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.
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.
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.
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.
Keep your business running smoothly, so you’re always prepared for a partner or potential buyer to come on board. Even if you’re not actually selling, you’ll tighten up your finances so you can operate more efficiently and gain more consistent margins.
“If you’re sitting down with a potential buyer and you go, ‘Oh yeah, my gross margin’s usually 55%, but last month it was 33%, but don’t worry. That’s just because of something John the accountant’s done,’ the buyer is losing confidence,” Waddy says. These types of bookkeeping intricacies make it more difficult for you to gain visibility into what’s happening at your company. Instead, be consistent in your accounting and efficient in your cash management, so you’re well poised for growth.
How to follow through: “Keep it squeaky clean; [hold] cash in the bank,” Waddy says, offering tips on how to go about this. “You have to have enough cash, and your COGS and margins have to be consistent.” Run due diligence on your own business, so you’re prepared for a sale if one does come up. You’ll better understand your own cash flow and uncover opportunities to improve your margins so you can grow faster in the meantime.
One way to work out mistakes in your bookkeeping is by working with an accountant or financial officer with eComm experience. You should also seek out funding partners who have an eCommerce background to make sure you’re getting the most value for your brand.
“Whether [you’re working with] a CFO or in-house finance manager, an outsourced CFO, an accountant, or a bookkeeper, they have to have eCommerce experience,” Waddy says. “There are nuances with eCommerce finances that just don’t exist in other businesses.”
This is the best way to avoid common mistakes in your bookkeeping, such as those spikes and dips in your P&L statements we mentioned above. A CFO or accountant with eCommerce experience will understand those nuances that are unique to eCommerce. They’ll make sure your purchases are entered correctly, your margins are consistent, and you’re tracking toward growth.
Don’t just look for eCommerce experience when it comes to your internal finances. Financing providers who have an eCommerce background will understand how to view the industry and your company’s place within it, giving you more value and better terms than other providers.
How to follow through: “You’ve got to get a lender — a partner, really — that specialises in eCommerce,” Waddy says. “Traditional lenders don’t want to touch you, and when they do, the terms are astronomical. I’ve been on those terms with multiple banks getting drilled by the interest rate. I don’t think I would advocate anybody take money from a facility that doesn’t understand what you’re doing.”
Instead of seeking out funding from a bank or a commercial lender that may not have the modeling or the background to properly assess your company’s potential, try a revenue-based financing provider like Wayflyer. You’ll get quick access to funds and flexible remittance terms — because we’re deeply ingrained in the world of eCommerce, and we want to see founders succeed.
“Wayflyer is all about eCommerce,” Waddy says. “I’ve been in that position where I’ve gone to the bank, and they haven’t understood. Wayflyer is able to analyse the data and look at it in their own due diligence. ‘Is this a good retailer? Yep, we can see how our financing can help them grow.’”
You should be able to extract cash for yourself and still leave a buffer in the business to operate. Outside financing is often a sound option to help build up that buffer. But you don’t want to turn to finance partners when you’re unprepared or negotiating from a weak position.
“Scrambling for financing in a position of weakness when it’s too late means you’re giving equity away to a shark,” Waddy says. “You’re taking high interest rates on whatever loan you can get your hands on. You’re borrowing from friends and family — I’ve seen it all. I think you need to get ahead of the curve. And that’s what the cash buffer is.”
Still, you shouldn’t have to leave all of your money in your business just to see it operate and grow. Instead, you can turn to revenue-based financing to fund your inventory, for example, and hold more cash in the bank so you can comfortably withdraw money when you need it. After all, that’s what getting into business is all about.
“I would absolutely advocate for a founder saying, ‘Well, I need to pull money out to live,’” Waddy says. “Wayflyer can come in and be that cash buffer so that founders can take good money out of the company and improve their lives.”
Learn more about how Wayflyer’s flexible funding options can help you fund your working capital cycle and build up a cash buffer for your eCommerce company.