In times of volatility, it’s easy for business owners to feel like their finances are beyond their control. When a business sells offline, online, or via wholesale, its success is dependent on balance sheet movement. The more dependent a business becomes on balance sheet movement, the greater the need becomes to focus on cash management. When economic uncertainty brings doubt and stress to eCommerce businesses, resourceful owners focus on cash management and increasing their reserves of working capital.
Three key situations when business owners should focus on their reserves of working capital
- When there are elements of volatility in the marketplace. In 2022, business owners are acutely feeling this volatility. Their forecasts are changing, but not in familiar ways as in previous years. This volatility can take the form of supply chain issues, energy sector volatility like rising oil prices, or political unrest. When volatility impacts a business owner’s confidence in their financial outlook for the immediate future, working capital reserves are important.
- When it’s time to negotiate better terms. Even a month or two of supply chain volatility or unfavorable terms from a supplier can greatly impact a business, even if that business is doing well. In an industry like eCommerce, where businesses are especially dependent on the supply chain for revenue collection, buffering up the balance sheet by renegotiating supplier terms can help a business weather more difficult times. One note: it’s also imperative to recognize when suppliers or distributors are also in pain. In these cases, business owners can focus on variable costs (managing expenses like marketing costs with a credit card to conserve cash).
- When marketing returns are unpredictable. Business owners are also feeling this unpredictability acutely in 2022. For example, iOS changes have limited tracking, prompting some business owners to double their previous ad spend to achieve the same results. If business owners are unsure whether return on ad spend (ROAS) will continue at a high rate, or if ads don’t seem to be working as well as they previously did, the worst thing to do is to spend more on the same channels. If ROAS is harder to produce, it’s naive to think it’ll turn around with even more spend. In times like these, be conservative, scale back ad spend, and wait out the uncertainty.
Strategies to increase reserves of working capital in times of volatility
- Re-evaluate purchase timing: Being more prudent when purchasing is an effective way to increase working capital. Of course business owners never want to run out of inventory, but they can scale back inventory orders to just what is immediately required; identify the channels bringing the highest returns and process those first; and prioritize the retailers that need to be fulfilled immediately while delaying less urgent orders for lower-priority retailers.
- Renegotiate terms: Even the smallest businesses have buying power, and whatever their size, business owners can use their buying power to ask for more favorable terms from their suppliers and retailers. It’s in everyone’s best interest when businesses remain solvent, and fair terms are an important part of a business’s success. As mentioned above, it’s important to recognize when suppliers or distributors are also feeling the pinch. Empathy and open communication with these suppliers, retailers and distributors is the best path forward, so use good judgment when timing negotiation conversations.
- Spend smarter: It may sound like common sense, but when it’s not profitable to spend, a business should stop spending wherever possible. Now is not the time to be blindly optimistic; instead, business owners must take an objective look at their balance sheet and be realistic about their financial outlook. If their business isn’t profitably spending, owners should focus on spending only where it is necessary until the volatility eases.
- Working capital solutions. Below are a few popular options for boosting reserves of working capital for eCommerce businesses. Before pursuing one of these (or other) options, be sure to do comprehensive research and/or seek out professional guidance, as all situations are unique to each business:
- Self-financing: Self-financing is a choice many make in early stages of the business. Self-financing can involve personal investments from the business owner, or financial support from friends, family, or a partner. Taking on a partner often involves giving up a share of equity to the partner relative to the size of the investment made.
- Bank loans: More traditional financing received from banks, these can include government-backed U.S. Small Business Association (SBA) loans, business term loans, and personal loans for business use. Well-qualified borrowers can receive favorable terms and long-term repayment options, but higher rates, high credit-score requirements, and personal guarantees can also be involved, depending on the type of bank loan received.
- Short term financing: Also known as revenue-generated financing, short-term financing involves quick loans from lenders with repayment over several months or a few years. In times of high growth, these loans can negatively impact the cash available to a business as owners pay back larger percentages to lenders after collecting receivables than with longer-term loans.
- Long-term financing: Also known as asset-backed financing, long-term financing involves capital lent against your accounts receivable, purchase orders, or inventory that will eventually sell. As the name suggests, long-term financing is intended to help you over the long term, possibly allowing loans to be paid back over several years. Brightflow AI is one example of a company that helps you access long-term financing. Brightflow AI uses software and forecasting tools to confirm the value of the business and reduce risk for lenders, so terms can be much more favorable for borrowers.
- Inventory loans: These loans include inventory factoring and inventory financing. Inventory factoring results in a quick cash infusion after selling outstanding invoices to a third party for a percentage of the overall invoice total. With inventory financing, invoices are used as collateral, and the business remains responsible for collecting on the outstanding invoices and repaying the lender. These loans can be a quick but potentially expensive method of borrowing against sales already made.
- Liquidation: Liquidation involves selling off assets at a discount. This may be old inventory that a business is no longer able to sell, or equipment that is no longer needed. Especially if the inventory or equipment is still being financed, business owners may be able to make more money selling it than they’re financing it for.
- Selling a business: Depending on the stage a business is in, the sale of a business is a valid financing option. Selling a business to an aggregator, selling with the help of a business broker, or a direct sale are all options for exiting a business and receiving financial compensation.
By focusing on reserves of working capital in times of volatility, business owners are controlling what they can, while reducing their risk in areas beyond their control. Forecasting becomes an important tool for cash flow management, and forecasts should be monitored weekly in times of volatility. Learn more about cash forecasting and unlocking working capital at brightflow.ai.