As an Amazon seller, poor cash flow is one of the biggest issues that you'll face. While profitability is important, it's not the full picture of what's happening in your business. Cash flow is the money-in and money-out flow of your business, and it's crucial to monitor it closely to avoid being stopped in your tracks.
Understanding cash flow is crucial to the longevity of your business. Profit on paper is easy to understand, but it's not giving you the full picture of what's actually going on in your business. Stick with us as we explore the importance of cash flow, the cash flow cycle, the risks of poor cash flow management, and solutions for cash flow problems.
Cash flow refers to the money-in and money-out flow of your business
Healthy profit margins are crucial to fixing cash flow problems
Lead time for products plays a significant role in cash flow management
Close monitoring is crucial in maintaining a healthy cash flow
External funding can be a remedy for cash flow problems
Make sure you stay on top of your tax obligations. Here's more info on the 1099-K for Amazon Sellers.
And if you're interested in exceptional prep center services - go ahead and dive into the details here.
What is Cash Flow?
Cash flow refers to the amount of cash that is coming in and going out of your business.
It is important to understand because even if your business is profitable, you may still experience cash flow problems. For example, when you place an initial order for inventory, a large amount of cash may leave your bank account all at once. Then, as you make sales, your bank account starts to fill up again, but you may need to order more inventory before you have fully recouped your initial investment. This cycle of money in and money out is what is known as cash flow.
Importance of Cash Flow for Amazon Sellers
While profitability is important, cash flow can stop your business in its tracks whether it's going well or poorly.
For instance, if you sell a product for $20 that costs you $5 and $5 for shipping, your profit would be $10. However, that's just your profit on paper. In reality, a lot of cash is leaving your bank account, especially when you're placing your initial order, buying more inventory, or launching new products. Being low in cash presents multiple potential issues such as delays in your logistical process, inventory replenishment, and other business aspects that need a healthy amount of cash to operate.
Risks of Poor Cash Flow Management
Poor cash flow management can have serious consequences for any business, including those in the e-commerce space. Here are some risks associated with poor cash flow management:
Inability to reorder inventory: As a physical product seller, you need to have inventory on hand to fulfill orders. If you don't have the cash to reorder inventory when you need it, you risk running out of stock and losing sales.
Increased debt: If you're constantly struggling with cash flow, you may turn to loans or credit cards to keep your business afloat. This can lead to increased debt and interest payments, which can eat into your profits.
Missed opportunities: When you're short on cash, you may miss out on opportunities to grow your business. For example, you may not be able to invest in new product lines or marketing campaigns that could bring in more sales.
How to Avoid Cash Flow Problems
To avoid or fix poor cash flow for Amazon sellers, there are three main things to consider:
Maintain a healthy profit margin. While profit is always important, having a high profit margin can help alleviate cash flow issues. This is because the higher your profit margin, the less inventory you need to sell before you have enough cash to reinvest in more inventory.
Lead time. This refers to the amount of time it takes for your products to go from being ordered from your supplier to being ready to sell. Knowing your lead time can help you determine how much inventory you need to have on hand at any given time.
Monitor your cash in and cash out situation. This means keeping track of how much money is coming in and going out of your business, and making sure you have enough cash on hand to reorder or grow when the time is right.
External Funding as a Remedy
If you are struggling with cash flow in your physical product selling business, external funding can be a solution. There are various options available for external funding, including:
Loans from banks or other financial institutions
Angel investors or venture capitalists
External funding can provide you with the necessary capital to invest in inventory, marketing, and other expenses without putting a strain on your cash flow. However, it's important to keep in mind that external funding comes with its own set of risks and considerations. For example, taking on debt or giving up equity in your business can affect your financial flexibility and decision-making.
Before pursuing external funding, it's important to carefully evaluate your options and consider the potential impact on your business. Make sure to do your research, create a solid business plan, and seek professional advice if necessary. With the right approach, external funding can be a valuable tool for improving your cash flow and growing your business.
Understand more about the Amazon Seller Payment Schedule, including your Payout Schedule, Amazon Account Level Reserve, and more.
Remember: Cash is King in Business
Understanding Amazon's cash flow is more than just a technical exercise; it's a window into the operational efficiency and long-term viability of a corporate behemoth that has its hands in everything from retail to cloud computing. Grasping how cash moves through Amazon's vast ecosystem is crucial for investors, stakeholders, and even competitors, for several key reasons:
Decision-making: For investors, comprehending cash flow dynamics can guide better investment decisions, especially when it comes to weighing the company's ability to sustain growth, pay dividends, or weather economic downturns.
Financial Health: Cash flow provides an almost immediate snapshot of financial health that other metrics may obscure. Unlike profitability, which can be manipulated using various accounting techniques, cash flow is a hard metric that shows how much money is actually coming in and going out.
Operational Efficiency: Looking at the specific elements of cash flow, such as operating or free cash flow, helps to evaluate the efficiency of the company. In Amazon's case, strong operating cash flow indicates that its core businesses are robust, providing the liquidity it needs to invest in new opportunities or technologies.
Risk Assessment: Understanding cash flow can help both internal and external parties assess the risks associated with the business. For instance, low or negative cash flow could be an indicator of operational issues or excessive debt, which could potentially result in insolvency.
Strategic Planning: For Amazon itself, and indeed for any business, maintaining positive cash flow can facilitate smoother strategic planning and execution. Having available cash allows for the freedom to explore new markets, invest in research & development, and adapt to changing market conditions.
In a world where companies are as complex and multifaceted as Amazon, dissecting cash flow offers an invaluable tool for assessing not just the company's current status, but also its future potential. As Amazon continues to evolve, keeping an eye on its cash flow will remain a key method for understanding its trajectory, offering insights that are as close as one can get to a financial crystal ball.
Don't forget, accurate financial records are crucial to a successful and thriving business. Understand Amazon FBA Bookkeeping in this guide.
Frequently Asked Questions
How do you manage cash flow of an Amazon business?
To manage cash flow for your Amazon business, first, identify your goals, such as liquidity planning, attracting financing, or growth planning. Choose a suitable forecasting period, typically short-term for most Amazon businesses. Estimate your sales based on historical data and consider other cash inflows like loans or investments. Predict expenses, including inventory replenishment and marketing costs. Finally, consolidate all data using business software to understand your cash flow better, ensuring informed decision-making for your business's financial health.
What is Amazon's cash flow?
In 2022, Amazon's cash flow from operating activities reached $46.752 billion, marking a slight rise of 0.92% from the $46.327 billion recorded in 2021. This follows a significant drop of 29.88% in 2021 from the 2020 figure, which stood at $66.064 billion. Notably, the 2020 cash flow from operating activities represented a substantial increase of 71.53% from the 2019 level.
How much profit does Amazon take from sellers?
Amazon deducts a percentage from each item sold, varying from a minimum of 6% for personal computers to a maximum of 45% for Amazon device accessories. However, for media products, the referral fees are calculated differently, being 15% of the total sales price of the product, rather than just the item price.
Is there money in being an Amazon seller?
The majority of sellers on Amazon generate a minimum of $1,000 monthly in sales, with some high-performing sellers reaching over $100,000 in monthly sales. Approximately 45% of Amazon sellers earn between $1,000 and $25,000 per month, translating to annual sales ranging from $12,000 to $300,000.