Why Cash Flow is so Important for Amazon Sellers
Success in selling on Amazon means that you will need to purchase even more products. The key issue is this: you don’t have the cash on hand when they need it. Cash flow management for Amazon sellers is vital, as is learning how to make an Amazon cash flow forecast. This lack of cash will cause major disruption to your Amazon business in the following ways:
- Inventory Purchases can’t be made on time
- Stock-outs can’t be prevented (or longer stock-outs)
- Cannot make payroll
- Cannot make lease
With the scalability of the Amazon FBA business model, the issue of cash flow can arrive faster and more pronounced than other business models.
For example, if you are growing at 100% month over month on Amazon (very possible), if you have already sold 100 units, that means you need cash to purchase the next 200 units to support that growth (simple example). People will ask, “why don’t you use your saving?”, If you are doing it right, at some point, your saving will not cover the shortfall.
As an Amazon seller, you know that the Amazon A9 algorithm does not take kindly to stock-outs. You will lose your keyword ranking and sales during periods of stockouts. It is vital to have the cash to keep in stock. Therefore Amazon inventory management and cash flow go hand in hand.
The bottom line is, selling on Amazon require cash and lots of it.
Cash vs Profit
Your Amazon business might be hugely profitable, but there is a timing mismatch between when your products are sold on Amazon and the time they transfer to your bank account as cash. Before going further, let define what profit is:
Profit ➡️ A financial gain, the difference between the amount earned and the amount spent in buying, operating, or producing something
So profit is what happens when it is earned, not when you get paid in cash. You can earn a profit in a transaction and not get the cash for this transaction until sometime in the future.
You cannot pay your supplier or logistics company in profits. So it is your job as an Amazon business owner to work around this issue and acknowledge that large profit does NOT mean a large cash balance. This is why creating an Amazon cash flow forecast is absolutely necessary, because it will clarify the distinction between “profits” and “cash on hand,”
How to avoid Cash Crunch
A cash crunch is a situation where you don’t have the cash in hand when you need it.
For example, your supplier will need the final balance of USD 30K to ship out your order from the factory. Unfortunately, you only have USD 5K on hand, and your Amazon cash balance won’t be settled into your bank account until 7 days later. In this example, you are short USD 25K, and this is your cash crunch.
So how do you avoid this situation? You will need to forecast your cash needs in the next 30 to 60 days horizon. To create an Amazon cash flow forecast, you need to forecast cash in the following buckets:
- Cash in Hand
- Forecast Cash Inflow
- Forecast Cash Outflow
To create this reporting, use a spreadsheet to plot the forecast dates on the Y-Axis while plotting the Cash in hand, Forecast Cash Inflow, and Forecast Cash Outflow categories on the X-Axis.
Cash in Hand
First, you will need to take into account all the cash that is available to you. It doesn’t have to be cash in your bank account. It can be assets that can be converted into cash quickly, such as stock, bonds, or time deposits. Whether you want to use these cash equivalent assets will be up to you.
- Cash in current accounts
- Cash in savings accounts
- Paypal balance
- Cash equivalents
Forecast Cash Inflow
For Amazon sellers, most of the cash inflow will be from the balance of the sale from your Amazon account. The trick will be to estimate the cash that will be deposited in the future. Amazon keeps a balance of your sales for 14 calendar days, so this estimate will need to be 14 days out. So the first step in creating a full Amazon cash flow forecast is to first forecast cash inflow.
There are multiple ways to estimate cash inflows for your Amazon business, some more complicated than others. To keep things as simple as possible, you can estimate the next Amazon cash inflow by average last two settlement and multiple that by a growth rate. Here’s an example, let’s say currently it is May 1, 2020, we can estimate the next Amazon payment (May 14, 2021) from the following:
- Sales growth is 10% month over month
- Most recent Amazon deposit (April 28, 2021) ➡️ $9,500
- Amazon deposit (April 14, 2021) ➡️ $8,300
The estimated cash inflow from Amazon based on the information above will be:
Est. May 14, 2021 payment = $9,790 ➡️ [($9,500+$8,300)/2] + (10% * [($9,500+$8,300)/2])
On May 14, 2021, you estimate the Amazon payment to be $9,790. This amount plus your current cash in hand balance is what you have to fund your operations (wage, supplier, shipping etc).
Forecast Cash Outflow
Cash outflow will be any payment to suppliers or any existing financial obligation. For Amazon seller, the common uses of cash are the following:
- Payment to suppliers
- Payment for shipping and warehousing
- Credit Card payments
- Loan payments
- Marketing agency
You will plot these outflow obligations on their due date in the spreadsheet. You will net this against your current cash balance forecast into the future. If any future date indicates a negative net balance, then you have a cash shortfall.
In our example, if you have to pay your supplier $7,000 on May 5th, 9 days before you get your next est. Amazon payment of $9,790. You would either 1) wait until May 14th, but this might cause stock-outs, or 2) Finance your cash shortfall.
Options to Finance your Cash Shortfall
There a few ways to plug your cash shortfall, lets list a few ways:
- A personal line of credit
- External Debt
When your Amazon business keeps growing your personal financial resources such as your savings or your line of credit will not be enough to satisfy your cash shortfall. At this stage you might need to get external debt, that is why we do our cashflow forecast so we know when we need to reach out for external debt.
Why Debt can be a Good Thing
I think a lot of us grew up thinking debt is a bad thing. Debt is only bad if you are spending it one time none productive use, such as using debt to spend on a shopping spree or getting that nicer car. On the other hand, debt can be used productively to leverage your income and profits, like the saying goes “You need money to make money” and debt can do just that.
For an Amazon sellers debt can be used in 2 ways. First, debt can be used to make sure your operations will not be disrupted, which means you have the cash to pay for inventory to prevent stock out or wages to keep your business running.
Secondly, debt can “leverage up” your profit and earnings; let me explain. For example, you only have enough cash to purchase 100pcs of your product being sold for $20, your net profit margin for each unit sold is 20%. So your total net profit in this scenario is $400. But there is actually demand for 200pcs of your product, so if you use the debt to purchase the additional 100pcs, and service the debt cost your net profit will be well over the $400.
Below, is calculation of the net profit on the two scenerios:
As you can, by using debt to purchase more inventory you can leverage up your profit to $720, $320 more than if you have not taken up the debt to fund the purchase of the additional 100pcs of product.
What is SellersFunding? How can they help?
To finance your external debt, you would probably think about reaching out to your local bank, but you will soon realize that they do not have the experience nor the processes in place to finance Amazon sellers. This means a long and cumbersome process to get your loans approved or at all. Because of this, there are new Fintech companies out there that specialize in financing Amazon sellers, and one of them being SellersFunding.
SellersFunding offers inventory loans against 50% of your inventory in FBA. That means if you have $100K in inventory, a loan of $50K can be offered. Payment to offset the loan will be deducted from your Amazon settlement until the loan balance is all paid off. Loans can be approved quickly, often in days, if you connect your Amazon seller account with their credit system.
In conclusion, Amazon seller should always be estimating their cash flow needs. It might sound cliche, but cash is literally the rocket fuel that supports the growth of your Amazon business. To avoid a cash crunch, do not be afraid to use debt and start reaching out for financing at a crucial moment when you need it.
If you have questions or insights to share, please feel free to post them via the comments section. Please also consider joining our Facebook Group where we discuss any questions you may have about running an Amazon business.
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