To truly succeed on Amazon, you must constantly look for ways to expand your business. Whether by selling in other Amazon marketplaces or expanding across different niches, if you want to build a successful business on the world’s largest marketplace, you’ll have to scale your business over time.
Sadly, business expansion is largely impossible when you do not have sufficient funding or capital. Taking out business loans is an option, but an even better option is managing your cash flow to ensure that your profit goes back into your business.
This aspect of Amazon selling is one that is rarely talked about but is just as important as product research and other business processes. So, in this post, we’ll give you some success tips for managing cash flow as an Amazon seller.
Related: Amazon Global Selling
What is Cash Flow on Amazon?
In basic terms, cash flow is simply the amount of money going in and out of your business over a specific period. Think of it as your business expenses (money going out of your business) and sales revenue (money coming into your business).
By effectively managing cash flow, you can tell when you are running at a loss, when you are making a profit, if you are hitting your financial goals, and where changes need to be made.
Managing cash flow by tracking profit and expenses makes it easier for you to hit your sales and business goals, and then expand your business.
Why Amazon Sellers Should Manage Cash Flow
Easy way to determine the financial health of your business
A business that generates more profit than losses is considered financially healthy, but the only way to assess the financial health of your business is to track your profit and expenses. When your business is financially healthy you can easily adapt to new trends in the marketplace. You can jump on new opportunities as they come, keep customers satisfied and grow your business.
Your business is better prepared for emergencies
One of the biggest benefits of managing your cash flow is that your business can run itself. The Amazon marketplace is volatile and unpredictable and much as you would hope that the tide is always in your favor, this is not always the case.
So you need to always have a cash reserve for emergencies. You can achieve this by managing your cash flow because you have cash available for emergencies.
Better inventory management
Managing cash flow ensures that you always have inventory available. You can easily restock products before they run out so you are not losing out on sales or revenue. You are also able to invest in new products that can help you boost sales.
How to track your cash flow on Amazon
The first step to managing your cash flow is to track your expenses and profits and there are two ways to do this.
Manual or Automated Financial Tracking
As an Amazon seller, you can track your cash flow yourself. This would require you to keep a record of all the money including revenue and expenses that go into and leave your business. You can do this using a spreadsheet where details of every transaction would be entered for record-keeping purposes.
However, a major drawback of tracking your cash flow yourself is that it gives room for human error. You will also have to manually update any changes in price or data obtained and this can be challenging. So it is always better to automate your financial tracking process using profit tracking software like the ZonBase profits tool.
Using the profits tool, you can keep an eye on your business expenses, and get a clear view of your profits. The tool displays your gross revenue, the number of units sold, your estimated profit, promotional spend, and even refunds.
Using this tool, you can get a bird eye view of your advertising expenses, ad spend, and ROI and this helps to see how your marketing efforts are translating into revenue.
The tool also comes with an inventory forecast feature that helps you to keep an eye on your inventory levels, obtain an estimated restock date based on sales history, and get prompt notifications when stock is low. Since inventory management is an equally important aspect of Amazon selling, you will definitely find this tool handy.
You can access the Profits tool for free when you sign up for a 7-day free trial of ZonBase.
You can make use of the Amazon FBA calculator
This is another simple way to track your cash flow on Amazon. The FBA calculator helps sellers to:
- Determine the total costs including fees and other expenses that are incurred during sales
- Determine Profit margins
- Make informed decisions as regards pricing strategy.
It is easy to access and makes the whole process of cash flow calculations a whole lot easier.
The Zonscanner mobile app provides an FBA calculator that helps to calculate the profitability of any product you want to sell. All you have to do is scan the product you are interested in, and the tool will pull up crucial sales information to help you estimate profitability.
Using Zonscanner, you can calculate your profit margin and obtain an accurate estimate of your net profit on any product you want to sell. This way, you can tell a product’s profit potential before deciding to sell it, and you can fix product prices that allow you to make a profit.
The Zon Scanner mobile app is available for download on Android and iOS.
How to manage Amazon FBA cash flow
Here are a few Amazon selling success tips to help you manage your cash flow.
Plan for a slow sales period in advance
You can not predict when sales will increase and when trends will change on Amazon, but you can plan, and put measures and strategies in place to ensure that when sales drop your business will not suffer.
Maintain a cash reserve
Cash reserve refers to the money that is saved up for emergencies and unexpected expenses. Think of it as the rainy day funds you put aside that serve as a cushion during lean times.
Maintaining cash reserve is important to prevent your business from going into debt or a deep financial crisis.
Here are some other benefits of maintaining a cash reserve:
- It gives your business financial flexibility to take advantage of growth and sales opportunities.
- It’s also a great strategy that you can use to prepare for slow sales periods.
- It enables you to be able to meet Amazon’s performance metrics and quickly attend to issues like unexpected refunds or chargebacks that may occur while running your business.
It’s always advisable to have 3 month worth of spending cash in your cash reserve ahead of periods when there is no cash inflow.
Understand Amazon inventory management policies
Amazon has very strict inventory management policies that all sellers must adhere to. To ensure that you are not breaking any of these policies you need to understand them. Amazon has storage limits that determine how many products you can keep in Amazon fulfillment centers.
