How many payouts should you be saving to buy your next round of inventory? When is your next payment to your wholesale supplier? That credit card payment is due soon, isn't it? If you are having trouble finding the answers to these questions, and if you find yourself waking up nightly, wondering whether you have enough cash to get you and your company through the next payment, then you should consider implementing the Profit First method for managing inventory and cash flows.
Profit First Cash Flow Model
The Profit First cash flow model is one of the most clear-cut strategies to aid in your understanding of inventory cash flow in ecommerce environments. A “Quick Start” to begin Profit First is by merely creating an inventory bank account with designated credit cards for both your inventory and operating expenses.
Let's explore how the Profit First method can help you manage your inventory cash flow.
A majority of sellers work with a single checking account in which operating expenses and inventory are often combined. This makes it difficult to understand where funds go and for what purpose. Listed below are the three types of sellers and how they typically order and purchase inventory.
As a retail or online arbitrage seller, your inventory is generally going to be purchased with credit cards. Within 30 days, the credit cards are paid off.
As a wholesale seller, orders are placed months in advance with the bill due at a previously agreed-upon date.
As a private label seller, payment is usually split up with 30% of the payment due at the initial placement of the order and the additional 70% when the order is shipped.
Having a single bank account for all your business activity means mentally calculating the funds needed for the inventory payments you know are coming. Yet, as you notice your checking account balance growing, Parkinson’s Law takes effect. You begin thinking of all the other uses those funds could serve for your business. However, Parkinson’s Law can be advantageous if used correctly.
Open a Separate Checking Account
Another easy way to manage your inventory cash flow is by opening separate checking accounts. When you open a separate checking account, allocate a portion from each payout to fund it.
One method to figure out how much to transfer into your inventory checking account is to begin by looking at the cost of goods sold for the covered payout period.
For example, let’s say your product sales were $90,000 for the payout period. With fees taken out, your final payout ends up around $60,000. The cost of the products sold was $27,000. When receiving the $60,000, take $27,000 out and move it into your inventory account.
Now you will have funds set aside for the next time you have to pay off credit cards or place orders.
Managing Inventory Accounts
"But I want to get my points, miles, cashback, etc. I want to purchase my inventory with my credit cards."
I hear this objection often. The answer is simple: purchase your inventory on an allocated credit card. This way you can collect your points from the credit card and increase time to pay for the inventory. After all, you should now have enough cash in the bank to stay above water and pay it off.
If you are currently using credit cards to cover costs for your inventory and operating expenses, separate them by their different purposes in the same way you would divide bank accounts. You can evaluate charges on the cards to the funds accessible in your account to see if your cash is meeting the credit you are accumulating.
If not, don’t continue building credit balances you can’t pay for. This could indicate you are selling products under the gross margin needed to sustain your business or operating expenses are out of hand.
Use the inventory account to pay for expenses associated with getting your product into the ecommerce environment such as Amazon. This could include fees such as:
- Prep center fees
- Shipping fees
- Bonding fees
Sometimes there are ancillary expenses (packaging, instructional inserts, etc.). These should not be considered operating expenses. So be sure to have the funds available in your inventory checking account to meet these costs in the following order.
Your Profit First Foundation
If you haven’t already done so, set up a savings account to use as your profit account. Now your solid foundation to start Profit First should consist of:
- Operating Expense Checking Account (previously your main bank account)
- An Inventory Checking Account
- And now a Profit Savings Account
Make your profit a habit. Each time you move funds into your inventory account, move 1% of your remaining payout into the Profit Savings account. You are now putting your profit first.
If you are having trouble with your cash flow, my book, Profit First for Ecommerce Sellers, maps out a strategy that will answer your questions.
If your ecommerce business isn’t where you’d like it to be in terms of profitability, check out my book, Profit First for Ecommerce Sellers. It answers important questions about how to implement Profit First in an ecommerce business. Take control of your money and your business, and put Profit First to work for you!