seamless, maximizes opportunities, and ensures there’s ample cash for operating expenses at all times.

To enjoy these benefits, eCommerce businesses operating on Amazon must consciously reduce expenses, have a comprehensive overview of the total expenses, and have separate accounts for operations and inventory.

At 8fig, we help eCommerce sellers fill funding gaps that threaten to derail their hard work. Join 8fig today to push your business on the path of efficient cash flow management.


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