At the start of the 1920s, the Model T Ford dominated 40% of the US’s automobile market, but Ford Motor Company was losing money on each car produced. Initially, Ford’s reaction to this dissonance was to slash prices and increase inventory, but those solutions failed, and soon Ford faced a very real crisis. The solution? A combination of Just-in-Time delivery and strict inventory control. Using these tactics, Ford Motor Company overcame its deficit issues, and the company pivoted quickly from potential insolvency to record profits.
So, what does the average e-commerce business have in common with Henry Ford? More than you’d think. Like Ford, e-commerce businesses can quickly fall into a situation where sales are up, but profits are falling. It’s a confusing dichotomy, and the solution involves having accurate and detailed financial information so that you can create a strategy that will enable your business to overcome cash flow issues so that sales and profits once again align.
Delay Payments to Vendors
When a cash flow crisis occurs, the first step involves managing expenses, and that means delaying outlays wherever possible. Start with your vendors. Review your payment terms and determine the latest possible payment date that won’t incur a late fee. Use credit cards if possible, which will help you satisfy debts but spread out payments in a way that gives you time to realign your finances. NOTE: If you are using a credit card it is extremely important that you have separate cards for business and personal. In terms of inventory, be cautious about bulk purchases. While the price and shipping discounts are alluring, you need to make sure taking on extra stock (and the cash outlay involved in purchasing that inventory) is not weakening your business by generating risk. You don’t want to end up paying to store products that won’t move until months in the future when your company needs cash now.
Find Ways to Get Your Customers to Pay You Earlier and More Often
In the case of Ford, the company asked dealers to pay for automobiles in cash upfront rather than waiting for payment once the car had sold. In the case of e-commerce, you can provide customers with additional benefits, like a discount or promo code for future purchases, as an incentive to pay in advance. You can also entice customers to purchase a subscription or buy a larger product supply by tying it into a larger marketing message about the long-term benefits of using your product. A typical example involves explaining how a customer will begin to see results 90-days after purchasing a dietary supplement.
Simplify Your Offerings
Finally, when faced with a cash flow shortage, take a hard look at your company’s infrastructure, and start streamlining. Simplify your offerings and eliminate unprofitable products and services. As you assess your products and services, these evaluation criteria can help you with your decisions:
- What is the product’s direct cost (those costs only associated with the creation of the product)?
- Does the price of the product cover production costs?
- What are the additional costs associated with running your business? (taxes, salaries, professional fees, insurance, etc.).
- Does the sale of this product cover a percentage of these overhead costs?
If the current sales of a specific product don’t cover the costs of production and an acceptable percentage of overhead costs, it might make sense to discontinue that item. Before you make your final decision, though, it’s essential to consider if the product has potential beyond its immediate contribution to cash flow. For example, some products are loss-leaders whose low price can entice customers also to purchase other, more profitable products and services. If the product’s total cost is relatively insignificant or doesn’t require a large portion of the overhead costs, its elimination may not make a considerable difference, so eliminating it may not make sense in the long run. Finally, it’s crucial to investigate whether the costs associated with the product can be reduced in a way that allows it to generate more revenue or if it can be parlayed into a product bundle that would generate more income than if each product were sold individually.
You Need Real-Time Financial Information
Ultimately, decisions on how to improve your company’s cash flow cannot be made without real-time financial information. AIS Solutions specializes in working with Shopify and Amazon e-commerce companies to deliver up to date financial information that you can access wherever you are, whenever you need it. Call to schedule a free consultation to see if we are a good fit for your company.