Make working capital work for you

The ecommerce industry faces a unique set of challenges when it comes to managing working capital. Luckily for us, there is no shortage of great software and services to help make the transition to a positive working capital less painful.

• Streamlining the communication and design process between manufacturers and merchants with SupplyCompass. 
• Improving demand predictability through AI software with Evo Pricing. 
• Combining slick software and operations for the storage and fulfilment process with Huboo. 
• Collecting advertising data across multiple marketing platforms with Triple Whale. 
• A/B Testing and optimising websites, checkout flows and UX with Optimizely.

Having access to all these tools is great, but in order to use them effectively within your ecommerce business, it’s important to first get some context about why working capital optimisation is so important. Specifically by establishing the problem areas people face, what you can do to tackle them, and any other useful tips for leaving your negative working capital behind you. 

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Let’s start with the basics!

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The 2 largest expenses any ecommerce business faces are usually the cost of goods sold (i.e. inventory) and marketing. That’s typically closely followed by delivery costs and storage. One of the ever-present challenges for selling online is that almost the entire cost base is incurred before items are sold, so there’s a lag between costs incurred and revenue, which needs to be financed. 

A growing company needs to continually invest in its working capital to fund its growth. As such, it makes sense to be as capital efficient as possible by maximising the return from the money invested in working capital. That means keeping the amount of cash tied up in it as low as possible while maximising sales growth and keeping the cash conversion cycle as fast as possible. We know that might sound like a daunting task, so let’s break it down.

When it comes to managing working capital there are 4 ways to improve your position:

1. Reducing the costs incurred in the supply chain so you don’t have as much money going out the door.
2. Delaying payments to suppliers throughout the value chain to reduce the lag between costs incurred and revenue received.
3. Increasing the amount of revenue you receive from customers so you get more cash in the end.
4. Reducing the time it takes to receive that revenue from your payment accounts to again help reduce the lag between costs incurred and revenue received.

Optimise your process across these points to begin creating a positive working capital cycle. Here we’ll take a look at how you can use software, financing and operational improvements to kickstart your journey to positive working capital and better cash conversion.

1. Reducing costs

Manufacturing ‍

Getting a better price is also about being a good customer. For this, think about the 3 R’s: reliability, regularity and relationships. In the same way, you’d be more inclined to give a discount to loyal customers, suppliers give better prices to their best customers. By forecasting orders early, sticking to plans and having good, open communication, you can have a notable impact on the price you’re paying for your goods. It’s well worth investing in good technology which helps both sides.

A UK-based credit customer recently told us they pay for stock 30 days after delivery. How? They source and manufacture in the UK. Meaning they are closely involved in the process, being able to meet the people involved whenever they need. Knowing the owners they also help source input materials from around the world. Clearly, that relationship is paying dividends for them.‍

2. Delaying payments

Marketing

When it comes to ad spend there are two options. Spend enough to get on invoicing terms with the big platforms, which will usually give you 30 days to pay for ads, or use cards which will give you anywhere from 30 days to 60 days. For Google Ads you normally have to spend over £5k/month for the last 12 months. For Facebook it’s $10k USD over the last 3 months. Alternatively if you use a Juni card you actually get paid to do so, as you’ll receive 1% cashback on all eligible spend whilst also having up to 60 days’ for repayment. Whichever option you end up going for, you will see that having an additional 30-60 day buffer before payments are due will significantly help with cash flow flexibility and working capital availability.

3. Increasing revenue

Retention

‍Turn first timers into repeat customers to ensure you get revenue without having to spend more on new leads. This should reduce your cash conversion cycle, as it means less money required upfront. Building out post-purchase funnels is a vital part of maximising your customers lifetime value, as it ensures that they stay engaged with your brand and become return customers. Again, software is your friend here - check out tools like Braze to maximise your engagement with existing customers.‍

4. Accessing revenue faster:

‍Financing

‍The quickest way to access cash from your sales is through financing. For B2B businesses, invoice financing has been around for years and is still used regularly by our B2B ecommerce customers. For B2C sellers without large invoices, there are fewer options. A B2C subscription business can look at using the likes of Pipe to access revenues early. Keep up to date, as more “instant payout” solutions are popping up in the industry.

Other than that, it’s a question of minimising the time that cash sits with your payment processors and merchant accounts. Regularly speak to your account manager and ask what they need in order to give you access to your cash more quickly. Most will disburse cash faster for bigger/longer-serving customers, so being aware of what performance hurdles you need to reach to reduce your hold days is crucial. It never hurts to ask.