Liquidity planning: 5 tips on how to sell better on Amazon without unpleasant surprises
Liquidity planning is particularly important in the e-commerce business. After all, as a seller, you always need to know when you can afford to reorder or develop more products or add them to your assortment.
The internet giant Amazon pays out every two weeks, but selling products on Amazon is still not a self-runner, let alone a guarantee for consistently stable liquidity. In this article, you will learn how solid liquidity planning helps you keep your business “liquid” even in difficult times.
1. Keep track of all costs and revenues
Even if the business is currently doing well and generating enough cash, which makes the scenario of a liquidity shortfall seem far away, it is advisable to regularly review your revenues and costs. This gives you a deeper insight into your business and helps you plan ahead for more difficult times.
Specifically, in this so-called liquidity analysis, you compare your expenditure side with your revenue side. By grouping your costs by categories, you can see in such an overview where the highest cost points in your business are and where you might even be able to save. A cost breakdown looks like this, for example (and may contain much more or less depending on the company):
On the other hand, you present the income side of your business, e.g.:
It is important that you consider all your income and expenses during a specific period (e.g. a month) in this statement. Over time, you will recognize recurring patterns, and it will be easier for you to make estimates about what income and costs you can expect in the coming months. This statement is therefore the starting point for your liquidity planning.
2. Liquidity planning on a monthly and weekly basis
A liquidity plan is usually created for one year in advance on a monthly basis and regularly reconciled and adjusted with reality. Especially with fluctuating demand, as can occur with seasonal products, weekly or even daily liquidity planning is recommended. This gives you the best possible scope for action to use the available funds sensibly in your business.
Depending on whether you expect a liquidity deficit or surplus in the near future, different decisions need to be made, for example:
In case of deficit
In case of surplus
Your liquidity plan can provide you with important answers to these (and other) questions. The prerequisite is that the plan is based on the most accurate actual values possible and provides a realistic view of the future.
3. Consider payment terms in liquidity planning
What often leads to financial shortfalls, even with a liquidity plan, is the failure to consider payment terms.
Example:
A customer purchases one of your products on Amazon on March 30. The invoice date is therefore March 30. However, Amazon only pays the proceeds to you on April 10. How do you account for the customer payment in your liquidity planning?
If your answer is “April 10,” you are correct. Because that is the date when the payment actually arrives in your account and thus affects your liquidity. The invoice date is irrelevant in liquidity planning; the payment terms must always be considered.
The same applies to your expenses, i.e. the invoices you have to pay. Include the payment term in your liquidity planning here as well, meaning the date when the money actually leaves your account. Only then will you get an accurate picture of your future cash flow.
4. Play through different liquidity scenarios
It may seem unnecessary to play through the best or worst case when liquidity planning is supposed to be as realistic as possible, as mentioned above. However, playing through different scenarios certainly has its justification, as it shows you your complete entrepreneurial scope for action.
In pessimistic scenarios, you can examine how, for example, declining demand will affect your liquidity and how much time you would have until an acute liquidity shortfall occurs. If such a case does arise, you will already have a rough idea of what to expect, and you will not panic.
In advance, you can then consider what you would do in the worst case, or how you can better prevent it, for example, by gradually building up reserves. The same applies to optimistic scenarios. These allow you to think ahead about what you could do with surpluses so that your business can grow as best as possible.
5. Use digital tools for liquidity planning
Most entrepreneurs and financial managers use Excel for liquidity planning. A major disadvantage is that this takes a lot of time, as the various account movements must be viewed manually and then entered into the spreadsheet. Additionally, errors can quickly creep in, which subsequently distort the liquidity plan.
Digital tools that are specifically and exclusively developed for liquidity planning provide a remedy here. Such liquidity management software automatically connects to all your business accounts and retrieves account transactions from there every day. The liquidity planning is updated based on the new data, so you can always look at a current and accurate plan.
With digital tools, it is also quick and easy to create a variety of different liquidity scenarios for your business, which are also updated based on the latest account movements.
Conclusion
Liquidity planning helps you as a seller on Amazon or other sales platforms to better estimate your future cash flow and thus plan as best as possible for the future.
It is important that you consider all your income and expenses, as well as the payment terms, in your planning, as only this will provide you with the most accurate picture of your current and future liquidity.
Digital tools for liquidity planning assist you in this and take away a large part of the manual work, allowing you to spend your time making strategic decisions for your business instead of typing in columns of numbers, in order to become even more successful in e-commerce.
Image credits in the order of the images: ©Dilok – stock.adobe.com
