We’ve all heard the expression: Cash is king. But having cash alone isn’t enough. Your small business also needs to understand how to manage that cash and how to deal with typical ecommerce expenses.
A lot of online businesses make the mistake of not remaining cash flow positive. They spend more than they make, or they time their spending poorly and find themselves coming up short for essential expenses or profitable opportunities.
Common ecommerce expenses
If you sell online, there are certain expenses you will have to come to terms with. This is especially true if you run an Amazon or eBay-based store. When running your online store, it’s important to keep these seven expenses in mind to maintain your cash flow.
- Salaries and payments
The quicker you grow, the more you have to hire employees to take on some of the workload. And unless you work somewhere where labor is free, you’re going to have to pay these employees (think: the merchandisers, customer service, the packers, and the shippers).
This means you will have to learn to manage your cash flow if you want to be able to pay your employees. Because even if they love your company, they won’t be understanding if their paychecks are late.
- Sourcing products
This step is often one of the most costly you will experience. Major sellers spend countless hours scouring the Internet trying to find profitable opportunities. However, sitting on low demand products is a costly and wasteful way to use your capital. Instead, invest in the right tools to help ease the process of finding popular products for your small business.
- Platform fees
Every major platform has fees associated with it. You have to price these fees for the items you sell if you want to maximize your profits. Here are a few of these fees:
- Amazon – Monthly subscription, referral fees and additional fees if you enroll in Fulfilled by Amazon (FBA)
- eBay – Insertion fee, final value fee and listing upgrade fees
- Shopify – $29, $79 or $299 per month, other fees for additional features and payment processing
- PayPal – $2.9% + $0.30 per transaction (a fee that scales with growth)
These fees may not seem too expensive at first, but if you are selling thousands of items per month and have to wait for a period of time before your profit clears, they add up and can negatively affect your cash flow.
Shipping costs are a fact of life when it comes to running an ecommerce business. Your shipping price will depend on the types of products you are selling. Some stores charge for shipping while others offer it for free. Your goal will be to bake those costs into the price of your product.
However, don’t forget shipping supplies like boxes, box stuffing, tape and shipping labels. All of these things cost money. And even if you do everything right, sometimes your shipment will get lost or destroyed by your courier. Customers don’t care about what happened and will expect a replacement. Since you have to pay for all of these shipping costs upfront, you need proper cash flow to do that.
- Returns and refunds
It doesn’t matter how well you ship something, accidents happen, shipments get lost, and frustrated customers will contact you looking for refunds. Customers can also return items that are broken, the wrong size or that they just don’t like. Refunds and returns can weigh heavy on your profit margins as they are a massive waste of capital and can even result in you having to discard perfectly functional items.
Sometimes your courier drops a package or handles it roughly, damaging the product in the process. While you can try and fight it, you should make a habit out of trying to be friendly with your customers and offering returns under reasonable circumstances. Always budget for returns, even if your product is extremely high quality and durable.
- Bank and processing fees
Finally, everything went perfect and you were cash flow positive, but there’s still one problem: You forgot about bank fees and processing fees. There is someone out their looking to charge you a fee through every step of the ecommerce process. While bank fees won’t break the bank (no pun intended), they are an expense you will need to budget for.
You’ll need to purchase the right software unless you want to hire enough employees to compensate for not having it. Whether we like it or not, automation is a must-have in ecommerce. Let programs source products, take care of your inventory management problems, and print shipping labels for you.
Software isn’t free, but it’s an expense that will save you a lot of money in the long run. The more you can reduce your overhead, the better your cash flow will be.
One of the easiest ways to stay on top of your cash flow, besides proper cash flow management, is to have a line of credit as a backup. Lines of credit provide you with leverage for cash flow situations covering expenses if you have gaps in cash flow. Rather than miss opportunities, you can seize them using the proper funding.
Dani Avitz is an ecommerce expert. He is co-founder and COO at Algopix, a research platform for the ecommerce community.