As an Amazon seller you know the term “cash flow” and you know that it’s important to the bottom line of your business. But do you truly understand how critical managing cash flow is? It is rarely discussed how much cash flow is truly the key to running a successful business.
Cash flow is the movement of money in and out of your business over a certain period of time. It’s also the lifeblood of any business. Without proper cash flow management, your e-commerce business can quickly run into financial troubles. For Amazon sellers, this is especially important because of the unique and ever-changing nature of the marketplace.
Amazon sellers have to deal with a variety of factors that all have a significant impact on cash flow, including fluctuating demand, seasonal inventory levels, and unexpected expenses. In this blog post, we’ll explore what cash flow means for Amazon sellers, the importance of having better visibility into cash flow, and the common problems that Amazon sellers run into when managing their cash flow. We’ll even give you some tips on how to generate more cash flow to help scale your business.
Table of Contents
What is cash flow and how can I calculate it?
In the most simple terms, cash flow can be defined as where your money is at any given stage of the business cycle and where it’s going next. As an Amazon seller, you’re probably used to seeing some of your cash flow, but keeping tabs on all of it can be a struggle when the numbers aren’t all in one place.
Amazon does a great job at showing you your sales, but it’s not always clear how much money they keep through various fees. They also have no way to provide context for business expenses that come up outside of Amazon, like inventory purchases. While Amazon Seller Central is a great tool, it leaves lots of blindspots for your business expenses. These might include:
- COGS (cost of goods sold)
- 3PL
- Product launches (photography, social media ads, influencer marketing)
- PPC
- Payroll
- Any software that you use
- Bank fees and interest
- Consultants
And that’s not everything. The range of expenses for your business that Amazon can’t account for is wide and they all impact your business’s cash flow. To understand the full picture of cash flow in your business all these numbers need to be consolidated into one comprehensive view.
What is the best way to forecast and visualize your business's cash flow?
In a recent webinar, over half of the sellers in the audience shared that they track their cash flow data manually, in spreadsheets. For a small business, spreadsheets might work well, but the more your business grows the more complicated the spreadsheet begins to look. There are also little to no forecasting capabilities with spreadsheets because they’re so reactive. Spreadsheets might work for your business temporarily, but that sheet doesn’t have the capacity to truly help you spot trends in your business and the effect cash flow has on planning expansions like product launches and inventory restocks.
While a spreadsheet might tell you where your money is right now, it isn’t the best tool for telling you where your money is going. A good cash flow tool will integrate your Amazon Seller Central account, bank accounts, and any other accounting software that you might use. By consolidating all your inflows and outflows into one dashboard, you get up-to-date information that allows you to make better forecasting predictions to plan for the future of your business.
Solid cash flow forecasting is responsive to future product launches and inventory orders that you’re already planning. By integrating all your sales and expenses into one dashboard, cash flow forecasts become that much easier to visualize and understand. Think of it like a meteorologist predicting the weather without the data of surrounding counties–every heat wave comes from somewhere else first.
What is the problem with cash flow and how do we fix it?
There is one central problem with cash flow that many Amazon sellers run into–gaps in the flow of cash from one stage of the business cycle to the next. In an effort to protect both the customer and the seller, Amazon holds profit from sales for a period of time after the sale is made. This is great when there is an issue, but when your profits are tied up, it can leave you with no working capital to run day-to-day operations, like replenishing stock after a great week or month of sales.
For a business to run smoothly there needs to be a constant flow of working capital available for use on expenses. This is where the importance of forecasting comes in–forecasting cash flow can help you identify where these gaps in cash flow will be and help your business prepare through budgeting and alternative funding sources.
There are a wide variety of strategies in regard to budgeting for cash flow gaps. You might want to consider ordering smaller quantities of inventory more frequently to help spread out the cost, while also maintaining enough inventory to meet customer demand. Budgeting for gaps in cash flow might also look like aligning those gaps with valleys in your seasonal sales, that way you won’t need as much inventory.
Alternative funding can also play a role in your budget by helping you maintain a typical cash flow through gaps and generally increasing cash flow. Greater cash flow puts you in a good position to grow your business by giving you access to capital which can be used to make large inventory purchases before busy seasons and cover other expenses that your business might have.
At the end of the day, Amazon sellers want to be able to grow their business to the point that they can pay themselves out of the profits. However, many Amazon sellers don’t know if they can afford to while also keeping their business running. By utilizing cash flow forecasts and budgeting based on them, you gain the opportunity to scale your business, launch new products, increase marketing, and of course walk away with profits.
Viably is a financial management software that fully integrates with your Amazon Seller Central, business banking, and other accounting software to give you a comprehensive picture of your cash flow from all angles.
