By Roei Yellin, Co-founder and Chief Revenue Officer of 8fig
Talk of a looming recession continues, despite July’s unprecedented job market growth. Inflation has reached its highest level in nearly 40 years, and the Federal Reserve is working to combat it with interest rate hikes.
A recession is defined by the National Bureau of Economic Research as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” While we have not yet technically entered a recession, indicators do point to such an economic downturn within the next year or two.
Inflation and high prices on everything from fuel to food are already impacting consumer spending, with sales volumes decreasing and companies from WalMart to Coca Cola reporting falling profits. Retailers across the board are preparing for an inevitable change in consumer behavior, as shoppers with less disposable income put off what they see as unnecessary purchases in favor of essentials, like food and basic necessities.
ECommerce sellers are in a unique position when it comes to preparing for uncertainty, however, since their supply chain has so many interconnected parts. That simply necessitates effective and specialized approaches to planning that are unique to eCommerce. With the proper strategies in place, eCommerce businesses should have no trouble not only surviving, but thriving through the economic downturn.
The cash flow crunch limits eCommerce brands
ECommerce sellers are familiar with a challenge known as the “cash flow crunch.” This is when a business has more outgoing expenses than incoming revenue. In eCommerce, the cash flow crunch often hits when a seller must pay supply chain expenses before selling their product and receiving revenue.
Supply chains are complex systems, and sellers must deal with various interconnected stages including deposit, payment, shipping, logistics, and marketing. Each of these stages incur expenses, and the payments are generally due before the seller is able to generate revenue from selling the finished product.
When a seller has to continuously order inventory to stay in stock, the overlapping supply chain expenses can cause serious cash flow problems. In fact, cash flow is such a serious issue for young businesses that a survey conducted by CB Insights found that 38% of startups that fail do so because they run out of capital.
Planning ahead can help eCommerce businesses stay afloat
Through my work with eCommerce brands, I have noticed that most sellers are living day-to-day. They may have a general plan in their minds or written out on a spreadsheet, but they aren’t looking ahead on a product-by-product level.
Therefore, they often lack an accurate picture of the timeline surrounding supply chain expenses, inventory levels, and cash flow. It’s nearly impossible to grow past a certain size without a better method for mapping and planning the supply chain over the longer term.
Instead of dealing with the ups and downs of eCommerce as they occur, I recommend carefully mapping out each stage of the supply chain for the next year or more. Supply chain mapping, or detailing the flow of capital and goods across the supply chain, is an invaluable part of supply chain management. This important planning step gives eCommerce brands a clear visualization of their cash flow. They are able to easily identify the weak areas in their supply chain and pinpoint the stages where they are likely to run into trouble with regard to working capital.
This is a complicated process, and even the most seasoned financial advisor struggles to accurately integrate the many aspects of the eCommerce supply chain. However, there are technologies available to help sellers map out their supply chains and stay in control of their cash flow.
Map out each batch of product individually
Another dilemma that eCommerce sellers face is the variation in the supply chain for different products. Instead of looking at their finances as a whole as traditional financial institutions tend to advise, eCommerce sellers would do well to identify the disparate needs of their individual products.
One item, for example, may sell better during the summer months. In that case, the seller will need an inflow of cash in the winter, so they can order inventory to have on hand by the spring and sell it in the summer. Another product might take longer to produce, so the delay between paying the supplier and earning revenue will be greater.
ECommerce sellers need to look ahead in this way in order to more accurately understand when they need capital and when they can expect to bring in revenue. By adapting a product-by-product approach to profitability, eCommerce brands can double down on hero products that offer consistent revenue and avoid launching new product lines that may tie up valuable working capital that is needed elsewhere.
An appreciation of the cyclical nature of eCommerce working capital requirements helps businesses manage their cash flow accordingly.
Flexibility is key for keeping up with the times
Flexibility and adaptability are invaluable to the success of eCommerce businesses, particularly during times of economic uncertainty. The very nature of eCommerce necessitates agility; supply chain delays occur unexpectedly, a shipment may arrive broken, demand may suddenly rise or fall.
Injecting flexibility into the supply chain is a great place to start. A flexible supply chain ensures that sellers have the ability to adjust production, operations, and shipping to respond to changes such as global supply chain disruptions. Optimizing a supply chain for flexibility involves a number of factors including diversification of suppliers, establishing transparency, and incorporating automation where possible.
Ordering inventory more frequently and in smaller batches is a great strategy for keeping a business nimble, too. If demand changes or something goes wrong with a shipment, there are fewer losses and a shorter turnaround time before the next shipment arrives. In addition, business owners can adapt more quickly to a changing economic environment.
Flexibility in funding is another important asset for eCommerce businesses. When searching for a source of working capital, finding an adaptable partner can go so far as to save a business in a pinch. Costs arise unexpectedly, consumer buying trends vary, and global events disrupt the supply chain. Therefore, having the flexibility to make adjustments to reflect a business’ ever-changing reality is a huge advantage.
As the economic situation continues to develop, eCommerce businesses can use a more specialized and effective form of planning to remain competitive. By carefully mapping out their supply chain expenses with a distinct awareness of each product, they can get a better sense of where their strengths and weaknesses lie. Then, as long as they are flexible, they can adapt to any economic situation.
About the author
Roei Yellin is the co-founder and Chief Revenue Officer of 8fig, a planning and funding platform for ecommerce sellers. Following his start as an Olympic athlete, Roei has accumulated over a decade of experience building fintech products focused on payment systems and supply chain analytics.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.