5 Inventory Cash Flow Mistakes that Might be Holding your Amazon Business Back
An eCommerce platform like Amazon is an extremely competitive space with a majority of businesses migrating to selling online. Extensive focus is placed on marketing, pay-per-click advertising campaigns, and distinguishing your product through price or quality. However, for a successful Amazon business, something as simple as keeping the cash flowing could be a big advantage.
Efficient management of cash will keep the inventory cash flow of your business positive. When you spend money from your business to buy products, it results in cash outflow, and selling those products on Amazon gives rise to cash inflow. Always being in a position where your inflow outweighs your outflow is a crucial pillar on which your business should be built.
Below are some common cash flow management mistakes that businesses fall prey to.
1. Incorrect Account Keeping Practices
One of the biggest mistakes new vendors make is maintaining a single account for all income and expenses from their Amazon business. While separating your company and personal account to ensure you are covering your cost of living is essential, it isn’t the only important accounting practice.
It is advisable to separate your operational costs, inventory cash flow, and savings so that you have a clear picture of your business’s financial situation. Operational costs are fixed over the long term, and your bills need to be paid at the same time month after month. Inventory cash flow, however, needs to be monitored and kept in the green. Ordering inventory is a big expense, and you need to constantly account for sales and adjust your cash flow expenses accordingly.
It is tempting to receive a large amount of money from Amazon and immediately think of ways to spend it on advertising and other growth avenues. But your primary responsibility in this situation should be to ensure you have enough to cover your next order and then focus on saving to avoid the need for financing in the future.
Keeping money in a single account may seem simple, but it can leave your business vulnerable to financial losses when things aren’t going your way. It is best to have an exact idea of your expenses and income by maintaining separate accounts.
2. Inability to Predict and Prepare for Future
Another mistake you might be making is planning only for the short term. Amazon businesses tend to make this mistake right from the get-go by putting all their money into getting the first lot of inventory and hoping to finance the next order with that money. The business could then be stocked out owing to a delay in receiving payment due to Amazon’s payment policy. Being stocked out is bad for a business’s organic growth on the platform, which turns out to be a false step.
Planning for the future by keeping some capital aside for a second purchase after measuring the success of the first is a more effective strategy.
Keeping your savings aside, as mentioned earlier, also helps in this regard to keep the business going during the off-season or when you are encountering a low period. Taking a loan to finance your Amazon business may not, in theory, be a bad idea but having to pay a large interest, especially for businesses that have a low-profit margin, can adversely affect sustainability.
3. Inefficient Order Management
As your business grows and you gain a better understanding of the market, you will also be able to forecast demand. If you have spent this time building a relationship with the vendor then you will be able to negotiate better terms and delivery periods.
Vendors may be able to provide you faster shipping to keep you from being stocked out, but that could come at a cost. If you aren’t managing your margins, you are likely to make Amazon more money than yourself.
There is also the trap of reducing the per capita cost of your product by ordering more than what you need so that you don’t run out of it and also get better profit margins. But you will have to deal with a negative cash flow till you are able to sell all this product, and you might need financial support to keep paying your other bills during this period.
Efficient order management is an important step for managing inventory cash flow. Being overstocked and having a negative cash flow while planning sales strategies, and being understocked, risking being out of stock, are both bad for your business.
4. Incorrect Calculation of the Cost of Goods
The cost of a product to your business isn’t the same as the price you are paying your vendor for it. You need to add the additional expenditure for advertising campaigns to ensure it flies off the shelves faster, shipping costs you have to bear to obtain the product, and any financing assistance you may have taken for your business.
All this adds up to give you the actual cost of the product. You have to keep this figure in mind while calculating your profits. If your sales are not consistently covering these costs then you need to take another look at your strategy.
It is important to ask yourself questions like, is the interest you are paying on loan being compensated by your sales? Are there better financing options available with more relaxed terms of repayment? Can you optimize your shipping cost to balance being well-stocked while not overpaying for faster delivery? How can you adjust ad spending according to your product inventory to reduce ads when you are low on stock and then increase the spending when you have more stock to sell?
Cash is King
Many factors can contribute to the success of your Amazon business, but inventory cash flow management is one of the most important. Avoiding a cash flow gap, particularly in eCommerce, could be the difference between having a sustainable and unsustainable business. If you're new to eCommerce and are having trouble implementing these measures or believe you need assistance, there's aid just around the corner. Powerhouse91, an industry leader in buying and operating online brands, will help you with the inventory cash flow management of your business for Amazon and achieve full business growth.