There is a little number of e-commerce that survives beyond a few years from their launch, and research shows that about 80 - 90% of online stores fail. Why is this? Many reasons cause this, and it's even a fierce game for starters as the eCommerce niche is highly competitive but has a very low barrier to entry. The low barrier entry is why many unserious people rush into it making them close down at the very first hurdle. Another thing that plays a critical role in the closure of many well-funded eCommerce stores is financial mismanagement. Also, e-commerce business has fewer liabilities compared to brick-and-mortar stores, and this is one of the reasons why eCommerce businesses are so lucrative. But, why do many eCommerce stores still struggle financially? Read on…
A Primer on Working Capital
Even with the fact that many small businesses know much about their cash flow most of them do not understand the difference between cash flow and working capital. Meanwhile, cash flow is essential as it is the difference between all your income and expenditure – if you earn $30,000 a month and $20,000 is spent on rent, procurement, and payment of salaries then you have a $10,000 positive cash flow. However, working capital, on the other hand, is just like cash flow, but it is the difference between all your assets and liabilities in a financial year. So, if you calculate all your assets like properties, inventory, income for the year and it totaled around $600,000, and you spent $500,000 on expenses then you have a surplus working capital of $100,000.
What eCommerce Businesses are doing Wrong
poor working capital is fuel by two main factors which are inventory management and vendor terms. eCommerce is not the only one that suffers from this issue as brick and mortar stores too suffer from these factors. Inventory can be liquidated just like your property or equipment, and it is listed as an asset on paper. This might not also be the case in practical timers. For example, the value of your phone can go down once new models are launched in the market if you sell them online.
In other words, your working capital becomes more vulnerable by your inventory.
Your working capital can also be a wreck by your vendor terms. Let's take for example an online store selling phones that can procure $100,000 worth of phones with a 60-day credit period from a vendor. So, this online store must sell these $100,000 worth of phones within two months so they can pay the vendor back and also maintain the current working capital. The business can even be staring at a deficit, and another asset might be sold if the phone fails to sell.
How to Improve Working Capital
• Reduce inventories
Your inventories can be compared to a depreciating asset and a ticking time bomb. This means that you could put too much pressure on your business to sell when you hold too much inventory.
• Change the business model
Changing your business model might be the way out (but that will also depend on your business model). Your store can charge higher prices for a bespoke design when you have a made-to-order product. This will also allow you to sell your product before paying your vendor to proceed with the production.
• Update vendor terms
One of the leading causes of poor working capital among eCommerce businesses is a bad vendor. Each product goes through its own unique sales cycle but takes, for example, it's faster to receive a dress bought online than a phone or TV. At the same time, it cost less to hold apparels in inventory than the one consisting electronics.
The bottom line is that it is essential to any business and not just e-commerce store alone to establishing a healthy cash flow and working capital.