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:

1. Cash in Hand
2. Forecast Cash Inflow
3. 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
• Wage
• 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:

• Savings
• 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.

Amazon-Specific Cash Flow Challenges You Can’t Ignore

On paper, cash flow management looks universal: money in, money out, and the timing in between. But Amazon sellers are facing unique challenges that are distinct from those that DTC operators and ecommerce businesses face.

First of all, Amazon controls when you actually receive your money. In most cases, Amazon only disburses your sales proceeds on a regular settlement schedule (often every 14 days), and may hold back funds in a reserve to cover returns, chargebacks, and other adjustments. This can introduce a substantial delay between the moment you make a sale and the point in time when you actually receive your payment.

Second, Amazon’s fee structure creates drag on cash. Referral fees, FBA fulfillment fees, inbound shipping, storage fees, long-term storage fees, and disposal or removal fees all chip away at your margins. You should be modeling these fees accurately (at SKU level) to make sure that you are actually running a profitable business, with the margins you had in mind.

Third, returns and refunds create volatility. When a customer sends a product back weeks after the initial purchase, Amazon reverses the order and may withhold funds from your next payout to cover it. If you sell products with a high return rate (such as apparel items where users may routinely shop multiple sizes just to return what doesn’t fit, or consumer electronics, you need to incorporate a certain percentage of sales in your cashflow calculations to account for these factors.

Lastly, there’s the operational reality of long lead times due to global supply chains. Most sellers are working with overseas manufacturing partners. This again hits your cashflow as it introduces a lag between the time when you pay for your inventory to when it lands in the US and gets eventually sold on Amazon. That lengthens your cash conversion cycle and increases the risk of a cash crunch if anything slips.

Key Cash Flow Metrics Every Amazon Seller Should Track

Most sellers look at one thing: the bank balance. If there’s money in the account, things are looking good. If the balance starts shrinking, panic sets in. The thing is: keep in mind that your band account balance is a lagging indicator. If things start going South, you might be late to course-correct and things probably will get worse before they get better.

To manage cash flow like a sophisticated Amazon operator, you need to get comfortable with a small set of simple, practical metrics that give you an early warning signal.

The first one is operating cash flow: the net cash your FBA business generates from normal operations over a given period of time. You don’t need an accounting degree to figure out how to calculate this: On a monthly basis, look at all the cash that came in (Amazon payouts, wholesale orders, other marketplaces) and subtract all the cash that went out: Inventory purchases, payroll, tools, logistics, ads, and debt service. Then track this metric over time. See if it trends up or down. Note that a growing business can show healthy revenue and profit but flat or even negative operating cash flow. So flat or negative operating cash flow does not necessarily need to alarm you as it can be a sign that you are reinvesting into your business to fuel more growth.

The second is your cash conversion cycle (CCC). At a high level, CCC measures how long cash is tied up in inventory before it returns as cash from sales. For Amazon sellers, it’s the time between:

1. Paying your supplier
2. Receiving inventory into FBA and selling it
3. Amazon releasing the resulting revenue to your bank account

Think of this as the equivalent of cars being built and sitting at a dealer before they get sold to a customer. The longer that cycle, the more cash is tied up in inventory. This can obviously introduce risk as product quality may deteriorate in storage, prices may change over time, or product sales may impacted by seasonality effects. If cash conversion cycle is longer than 120 days for instance, and you want to double your monthly sales, you’re committing cash for four full months of higher inventory before your bank balance reflects it. Tracking CCC forces you to ask, “Do I actually have the cash to support the growth rate I’m targeting?”

A third practical metric is payback period per SKU. When you launch a new product, how many days does it take before the cash invested in that SKU (including inventory, launch discounts, initial PPC, and creative) has been fully recovered? If your payback period is long, i.e. 180 days or so, you will likely feel strapped for cash when you try to scale. Tightening that payback window, even to 120 or 90 days, can dramatically improve your ability to reinvest in additional products.

