Some of the key questions we hear a lot within the Fetcher community surround growth tactics and scaling for Amazon FBA businesses. We recently partnered with Payability to discuss this from a financing perspective. Some of the most important things to understand and get right are cash flow and having sufficient financial data to back up strong decisions on your investments. To explain in more detail, I invited Alison Sperling, head of Marketing at Payability, to lay out some tips on how you can overcome growth hurdles as an Amazon seller.
As an Amazon Seller, you’ve probably been considering how to take your business to the next level. While the possibilities are endless, many times it seems like the biggest hurdle to actually growing your Amazon business is simply money – or cash flow.
Whether you want to expand your inventory, boost your marketing efforts, or free up some time to focus on growing your company, a little extra capital may be all you need to make these things happen. But let’s face it, money is hard to come by.
How To Finance Amazon Business Growth
One route would be to finance growth yourself by reinvesting your profits into the business. This can include buying more inventory, or putting some money into marketing efforts or any other business costs.
Particularly for sellers who are just starting out, or who are just starting to scale, this can sometimes be restrictive and slow down progress. In this case, external financing is an option, but there needs to be some considerations first.
Taking on external financing comes with a number of risks. In addition to the obvious act of taking on a new debt and paying new fees, you might still run into cash flow issues and stockouts if you do not have a comprehensive growth plan for that new capital.
For example, investing your capital in PPC campaigns (also known as Sponsored Products), can lead to a much-desired increase in sales, but you also need to have funds on hand to maintain sufficient inventory to meet the higher demand. A stockout can be a major blow to your sales, and it can take some time to recover from, because it will cause your listing to show as out of stock, and your BSR to tank. Not ideal at all!
However, you should only seek external financing if you are certain that you can afford it. This means that your return on investment will be greater than the cost of financing – and you have a detailed plan that outlines how you will appropriate the capital you acquire. Like any major business decision, it is important that you have reliable metrics to help you determine whether you should seek financing and how to invest it for the maximum return.
Whether you are self funding growth, or seeking external financing to build your business, let’s examine three steps you should take when evaluating how to invest for the best return…
Step 1: Determine How You Would Invest the Extra Capital
The first thing to do is to determine how you’ll use additional capital. You’ll definitely want to analyze your current business financials (using Fetcher, for example), to find growth opportunities. Here are some common ways to make sound investments in your FBA business:
1. Grow Your Sales with Advertising
If you are currently investing in PPC advertising, also known as Sponsored Products, make sure you dig into the return on investment. If your PPC campaigns are performing well and generating a solid ROI (150% or higher), then you have an opportunity to grow your sales and boost your profits by increasing your PPC spend. This 150% ROI tells you that if you invest $1 in PPC, you will generate an additional $1.50.
If your PPC advertising is not bringing in a strong ROI, then it is time to reassess your strategy and spend some time on campaign management to turn this around. Advertising on the Amazon platform provides great opportunity, but only if it is well managed for the best return on investment.
You can get your hands on all of the information you need to know about launching and managing your Amazon PPC campaigns in this ultimate Amazon PPC e-guide.
2. Growing Sales with Additional Inventory
The second growth opportunity is purchasing more inventory. Seems simple right?
This becomes more complicated when cash flow is not positive. The easiest way to figure out how you are doing is to compare your average daily sales with current inventory levels and the estimated remaining days until stockout. If your remaining inventory is only sufficient for a few days (<10 days), then your sales are likely outpacing your inventory reserves. This can quickly become an issue!
If cash flow is not a problem, then you could be using inventory turnover calculations to order more inventory ahead of time, taking into account freight and shipping, to ensure restocking is never an afterthought.
In the world of Amazon, and ecommerce in general, you want your inventory turnover to be as fast as possible.
3. Growing Profit by Reducing Product Costs
The third growth opportunity that requires cash flow is how to increase profit by reducing the cost of product stock. For many Amazon Sellers, especially those who are sourcing from a wholesaler or distributor, you can get lower costs or even bonuses when you make larger purchases or pay faster. Similarly, ordering larger quantities as a private label seller allows you to negotiate a lower cost per item.
For example, if your supplier will give you a 20% discount by purchasing 200 items instead of 150, then the cost of capital to make that additional purchase should be more than covered by the discount you’re receiving.
It’s always worth looking out for money saving options like this which will have a positive effect on cashflow overall.
Step 2: Determine If You Can Afford Financing
At a high level, to determine if you can afford external financing, you need to look at your gross margin. Gross margin is your sales minus the cost of goods sold (COGS), divided by sales.
If you use PPC to market your products on Amazon, it is important that you include your PPC spend in your COGS so your gross margin calculation is more accurate.
Once you have your gross margin, evaluate the cost of financing to determine if you would still make a healthy profit by taking on financing to grow.
For example, last month you sold $100,000 worth of dog toys on Amazon with a gross margin of 40%, or $40,000. Now you need to figure out the costs of financing and what that does to your gross profit. If you’re paying financing fees of $2,000, you can more than cover that cost with your gross profit of $40,000.
Step 3: Identify Any Financial Constraints
Once you identify how you will invest your extra capital, you will need to determine if you will run into any cash flow problems. Cash flow issues are very common for Amazon Sellers due to the delay between sales and when the Seller is paid by Amazon.
As previously mentioned, if you decide to invest in PPC or Sponsored Products campaigns, you might run into a cash flow problem if you do not have the funds to maintain enough inventory to match the increase in sales. Make sure you account for potential cash flow issues when creating your investment strategy.
Why is Cash Flow Important?
Cash flow can be the difference between growing your business and,well, not growing. For all of the above growth opportunities, having positive cash flow is crucial to being able to reinvest quickly, take advantage of new opportunities and really kick your growth into over drive.
Gain Consistent Cash Flow with Factoring
To overcome cash flow issues, you need to have consistent funds coming in so you can restock inventory and maintain your advertising spend. Factoring is an effective strategy for bringing in a consistent cash flow to fund ongoing growth.
What is factoring?
Factoring is the process of giving your owed invoices to a 3rd party factoring company, who will then collect funds on your behalf. So if waiting to be paid on invoices is impacting your cash flow, then factoring could be a solution worth considering.
Payability provides financing specifically designed for Amazon Sellers utilizing factoring powered by technology. With affordable rates, Payability’s Amazon financing ensures you get paid daily for your Amazon sales – with no more waiting for payouts from Amazon!
Interested in learning more about getting paid daily for your Amazon Sales? Sign up with Payability and receive a $100 Amazon Gift Card upon activating and going live with your account.
Cash flow is important for any Amazon business, especially one that is seeking to grow and scale, avoid running out of inventory and maintain a healthy level of average daily revenue. Having cash flow in your business allows you to promote growth with Amazon PPC, effective inventory management and running promotions or pricing changes.
Some small businesses struggle with this at the beginning, or may run into some difficulties during a period of growth or expansion into new products or marketplaces. In these circumstances, external financing and factoring are options that can be considered.
Alison Sperling is the Director of Marketing at Payability. Alison completed her MBA with a concentration in Finance from Syracuse University in 2011. She has two cats and volunteers with several animal rescue organizations.
Author: Shane Stinemetz
Jiu Jitsu fighter, Sci-Fi lover and Digital Nomad. After becoming an FBA seller, Shane left the tech scene in Silicon Valley to work on Fetcher and travel around the world.