Overcoming cashflow woes in a seasonal e-commerce business
Most businesses are subject to cyclical pressures at various points of the year, and nowhere is this more noticeable than in the world of e-commerce, where consumer demand is often closely tied to broader cultural or economic factors.
For example, many e-commerce businesses can expect to see a substantial spike in sales during the lead-up to the December holiday period, but by February, sales and cashflow can dip as consumers pause to take a breath after spending big during the festive season.
The strength of any business is proven during its off-seasons. Not only must e-commerce businesses maximise their profit-making potential during peak times, they also need to implement strategies to make the benefits of those earnings stretch throughout the entire year, especially during the off-peak periods.
Here are four strategies to help e-commerce businesses to overcome cashflow issues during their quiet cycles.
Rely on a revenue forecast
What did sales look like last year? What about the year before that? Closely examining previous years’ sales performance is a great first step to forecasting future revenues, which in turn can help businesses keep tight control of their costs and cashflow throughout the year.
Start building a revenue forecast by gathering sales data from the past two or three years, at a minimum – this will provide a pre-Covid glimpse of the yearly sales cycle. The historical sales data will provide insight into patterns and trends that can help a business better predict demand. Running a scenario analysis will also help businesses owners see how different forecasts might impact them.
Budget for the future
Creating a revenue forecast will give e-commerce businesses the ability to prepare a budget for the coming year. Budgeting is an essential part of running any business. With an annual forecast, it’s possible to produce a budget that will help to ensure funds are available to meet demand during the busy times while not being wasted on the quiet times.
One of the first things to do, after creating a forecast, is to assess the cost of buying products from suppliers. It’s also important to take into consideration the payment terms for each respective supplier.
The requirement for up-front payment, or short payment terms, for products that may be sold weeks or months down the track can lead to substantial financial pressures for an e-commerce business. Without adequate finances, a business may not be able to afford enough product to meet forecasted demand and miss out on sales opportunities.
Get to know the lead times and payment terms
How long does it take to get a particular product? Will it arrive in time for a peak period? These are questions every e-commerce business needs to answer if they want to manage their cashflow over the entire year.
Some products can take months to produce, which means orders need to be placed months in advance from when they might be needed. Lead time comes into play when a product requires an upfront deposit for full payment at the time of placing the order. It may be necessary to explore financing options to keep cashflow sound while waiting for the product.
Shop around for payment terms
Long lead times can be managed with long payment terms, so it’s important to discuss payment terms options with multiple suppliers to work out what kind of credit and time frames are available. It’s possible one supplier offers an option that will put less strain on cashflow over the course of the order’s lead time than another.
Such conversations are also a gateway to negotiating better terms overall, by providing an understanding of the various industry offerings. You won’t know if you don’t ask.
The story is originally published on Inside Small Business.