As an Amazon seller, you’re always looking for ways to grow your business while keeping your expenses in check. One way to achieve this is by speeding up your cash conversion cycle using good debt. In this episode of the “Protect Your Amazon Profit” series, we’ll explore how you can optimize your accounts receivable and payable to increase profitability.
Importance of Managing Accounts Receivable and Payable for Amazon sellers
As an Amazon seller, managing your cash conversion cycle is critical to increasing your profitability and business growth. The cash conversion cycle formula is a measure of how long it takes for a company to convert its investments in inventory and other resources into cash flows from sales. In this episode, we’ll explore how you can speed up your cash conversion cycle using good debt, negotiate favorable payment terms with suppliers, and optimize your accounts receivable and payable. This episode is to provide Amazon sellers with practical strategies for optimizing their cash conversion cycle, reducing working capital, minimizing risks, and increasing profitability using good debt.
Why This Matters
- Reduce Working Capital
- By optimizing your cash conversion cycle, you can reduce your working capital needs, freeing up capital for other investments or reducing your need for external financing.
- Minimizing Risks
- By improving your accounts receivable and payable management, you can minimize the risks associated with inventory stockouts, delayed payments, and other supply chain disruptions.
- Grow Organically
- By reducing your working capital needs and increasing your profitability, you can grow your business organically, without the need for external investment or loans.
- More Sellable Business
- By optimizing your cash conversion cycle, you can increase the value of your business and make it more attractive to potential buyers or investors.
- More Investable
- By improving your profitability and reducing your need for external financing, your business becomes more investable and can attract higher valuations and better returns on equity.
- More Lendable
- If you do need external financing, optimizing your cash conversion cycle can make your business more lendable and improve your cash flow.
What We Want
- Negotiating Favorable Payment Terms with Suppliers
- Negotiating favorable payment terms with your suppliers can help you manage your cash flow more effectively and reduce your working capital needs. For example, you can negotiate longer payment terms, such as 60 or 90 days, or ask for discounts for early payments.
- Leveraging Supplier Credit
- Using supplier credit can help you reduce your working capital needs and improve your cash conversion cycle. By using supplier credit, you can delay payments for inventory until after you have sold it, reducing the need for upfront capital.
Classic Mistakes to Avoid
- Poorly Negotiating Payment Terms with Suppliers
- If you don’t negotiate favorable payment terms with your suppliers, you may be forced to pay upfront for inventory or make payments before you receive payment from your customers. This can strain your cash flow and increase your working capital needs.
- Having No Cashflow Projections
- Without accurate cash flow projections, you may not have a clear understanding of your working capital needs or be able to plan for future investments or financing needs.
- Ignoring Cash Flow Projections
- Even if you have cash flow projections, ignoring them can be just as damaging. It’s important to monitor your cash flow regularly and adjust your strategy accordingly.
- Building Strong Relationships with Suppliers: Strong relationships with suppliers can lead to more favorable payment terms and discounts.
- Negotiating Favorable Payment Terms and Discounts with Suppliers: Amazon sellers should aim to negotiate payment terms that align with the business’s cash flow.
- Utilizing Supplier Credit Effectively: Amazon sellers can leverage supplier credit to reduce working capital and increase profitability.
- Keep Negotiating with Suppliers: Continual negotiation with suppliers can lead to better payment terms and discounts.
- Separate Size of Order from Cash Flow: Splitting orders can help sellers to align payment terms with cash flow.
- Lower Costs/Unit = Higher Gross Profits: Lowering the costs per unit can increase gross profits and improve cash flow.
- Better Cash Flow = Lower Working Capital!: Improving cash flow can help to reduce working capital and increase profitability.
In summary, optimizing your cash conversion cycle can help you scale your business with minimal capital. By focusing on quicker inventory turnover, faster accounts receivable collection, and efficient accounts payable management, you can reduce your working capital, minimize risks, and grow your business organically. It’s important to avoid classic mistakes like overstocking inventory, poorly negotiating payment terms with suppliers, and ignoring cash flow projections.
We hope this episode has been helpful in providing you with strategies to speed up your cash conversion cycle. We encourage you to apply these strategies to your business and make continuous improvements. In the next episode of the “Protect Your Amazon Profit” series, we will discuss how to reduce Amazon fees and increase profitability. Don’t forget to book your free Amazon profit audit with Michael Veazey at www.myamazonaudit.com.