6 Expert tips for eCommerce cash management

One question eCommerce advisor and expert Paul Waddy gets a lot is, “How much cash do I need in my business?” That’s usually followed closely by, “How much inventory do I need?” The answer to both lies in striking a healthy balance through good cash management.

“Your money is always tied up in your product, so you need that operating leverage,” he says.

Waddy has more than 12 years of eCommerce experience. He was ranked No. 2 on Inside Retail’s list of Top 50 People in E-Commerce, and he’s a seasoned adviser to some of Australia’s most well-known eCommerce brands.

We spoke to Waddy about his top cash management tips for keeping your business healthy and geared toward growth. A strong cash management strategy will make your business more resilient and allow you to take cash out of your company with peace of mind.

1. Hold 12 weeks of inventory to keep up with demand

eCommerce businesses should keep enough inventory on hand to cover manufacturing lead times and meet demand until their next batch of stock comes in. Importantly, they should hold enough stock to account for fluctuations in sales so that they don’t run out of cash if demand rises before a new batch hits.

Looking at businesses that import their product, you typically need to plan for 8 weeks of manufacturing lead times, plus another 4 weeks for shipping. That supply chain crunch is one of the biggest inventory management challenges that eCommerce founders are facing. Waddy’s recommendation is to keep at least 12 weeks of inventory on hand, and possibly even as much as 16 weeks, to make sure you’re safe.

“What we should do is be holding enough inventory to say, ‘I want to get a month’s worth of sales data on this,’ and then I can go in and replace my order so that just as I’m selling out, the inventory’s coming in,” Waddy says.

To benchmark your inventory, Waddy also recommends checking your week’s cover or month’s cover based on your sales data.

How to follow through: “I would encourage anyone to check their month’s cover — in other words, how much stock do I have on hand right now at a sales level,” he says. “If I’m doing a million bucks in sales and I’ve got $3 million of stock on hand, I have 3 months’ cover.”

With that data, you can determine how quickly you’ll sell out and when you’ll need to reorder. That will also help you understand when you’re at risk of having too much inventory as your next order is arriving. You don’t want to have too much cash tied up in inventory. Crunch the numbers, and if you’re getting close to the end of the month and holding too much stock, it’s time to run a sale.

2. Keep 10 weeks of cash on hand to stay resilient

While finding and then holding the right inventory levels is important, that can’t be your only focus. You also need to have money in the bank to acquire new customers and move your business forward for the long term. Plus, you need cash on hand to withstand those challenging periods where something goes wrong. Keeping at least 10 weeks of cash in the bank gives you a buffer to ride out any storms and operate with some wiggle room.

“You need to hold money in your bank account in order to hire new people, pay wages, do marketing — and all of these other things that are required as you grow,” Waddy says.

We’ve also seen plenty of factors impacting retailers and their profit margins over the last few years, whether it’s pandemic lockdowns, shipping delays, or inflation. The best way to protect yourself against factors outside of your control is by leaving yourself a buffer so that your business can sustain itself even if sales or revenues take a large hit.

Waddy points to the pandemic as an example of when many companies were left exposed because they didn’t have enough cash on hand to survive turbulent conditions.

“We saw the honor roll of businesses that went belly up during COVID. Why? Because they ran out of money,” he says. “The death knell for those companies started well before COVID. Some of those companies went belly up within weeks. They didn’t even have two weeks’ worth of free cash. Others sailed through because they had the cash, and they came out the other end stronger than ever.”

How to follow through: Plan for a rainy day and hold onto cash even when you’re growing. To figure out how much you need, Waddy recommends adding up only your fixed expenses for 10 weeks: staff wages, rent, and utilities, for instance. That’s the number you should target. Otherwise, it might be too late to access funding from financing providers once you really need it because they’re more likely to see you as a risk.

3. Look out for irregularities in your gross margins

Extreme dips and spikes in your profit and loss statement month-over-month could be a sign of a bookkeeping error, and you’ll want to get that cleaned up.

Any size retailer can have this mistake — not just startups — so it’s something every eCommerce founder should watch for. Companies that don’t offer big discounts and have consistently strong margins of around 70% should see steady growth in their P&L statements. If there are consistencies in your gross margins, you know there’s likely a mistake.

“You see your gross profits on your P&L going up, down, up, down, in months where you know you’ve had a good month,” Waddy explains. “If all of a sudden you drop into loss-making territory, and you’re sort of scratching your head, trust your gut. Your bookkeeper is entering your purchases incorrectly.”

How to follow through: “Practically speaking, open up your Xero file right now, and go check your gross margin,” he says. “If your gross margin is fluctuating, your COGS and your purchases are being entered incorrectly.”

Speak to your bookkeeper or head of finance if you see this trend so you can clear up the mistake and get your purchases entered correctly.