How to plan your cash flow when your eCommerce business is seasonal
There was once an entrepreneur with a clear idea for a business that specialises in gifts for a very specific day: Mother’s Day. After a few successful years of making moms throughout the world smile, that business grows to generate around $2 million in revenue in the month of May alone. But throughout the rest of the year, as online shoppers focus their attention on other festivities, business is much slower, and monthly revenues are unlikely to top $600,000.
These fluctuations in revenue are drastic, but they aren’t unique. All seasonal retailers experience some level of demand fluctuations that boost profits, contrasted by comparatively low profits outside of peak season. You can maximise profits in peak season and mitigate the financial stress of the low season by planning your cash flows to ensure year-round success for your business.
Seasonal fluctuations in demand drastically impact your inventory needs and can make it difficult to maintain stable cash flows throughout peak and low seasons. Inaccurate sales predictions can lead to major issues, like overstock that eats into your profit margins. Revenue forecasting helps you mitigate these problems by helping you estimate future sales, so you can meet demand fluctuations. And the more accurate your forecasting is, the easier it will be to scale your business to match seasonality.
Seasonal fluctuations in demand drastically impact your inventory needs and can make it difficult to maintain stable cash flows throughout peak and low seasons
Start by gathering your sales data for the last two to three years of operations. This will give you the insight into sales patterns you need to identify sales trends that will help predict demand, like when sales could begin to pick up and which products are most popular. You can also run a scenario analysis to see how different forecasts will impact your business. For example, if sales are drastically lower than forecasted, your capital will be tied up in illiquid assets until you’re able to sell them for a profit.
Prepare a budget
After forecasting, you’ll have a good idea of what sales demand will be and which products you need to meet that demand. Then you can begin assessing product costs to determine what capital your business needs to stock inventory.
Start by assessing the cost to buy products from a manufacturer or supplier and considering the payment terms, like if you’ll need to pay full price upfront. While some manufacturers may be willing to delay payment for large customers, it’s unlikely to be an option if your eCommerce business is small or doesn’t have a long-term partnership with your manufacturer. To buy product, a business will need to pay full price for the product upfront or place a deposit and pay the remaining balance at a later date.
This presents a financial problem for eCommerce businesses — their ability to pay for product defines order size. If the business doesn’t have access to financing, it might not be able to afford enough product to meet forecasted demand. This is particularly true for growing brands, whose future sales will outpace current operations, which means they won’t have enough profit to buy product, and they will miss out on sales opportunities. After all, you can’t pour all of your budget into product — there are other operational costs to consider as well.
Some of those other costs include the domain name and hosting platform for your website, labor, and storage for your inventory. You may also want to include savings and reserve funds in your budget to provide a safety net if hidden costs come up. For example, if sales are lower than your forecast, you might need capital to invest in marketing during the low season.
Understand lead times and payment terms
“Lead time” is the period of time between when you first place an order with a supplier and when you receive the shipment for your inventory. In simple terms, it’s how long it takes a supplier to fulfil your order — and it has a big impact on your business. Lead time dictates when you will need to place an order to prepare for seasonal demand and when you’ll need to have the funds to pay.
For example, an eCommerce business that specialises in home and garden supplies will need outdoor patio furniture in stock when customers begin shopping for those items in the spring. Manufacturing this type of furniture takes months, translating to a six- to eight-month lead time. This means the business would need to place the order in August to have products in stock by February, when it will begin receiving its first orders. The brand should also be prepared to pay a deposit when it places the order, which means it will need to explore financing options at least one month before placing the order.
Lead times can vary greatly depending on the business and the industry it operates in. While retailers selling garden furniture have months-long lead times, holiday chocolate sellers may only need to wait a few weeks for a supplier to fill their order.
Talking with multiple suppliers will help you understand what the average lead time is and what type of credit or payment terms you can expect. These conversations are also an opportunity to negotiate for better terms. For example, a supplier may be willing to offer better payment options if you agree to pay a marginally higher price for the products. While the cost of goods sold (COGS) is higher, the payments are more affordable, which means you won’t have to borrow or finance as much capital.