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.

Conclusion

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.

FAQ: Amazon Cash Flow Management for Sellers

The post Amazon Cash Flow Forecast: How to Manage your Amazon FBA Cash Flow appeared first on SellerMetrics.

Sourcing for funds is a phase that most, if not all, businesses encounter every now and then. Just because you need to pool funds from external sources, it doesn’t necessarily mean that your business is facing financial turmoil. Most financial institutions use this mindset, so potential borrowers should adopt the same mindset! It should not be degrading to request financial support for this is rather a part of the business. Amazon FBA is also a business, and so all sellers should be unafraid to seek out Amazon financing options, or external financing for their Amazon Store when needed.

According to a Business Finance Survey by the British Business Bank, only 37% of companies seeking to finance is under the reason “working capital/cash flow,” which refers to the need to continue trading or for the general running of the business, and also to cover a short-term gap in the funds.

A small 2% from the same study has the reason of “refinancing.”

Challenges Small Businesses Face When Seeking Financing

Needless to say, not everyone gets approved when they request funds. There are some factors financing institutions lay the groundwork for simply because lending money to other parties is a risk in itself.

Here are some of the challenges you need to consider before starting to shop for financing options.

Poor or No Credit History

Most lending companies use credit reports to determine the potential borrower’s paying capability. It goes to show that if you had issues with a previous debt, what are the chances it won’t happen again?

A credit score of 720 happens to be the threshold. If you have a credit score above 720, you will be approved for a loan in most cases. Below this number, you need some fixing worked on. You can start by checking for accuracy on your credit report, which you can request for free once a year from one of the 3 credit bureaus: TransUnion, Equifax or Experian.

Limited Cash Flow

Cash flow is a measure of how much cash you have on hand to pay a loan. It is one of the first things lenders consider when gauging your business’ financial health.

We recommended that you calculate your cash flow periodically – at least every quarter.

Insufficient Operating History

Financial institutions prefer to engage with a business with significant track records. Your request for funding may be declined if your company has been operating for a while but has not sustained a certain amount of credibility.

Insufficient Collateral

Loan applications usually include a request for collateral in order for the requestor to receive funding. For large corporations, this is a non-issue, but for SMBs, this can be a hurdle. This is also likely the biggest challenge for online businesses. It is hard to source funds if there are no actual physical stores for collateral.

Lack of a Solid Business Plan

Lenders will want to know that your business will stay on for long, and having a solid business plan is a fundamental testament to this. This makes your loan application much more attractive. It also gives investors a good idea of how you’ll spend their money.

A standard business plan includes a brief of your company, market, products and financial reports. If you’re not sure your plan is strong enough to persuade lenders, it is advisable to talk to a business plan expert who can review it and offer feedback. Financial experts can easily spot a half-baked plan and it likely won’t be approved!

Character

Deciding on whether you get a loan or not is not 100 percent objective. Well, ideally, it is, but there are some subjective factors that come into play, and this is where your character comes in. Two things to bear in mind when it comes to presenting with the right character: apathy and disorganization.

Apathy

Some financial experts argue that most business owners present their loan application rather too methodically that they appear apathetic. You need to exude enthusiasm and a compelling faith in your venture to draw in investors and make them also a believer in your offer.

Disorganization

Before approaching potential lenders, make sure you have everything set properly and in order. All required documents need to be available with multiple copies, which should be clear and labeled as such. Also, fill in all relevant forms with information correctly. Sign and date all fields that need a signature & date if necessary.

The fewer trips you make to the lending company office, the more chances of your loan request getting approved. To help you organize, it is advisable to print out a loan application checklist.

Funding Options for Amazon FBA Sellers

When you run into a situation where you need to finance – whether to continue running your business or for business growth – or for any other reason, here are some of the options available to help out your Amazon FBA finances. Some of these are Amazon financing options, others are external sources.

