Being an Amazon seller is a cash-intensive business. So to make your business sustainable and profitable, you must learn how to manage your cash flow on Amazon. Cash flow refers to the money coming in and going out of the business. Effective cash flow management is essential for covering expenses, investing inventory, and maintaining healthy ongoing operations. To visualize the concept of cash flow as a seller, consider it your business expenses and sales revenue.
The benefits of managing cash flow are immense. Starting from the fact that you’ll know whether you’re hitting your goals or are you running at a loss, up to realizing where changes need to be made. To manage your cash flow rightfully, you first need to acknowledge the undergoing process. Let’s go ahead and understand the cash flow cycle.
Understanding The Cash Flow Cycle in Amazon Business
Understanding the cash flow cycle as an Amazon seller is crucial for managing your finances effectively and ensuring smooth business operations. It makes hitting your sales and business goals easier and then properly expanding your business. To understand the cash flow cycle, there are some key points to consider. Let’s discuss them.
Product Costs
Product costs are a crucial part of knowing your cash flow cycle. In order to calculate your profit accurately, you need to be aware of all your costs. The manufacturing, shipping, packaging, acquiring inventory and other related expenses come here. This process can help you determine your gross profit margin and reveal the profitability of your business.
Inventory Management
Inventory management is crucial for maintaining a healthy connection with cash flow cycles in your Amazon business. You need to have the right amount of stock anytime to avoid storage fees due to excess inventory or missed sales opportunities due to insufficient inventory. Inventory management can be done based on demand forecasts, sales velocity, and other marketing markers.
Revenue Generation
Being an Amazon seller means your main revenue stream comes from product sales on the platform. You need to understand the revenue generation and the timing when Amazon pays for sales. Typically, the Amazon platform sends payments every two weeks, but it may vary according to your account and payment methods.
How to Manage Your Cash Flow
Managing your cash flow effectively requires certain knowledge. FBA allows you to store the inventory in fulfillment centers and handle product packaging, storage, and shipping. But in order to be successful, you need to maintain your Fulfillment by Amazon cash flow through certain strategies. Follow the ones we’ll talk about below and keep your business successful.
Set Competitive Pricing
Setting competitive pricing helps you increase your sales and maximize your profit margin. Consider all the factors determining your pricing strategy, such as Amazon fees, product costs, and competitor prices. You can use the Wholeseller repricer tool to automate this process. Always keep track of the market trends and adjust your prices accordingly to attract customers and increase sales.
Prepare For Slow Seasons in Advance
Successful management of the cash flow requires being ahead of the slow seasons. Analyze the past data you have so you can predict when the slow season will happen. This will help you understand which products are affected and where your focus should be. Another strategy you can implement is diversifying your specter of products. Offer various products in different segments so you can avoid the impact on your overall sales.
Sales Velocity and Inventory Performance
Monitoring sales velocity can help you optimize your inventory levels. By knowing the rate at which your products sell, you can optimize and maintain your inventory. Too much inventory can tie up your cash, and too little inventory leads to missed sales opportunities. That’s why managing cash flow is closely linked to these parameters. Always monitor your inventory performance to know your aged, stranded, and excess inventory levels.
Maintain a Cash Reserve
Having a cash reserve is a crucial part of successful cash flow management. That way, you can cover unforeseen expenses or a slower season without worrying about whether you’ll collapse. Reserves will serve as a financial buffer to keep you safe during the reduced-sales period. Your cash reserve will allow you to continue covering your inventory, marketing, or restocking expenses without experiencing cash flow problems in your Amazon business.
Cash reserves are useful in many ways, including bridging the gap between payables and receivables or taking advantage of unexpected inventory opportunities.
Look At The Sales Figures Of Your Competitors
Managing the cash flow in your Amazon shop involves regularly checking your competitor’s listings and ways of work. If you want to be among the top Amazon Wholesalers, you should examine and follow their way of work. You can check the number of units they’ve sold in a certain time frame and at what price. This will help you develop your thinking about whether you should lower your prices or discount some products.
What is a Cash Crunch?
The cash crunch is a term used by start-ups and small businesses when a company has a negative cash balance insufficient to satisfy the business’s workflow. A cash crunch may occur due to not equally created profits or bad cash-flow management. Factors that contribute to this outcome include:
- Slow sales for a longer period
- Poor financial and cash flow management
- High expenses
Whatever the reason, a cash crunch always negatively impacts your business’s health and stability. It’s important that you, as a seller, can avoid this situation or decrease the effect of it when it appears. Now that we’ve explained a cash crunch let’s discuss how to avoid having one.
How Can You Avoid Cash Crunch?
The strategy most sellers use to avoid having a cash crunch is to create and use a cash flow forecast. Cash flow forecasting estimates the inflow and outflow of your business over a specific period. It can help you predict future cash positions and understand your current financial position.
With cash forecasting, you’ll be able to know what measures to put in place and avoid a cash crunch in your business. To create a cash flow forecast, you need to gather the required information into three major categories:
- Cash inflow
- Cash outflow
- Cash on hand
Cash inflow covers all the cash coming into your business during the forecast period. Enter the expected income and date into the spreadsheet you’ll be working on. The most used strategy for this calculation starts by obtaining the average cash flow in your Amazon business in the last two months. After that, multiply the value obtained by the growth rate that month. The value you get becomes your cash inflow for the next month. Cash outflows are defined as the money flowing out of your business. Here, you should consider any expenses that require you to pay something. And cash on hand is the amount of money the company has readily available in bank accounts or cash reserves. It represents the liquid funds you can utilize for various purposes.