Not understanding these policies may lead to acquiring additional expenses which would lead to an increased cash outflow and you may start losing money.
Some other inventory management policies you need to take note of in Amazon selling include return management policies, the expiration date of your inventory, and Amazon restricted category. Ensuring you are not in violation of any of these policies will help you in managing cash flow.
Pay attention to the competitors’ sales data
Successful sellers know the importance of tracking competitors’ data and using this information to their advantage. There are lots of great insights you can obtain from carrying out competitor research.
You can get an idea of popular products, new market trends, and pricing strategies. This also helps you make informed marketing decisions like when to drop product prices and offer discounts that are sure to attract customers.
Establish financial goals for your business
If you do not have financial goals to track, you cannot determine if your business is growing. Establishing financial goals is one of the most important success tips in managing cash flow. Financial goals give you a clear focus and purpose on what you want to achieve and help you to make tweaks and adjustments so you can stay on course.
When it comes to Amazon selling the primary financial goal is profit generation so whatever strategies you are putting in place should all be focused toward this goal. Some success tips you can implement are:
- Making use of pricing strategies that attract customers
- Implementing effective marketing strategies
- Analyzing and utilizing market trends
- Building a strong and reliable customer base
Factors to Consider When Managing Your Amazon Cash Flow
The factors that you have to consider when managing cash flow are factors that affect when money comes into and leaves your business. These are factors you need to bare in mind because they aid you in planning your expenses ahead and deciding how best to spend the cash at hand. Here are two major things you should consider:
Your credit card payments
If you make use of a credit card to pay for business expenses and operations, you need to come up with a suitable time to pay your credit card bills. Knowing when your credit card bills get paid will enable you to plan appropriately for a cash reserve so you are not stuck in a cash crunch when it is time to get them paid.
Although your credit card may be a source of cash inflow for your business you do not want to be stranded financially when it is time for cash to go out.
Amazon Disbursement Funds system
It typically takes Amazon about two weeks to disburse payment for sales. During this time, you will have to keep your business running and pay for various business operations like updating inventory.
But you cannot do this without a cash reserve, so you need to know when there will be a cash crunch — no cash inflow but a continuous outflow of cash from your business.
What is a Cash Crunch and How Can You Avoid it?
A cash crunch is a situation where a business lacks sufficient cash to settle immediate financial obligations. Some factors that may contribute to this situation could be:
- High expenses on your business
- Poor financial decisions
- Slow sales for a prolonged period
- Lack of cash reserve or energy funds
Whatever the reason may be, a cash crunch tends to have a lot of negative effects on your business’s financial health and it’s important that as a seller you can avoid this situation or mitigate the effect when it occurs.
A good example would be a situation where you need to update your inventory and the cost to purchase goods for this purpose is about $5,000. You, however, only have $2,000 at hand and would be unable to pay the balance. In this case, you do not have enough cash to satisfy these financial obligations and you find yourself in a cash crunch.
Now that you have a good picture of what cash crunch looks like, let’s talk about how you can avoid it.
How to Avoid a Cash Crunch as an Amazon Seller
The most effective strategy to avoid a cash crunch is by using the cash flow forecast.
You can think of the cast flow forecast as an estimation of the amount of cash coming into (inflow) and leaving (outflow) your business over a specific period. It enables you to understand your current financial position and predict your financial health for the next couple of months.
You are then able to know what measures to put in place to avoid a breakdown in business operations. The easiest way to compute the required information for your cash flow forecast can be using an Excel spreadsheet.
To understand your cash flow forecast you will need to break down the required data and information into 3 major groups.
- Cash inflow ( sales revenue, royalties, and general profits)
- Cash at hand (investments, savings, cash reserve)
- Cash outflow ( expenses, inventory purchase, loan repayment, advertising fees, taxes, etc).
Let’s take a closer look at each of these and the role they play in forecasting your cash flow:
This covers all cash expected to come into your business during the forecast period. If the forecast period is about 12 months you need to be able to calculate the amount of money that will come into your business within these 12 months. To do this, you will have to enter the expected income and the expected date into the spreadsheet as cash inflow.
There are multiples ways to go about this calculation but the easiest strategy that most sellers make use of is:
- Obtain the average cash inflow for the last two months.
- Then multiply the value obtained by the growth rate over that month.
- The value obtained becomes your cash inflow for the following month.
This accounts for all expected cash payments and expenses to be made during the forecast period. For example, if the forecast period is 12 months and you have to pay for inventory or pay for advertising within that 12 months, all the expenses are listed under cash outflow in your spreadsheet.
How is cash flow different from profit?
Cash flow refers to the amount of money that goes in and out of your Amazon selling business within a specific period while profit is the financial gain that is earned from a particular transaction or sales. You can have profit but no cash to run your business operations because on Amazon you will not receive your profit in the form of cash until after 4 days.
What options do I have to finance cash shortfalls as an Amazon seller?
Some options you can fall back on in the case of a cash shortfall could be seeking external loans, relying on your savings, and a personal line of credit.
In conclusion, Amazon selling can be a profitable venture but it’s important that you effectively manage your cash flow to ensure that your business stays financially healthy and profitable. This you can achieve by setting financial goals, adhering to Amazon’s policies, researching your competitors, and being prepared to utilize growth opportunities.