Financing Option 1: Amazon Lending

Amazon Lending is an invitation-only short-term business loan program. It’s offered to qualified sellers and finances additional inventory to sell through the Amazon marketplace. It is a program that does not check your credit and loan amounts range between $1000 and $750,000.

Eligibility

To be qualified, you need to have a Seller Account in good standing and with good customer metrics. You must be an active Amazon seller and your store needs to show a steady increase in sales.

Eligibility for this program is displayed in your Seller Central dashboard.

Interest Rates

This is not a disclosed information. The rate depends on your account and sales metrics. Some sellers, however, have reported receiving a rate anywhere between 3% and 17% APR.

How to Apply

Apply within your Seller Central account if you are eligible for Amazon financing options.

Financing Option 2: Amazon Line of Credit

Similar to Amazon Lending, Amazon Line of Credit is also an invitation-only program where the Amazon partnered with Goldman Sachs to provide eligible Amazon sellers with a Business Line of Credit. This line of credit allows sellers with the flexibility to request funds ad hoc, instead of receiving one large lump sum. Out of the mentioned Amazon financing options, this one is available only for Amazon sellers based in the United States.

Eligibility

Amazon and Goldman Sachs do not disclose the eligibility criteria. You will similarly see it on your Seller Account dashboard if you’re eligible. You can then open a link that will redirect you to the Goldman Sachs page to verify your eligibility and to complete your application.

Your merchant data will be thus shared with Goldman Sachs, which will then use your business revenue data to underwrite your line of credit.

Interests Rates

The interest rates range from 6.99% to 20.99% APR. The credit limit available is up to $1 million and it uses revolving credit.

How to Apply

Application is done via a Goldman Sachs page, which you will be redirected to when you open the link from your Seller Account dashboard. Again, this is an invitation-only initiative.

Financing Option 3: FinTech Lenders

The continually growing number of online sellers gave rise to the Financial Technology Lenders or FinTech Lenders. Most banks and traditional loan institutions would sometimes decline loan requests from online shop owners because of the absence of physical stores. Luckily, now you are not limited to just banks, and you’re not even limited solely to using Amazon financing options. FinTech companies are focused on, but not limited to, providing financing assistance to ecommerce businesses.

Some of the FinTech Lenders are AccrueMe, Sellers Funding, Kabbage, and Payability.

AccrueMe

AccrueMe offers growth capital to Amazon sellers with no monthly payments. They also do not charge any interest, but will take a small percentage of your profits so long as you’re using their money.

No credit checks and no personal guarantees needed, and funding is based on your Amazon sales. They can invest between $5,000 to $5,000,000 in your Amazon business.

Sellers Funding

Amazon sellers based in the United States, United Kingdom, Australia, and Canada (Quebec not currently supported) can also request for Working Capital solutions from Sellers Funding. They use an artificial intelligence algorithm to leverage your Amazon store performance for qualification. Sellers may still be eligible if the owners reside abroad so long as the business are registered within the listed supported country.

You can request for a minimum of $20,000 USD or £25,000 GBP. You need to have at least 6 months of sales history on your ecommerce marketplace and your sales average should be at least $20,000 net sales per month or equivalent for the past three months. Finally, your company needs to be generally in good standing, and your sales metrics will be consolidated across all of your sales platforms.

Kabbage

An American Express company, Kabbage offers a revolving line of credit which can be used on a per-need basis. There are different loan types available to all kinds of businesses for up to $250,000 USD. The loan amount offered is based on your sales volume and you don’t pay until you start using the funds.

Payability

Payability offers capital advance as much as $250,000 USD in as quickly as 24 hours. You need to have a seller account for at least 9 months with average monthly sales of $10,000. Fees are typically between 0.5% and 1% per week, with no obligation fees. You have the option to pay your advance sooner to lower down your cost.

