Strategically Scaling: Optimizing Your Cash Flow
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In the ever-evolving world of ecommerce, successful sellers understand that working capital is the key to success. While money might not be able to buy you happiness, it can certainly help alleviate stress for your Amazon business and help it scale. Before you can assess taking on working capital, it’s best to get a handle on your cash flow. How is money moving through your business? What are you planning to use funding towards?
In this blog we’ll review how to fully optimize your business’ cash flow, so you have a clear picture of how money is moving through your business. This will then lead us into our next blog’s topic of how knowing your cash flow can help you secure the best funding option to help your business scale. Before we get ahead of ourselves, let’s dive into all things cash flow.
Strategies to Optimize Your Current Cash Flow
Before you begin to look outside your business for cash flow support, it’s important to take a good long look at its current financial health. In order to understand the true position of your Amazon seller business, you need a comprehensive picture of how much money is coming into the business, how much is going out, and where it’s all coming from. Only then can you begin making changes.
Monitor the Right Metrics: Revenue vs. Profit
While it may seem obvious, keeping tabs on the right metrics of your Amazon business is the first step to improving your cash flow. Many Amazon sellers understand the revenue of their business, but don’t see the discrepancies between that and their profits.
Revenue is the total income generated by sales over a specific time frame. It's the headline number, the figure that often draws the most attention. However, profit is the income that remains after all expenses, including operating costs, taxes, and any outstanding debt, have been accounted for. While both profit and revenue can be reinvested into your cash flow, profit is what helps you scale your business and cash flow while revenue just sustains it.
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To accurately assess your cash flow and ensure that you’re making the most for your business, focus not just on revenue growth, but on increasing your profit margins. Here's how:
- Audit your expenses and look for ways to trim the fat without sacrificing quality.
- Analyze your pricing model to ensure it reflects the true worth of your products, accounting for both costs and competition.
- Consider the ROI on investments like PPC and advertising campaigns, virtual assistants (VAs), new software or tools, and more.
The slimmer your profit margins, the less your cash flow will be able to increase month over month–and the less capable your Amazon business will be of scaling.
Streamline Operations and Logistics
One of the biggest money-sucks for any Amazon business is operations and logistics. Whether you utilize Fulfillment by Amazon (FBA) services, a 3PL solution, or you have your own warehouse, packing and shipping is often one of the most expensive aspects of your business.
If you’re hoping to improve your cash flow, this can often be one of the best ways to ensure that your money is being used wisely. A critical evaluation of your operations and its cost can often reveal room for improvement and increased margins.
Build a Sleep Well at Night Buffer
One of the best strategies you can utilize to improve your cash flow is to build out buffers, like a Sleep Well at Night buffer, against cash flow negative months. These buffers are reserves of working capital built up over time from profit and funding that your business has easy access to but doesn’t regularly use. When your Amazon business faces an unexpected expense, or an opportunity with a steep upfront cost, these buffers can help alleviate pressure on your cash flow. In many cases, a Sleep Well at Night buffer is the difference between slipping from a cash flow positive to cash flow negative month.
To build up a Sleep Well at Night buffer, Amazon sellers set a number based around how much capital would take to fix various problems if they arose. Once you’ve determined what this number is for your business, you can start building up the buffer by:
- Start allocating a percentage of your sales or funding each month to a separate reserve. While most profit and funding would be immediately reinvested into your business, temporarily pulling it out of the cash flow stream ensures that it’s readily available if necessary.
- Reframe your mindset to think in terms of negative cash flow buffer months, rather than negative cash flow months. Once your Sleep Well at Night buffer is fully built your business should be able to remain in positive cash flow consistently– only pulling from reserves when necessary and ensuring that your business is steadily scaling.
- Understand that your Sleep Well at Night number will grow with your business. Opportunity costs and emergency costs increase with the size of your business- what it takes to fix a problem today will be very different next year. Continuously evaluate your business’ cash flow to ensure that your Sleep Well at Night buffer remains proportionally matched.
Conclusion
It’s key to track and manage how money moves through your ecommerce business. Overcome cash flow challenges, crunches, and be in a position to jump on new opportunities by taking a proactive approach by managing and intimately knowing your cash flow. By keeping cash inflows higher and more frequent than outflows, you’ll ensure that you have the space and power to grow your business. While knowing your cash flow is the lifeblood of your business, there are certainly times you’ll need to assess taking on external funding to help meet your growth goals at a speed that you’re satisfied with..
In our next blog we’ll discuss how knowing your cash flow can open you up to better working capital opportunities at a given moment, along with tips on how to identify and secure the best funding option for scaling.