Many Amazon sellers don’t bother to look into their finances until tax season. Unfortunately, this is like flying a plane without using any navigational instruments. Sellers that don’t assess their business’s finances on a weekly basis are making a crucial mistake that could run their financial resources dry.
We’re going to walk you through the key performance indicators (KPIs) you should be tracking, how to negotiate for better terms, and the best lending options available for Amazon sellers.
Positioning Your FBA Business for Smarter Cash Flow Management
Most large companies depend on a CFO to manage their finances and effectively minimize overhead cost. However, even smaller businesses need to penny-pinch and continually push to extend repayment periods, lower prices, and obtain more favorable return options. While it’s hard to step back from the day-to-day aspects of your business, it’s crucial to your success. Put a recurring weekly event on your calendar to review your KPIs before the taxman comes.
That’s all before throwing growth into the mix. Many sellers want to grow their businesses quickly, which requires additional capital. To fund growth, seek out alternate sources of funding for your business to ensure you are getting the best rates and repayment periods in addition to negotiating extended terms.
A Note on Becoming Your Supplier’s Best Customer
When determining how to chart your company’s growth, be aware that it’s not merely adding random SKUs or selling more of your existing items. In order to successfully scale, you’ll need to become your supplier’s best customer. Focus on a few key suppliers and develop a strong relationship through transparency and building up sales. Through this process, you’ll prove yourself to be a key account, which you can then leverage for extended repayment terms and lower prices, which will help you win the Buy Box and grow even faster.
1) Keep Track of Your KPIs
Key Performance Indicators (KPIs) are crucial for the success of any business. These metrics can help you evaluate your success at reaching key targets, allow you to spot trends or problem areas, and assess your overall performance. They are used across all industries, but are particularly useful for retail businesses.
The most successful Amazon sellers know to segment their analysis by brands, suppliers, and buyers, and review metrics for each of these areas at least once a week.
Here are the most important KPIs to evaluate the health of your Amazon business:
Inventory to Sales Ratio
This key management metric covers multiple areas of your business. It indicates the overall health of your inventory, as well as highlighting your sell through rate and margins.
This ratio shows how many times a company’s inventory is sold and replaced over a period. This ratio should be compared against industry averages. A low turnover implies poor sales and, therefore, excess inventory.
Gross Margin Return on Investment (GMROI)
GMROI is a ratio used to evaluate inventory profitability. A ratio higher than 1 means you are selling the merchandise for more than the total cost it took to acquire it.
Cash to Cash Cycle
Cash to Cash Cycle measures the amount of time it takes for capital invested to go from cash, then through the production and sales process, and then converted into cash again through sales. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect cash owed and the length of time the company is afforded to pay its bills without incurring penalties.
Days of Inventory (DOI)
This KPI will help you see the average number of days an item is held in inventory before it is sold. It’s extremely useful in determining order quantity to ensure you are not overstocking or stocking out of your inventory. DOI is much higher for companies not tracking KPIs.
2) Get a Lay of the Land: Perform a Supplier Audit
Lay all of the facts out on the table and perform an audit all of your suppliers. This will help you spot areas where you can negotiate to get better deals. For example, the seller in the example below should be able to leverage their large sales volume and 5 year relationship to negotiate better payment terms.
3) Explore Inventory Financing Options
Here are some of the pros and cons to taking advantage of financing from traditional banks, alternative lenders, or Amazon Lending:
- For large inventory financing, this is the best option
- Building an in-person relationship with an institution
- Average annual percentage rate (APR): 6-8%
- Underwriting process is becoming more streamlined for traditional banks, such as Bank of America
- Stringent approval requirements
- Approval rates have been declining
- Longer and potential costly closing process
- Approvals are dependent on checking and merchant payment processing accounts, previous tax returns, positive cash flow, and financial statements
- Average approval rate: 19%
Here is a side-by-side comparison of the most common alternative lenders:
- Approval often based on ecommerce sales history
- No need to provide tax return
- Time to close a loan: only 3-4 days (or within minutes for some lenders)
- Some offer different loan programs such as equipment loans, asset-based loans and merchant cash advances
- Average approval rate: 64%
- Likely the most expensive money available
- Terms are very aggressive.
- Average APR 20-50% (Some may break down payments by day)
- APR can vary from 10.9% to 12.9%
- Once approved, you only fill out 3 fields and have 3 clicks
- Monthly payments are automatically deducted from your seller account
- No origination fee and no pre-payment penalty
- Good option for those who don’t have an established credit line
- Amazon Lending is only available to sellers by invitation
- If you don’t follow through on monthly payments, they take your inventory as collateral. (Amazon doesn’t report to credit bureaus.)
- Excellent Amazon seller performance required
You don’t need a degree in finance to successfully run your Amazon business. However, you should be aware of the financial aspects of your business and track them on a weekly basis. Ensure you are getting the best terms from your suppliers by performing a supplier audit. This will help you determine who your best players are and where there are opportunities for negotiation.
Also, it’s crucial to do your research if you are using outside inventory funding. You want the best rates possible in order to lower overhead costs.
Overall, it’s imperative to step back from the day-to-day activities of your business and evaluate your finances at the brand, supplier, and buyer levels. To do this, use these 5 KPI’s:
- Inventory to Sales Ratio
- Inventory Turns
- Cash to Cash Cycle