Financing Option 4: Merchant Cash Advances

Another way to gain access to immediate funds is through Merchant Cash Advances. These are external financing options that Amazon FBA sellers who are not eligible for Amazon financing options can consider. MCAs allow business to grow against its future earnings. The biggest perk MCAs offer is the speed of obtaining funds if approved. Sometimes, delivery of capital advances occur within hours of applying and being qualified.

Similar to FinTech Lenders, MCAs can also be applied online. They require very little to no paperwork at all. Typically, no collateral is required and no credit check is needed either.

Since MCAs are within an unregulated industry, however, interest rates tend to be higher. There might also be some varying fees depending on the company. When applying for MCAs, make sure to understand every fee associated with your loan request.

According to Business.org, the best Merchant Capital Advance companies are: Lendio, Fundbox, CanCapital, and National Business Capital.

Lendio

• Loan Amount: $5,000 – $200,000.
• Loan Term: Up to 2 years.
• Time to Funds: As early as 24 hours.
• Interest Rate: Starts at 18%
• Minimum Annual Revenue: $50,000
• Requires past 4 months of bank statements or receivables.
• No collateral required.
• No credit pull.
• Request submitted via online cash advance application.

Fundbox

• Loan Amount: $1,000 – $150,000.
• Minimum Time in Business: 3 months.
• Interest Rate: Starts at 4.66% draw rate.
• Time to Funds: As early as next business day.
• Minimum Annual Revenue: $50,000
• You can integrate your bank account and accounting software with your Fundbox account, where you can directly draw funds from.
• To apply, you need to create a Fundbox account then click on the Apply button.

CanCapital

• Loan Amount: $2,500 – $250,000.
• Loan Term: Estimated at 6 to 18 months.
• Minimum Time in Business: 6 months.
• Interest Rate: Starts at 12.9%
• Time to Funds: As fast as 2 business days.
• Minimum Annual Revenue: $100,000
• The criteria for funding eligibility includes business performance.
• Some of the additional fees include: a 3% origination fee, and $595 MCA administration fee.
• To apply, fill out the online application form.

National Business Capital

• Loan Amount: $10,000 to $2,000,000.
• Minimum Time in Business: 6 months
• Time to Funds: Within a few days or even hours.
• Minimum Annual Revenue: $120,000
• No personal guarantee needed, no collateral needed.
• No minimum credit score requirement, no credit check hard pull.
• Flexible Payment Terms – no set payments, repayment is based on your day-to-day sales.
• The only paperwork required is 3 months of bank statements.

Financing Option 5: Personal Loans

Personal loans are often unsecured loans that can be used for a variety of things including business. This can be a good option for someone just starting out, without a bit of sales history yet to get them a business loan.

Eligibility

Being eligible for personal loans highly depends on your credit score, income, employment history, state of residence, and even your nationality.

The safest personal loan that you can apply for is still through your local bank or your credit union. Expect lots of paperwork to be required. Approval may take a few days to a few weeks.

You can also apply for personal loans with online lending companies. Just make sure you understand the terms and conditions and all the fees associated with it.

Interest Rates

On average, personal loan interest rates vary between 10% and 28%, depending on your credit score. Credit scores of 720 and above enjoy the lower rates of 11.4% or lower, while credit scores below 680 start at 18.85%.

How to Apply

Instructions on applying for a personal loan varies depending on the lender. More often than not, these are available on the financial institution’s website.

Final Thoughts

There are definitely a lot of viable sources of funds in case you need extra financial sources. However, they should not be treated as an extension of your financial department. The best way to obtain needed funds is definitely by growing your online business into a successful ecommerce store. With your business running stable and consistent with good performance, not only you may not need to borrow financial resources, but if you would have to, then the approval chances get very high.

Sources

1. Amazon
2. British Business Bank
3. Business News Daily
4. Business.org
5. Fundera
6. Jungle Scout
7. RepricerExpress
8. The Business Journals
9. Value Penguin

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