Inventory Cash Flow: Strategies for Amazon Sellers
by Cyndi Thomason, on April 9, 2019
Is cash flow an issue for you?
If you are a business owner, the most likely answer is “Yes!” Most businesses struggle with making ends meet at one point or another. Amazon sellers are often caught short when large inventory payments are due.
Simply managing your inventory cash flow separately from your operating expense cash flow can be a game changer. Through working with hundreds of Amazon sellers, we’ve determined one of the easiest strategies (with a huge payback) is to create an inventory bank account and designate separate credit cards for inventory and operating expenses. Let’s put this to work for you.
Most sellers operate with one checking account. Inventory and operating expenses are combined in this checking account and as a result, it is hard to understand the flow of funds for any particular purpose. As a private-label seller, typically you are required to pay 30% to your manufacturer at the time you place an order and 70% at the time the order ships. If you are using one account for all business activity, you should be mentally setting aside funds for the 70% payment that you know is coming. However, as your checking account balance grows, Parkinson’s Law begins to work its evil magic and you begin to dream about how you can use those funds for other purposes in your business. The good news is that Parkinson’s Law can also work in your favor as it improves your behavior, moving from a disadvantage to a definite advantage.
Make Inventory a Separate Activity
Quite simply, you open a separate checking account for your inventory activity. Fund this account with a percentage of each Amazon payout. A straightforward way to calculate the amount to move into your inventory checking account is to look at the cost of goods sold for the period covered by the payout. For example, your product sales were $90,000 for the two-week payout period. After Amazon collects their fees, your payout will be about $60,000. The products you sold cost you $27,000. When you receive the $60,000 in your bank account, move $27,000 over to your inventory account. This is building up the inventory account at the replenishment rate, and when you’re ready to place your next order, you will already have the funds set aside.
I often hear this objection from sellers—“But I want to pay for my inventory on my credit card, so I can get points or miles or cash back.” No problem: just designate a credit card for inventory purchases. You will be able to accumulate the points from the credit card and extend the time on paying for your inventory by working with the 30-day payment requirements of the credit card company. But you’ll have the money in the bank to pay this off within that period and ensure that you are keeping your finances “above water.”
Manage Your Credit Cards the Same Way
If you have been using your credit cards for inventory and operating expenses, separate them for designated purposes in the same way you separated the bank account for designated purposes. During the month, you can evaluate the charges on the credit cards against the funds available in your bank account. You can quickly see if cash is available to meet the credit you are accumulating. If not, you need to act quickly. Don’t continue to build up credit balances that you cannot repay. This is a red flag that you are either selling your products below the gross margin level needed to sustain your business, or that your operating expenses are out of control.
Other Uses for the Inventory Account
The inventory account can be used to pay for any expense associated with getting your product to Amazon. You may have prep center fees, shipping and bonding fees. You may have ancillary expenses like packaging and instructional inserts, etc. These expenses relate to the cost of your product. They are not operating expenses. You may pay for them more frequently than you pay your manufacturer, but they are still product-related costs. Make sure you are setting aside funds in your inventory checking account from each payout to cover these costs for the next order.
A Firm Foundation for Profit First
While you are at the bank setting up your inventory account, also set up a savings account if you don’t already have one. This will be your profit account. With these three accounts—the operating expense checking account that has been your main bank account, an inventory checking account and a profit savings account, you now have an easy, solid foundation for getting started with Profit First. As you transfer the funds from each payout into your inventory account, also transfer 1% of what remains of the payout into your Profit Savings account. With this one small step you are making profit a habit; putting profit first.
In my book, Profit First for Ecommerce Sellers, I explain this Quick Start approach and share case studies of other sellers that have successfully used this approach to understand their cash flow and become profitable every month. With just a few simple steps, you can, too.