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How to Avoid Cash Flow Challenges on Amazon
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Cash flow is pivotal to the scalability of your Amazon business. Without it, you run the risk of not being safeguarded from unexpected occurrences that are inevitable on the Amazon landscape such as inventory policy changes, unable to negotiate stronger pricing deals from suppliers and vendors, and without the resources to properly invest in your Amazon business.
In this instance, cash flow is defined by the amount of cash coming into and going out of your Amazon operation and is typically measured by bank account balances. Cash coming in is most likely your bi-weekly sales payout from Amazon after customers purchase your products. Cash going out can include sourcing and inventory management costs, taxes, Amazon seller fees such as referral, fulfillment, and storage fees, and salaries for any team members.
Cash flow takes two forms — negative cash flow means that more cash is going out of the business than coming in, and positive cash flow means that more cash is coming in than going out. In order to succeed on Amazon, you need to have positive cash flow on an ongoing basis.
However, even enterprise businesses are confronted with cash flow issues and negative cash flow, both of which can result from various triggers, such as payment terms or not aligning your inventory position with real-time product demand. The time between when you purchase inventory to when you get paid from Amazon for the sale can sometimes take weeks. When funds are tied up, you will not have enough cash to buy new inventory, which can, in turn, decrease your sales velocity and snowball into bigger issues.
What Problems Can Lack of Cash Flow Cause?
As mentioned above, a significant amount of Amazon cash flow delays stem from the payment turnaround time from Amazon. The two-week delay in payments from Amazon can cause negative cash flow which can lead to stockouts, missed sales, decreased inventory levels, loss of organic search rank, and late payment fees.
Additionally, during specific times of the year, wholesalers often move unsold inventory to make room for their seasonal selections. In order to take advantage of these inventory deals, you need ample capital on hand. If you do not have sufficient cash flow available, you will also not be able to take advantage of special promotions or lower upfront costs from wholesalers or distributors that you would normally receive when you make larger purchases or pay faster.
How to Solve Cash Flow Issues Quickly
To help you maintain a strong financial position for your Amazon operation, here are four ways to navigate and proactively prevent cash flow challenges.
1. Create a Monthly Budget for Expenses and Operations.
Establishing a budget strategy will allow you to more closely manage the funds moving in and out of your Amazon operation. As you allocate money for inventory and other business-related expenses, be sure to earmark funds to cover the duration when Amazon keeps funds pending — up to 14 days for sellers and as many as 90 days for vendors. In your balance sheet, include every expense, including but not limited to inventory, advertising, seller fees, and office supplies.
2. Negotiate With Your Suppliers.
Do you have Terms of Trade or longstanding relationships in place with any of your suppliers? If so, you can capitalize on these relationships and contracts for better pricing deals and payment terms. Periodic, effective, and structured negotiations with your suppliers are important to ensure ongoing profitability, healthy performance metrics, and a strong sourcing model and supply channel.
Suppliers have various ways that they can impart discounts to you, so you should discuss the possibility of further discounts or improved payment terms with each partner. If you have a reliable track record and have historically made all of your payments on time, your suppliers may be willing to provide inventory discounts or other perks like free shipping. If you are working with a new supplier, talk to them about what deals might be available to you upfront, such as bulk purchases, early payments, or cash discounts.
3. Use FBA to Your Advantage.
Fulfillment by Amazon has many benefits when it comes to helping you increase sales, which pave the way to positive cash flow. For example, your products become eligible for free shipping, a characteristic that many buyers rely on before they make a purchase. Additionally, Amazon handles product storage, order fulfillment, and customer service with FBA, so you have more time to focus on scaling your operation and optimizing your cash flow processes.
4. Consider External Financing.
If you are faced with a situation where a lack of inbound capital makes it challenging to maintain constant cash flow, you may want to consider external financing. Whether you decide to finance via savings and credit, bank loans and lines of credit, online business loans, Amazon Lending, or third-party financial companies that are designed specifically for enterprise Amazon sellers, continue to keep tabs of your payables and receivables to ensure effective financial management.
Steady positive cash flow can help you increase profits quickly by increasing your sales velocity, allowing you to invest in new inventory more frequently, enabling you to rank higher on Amazon, and negotiating better pricing with your suppliers. Taking proper measures to avoid cash flow challenges on Amazon can help you transform negative cash flow into incremental profits and drive long-term growth.