Liquidity Planning: 5 Tips on How to Sell Better on Amazon Without Bad Surprises
Liquidity planning is particularly important in the e-commerce business. After all, as a retailer, you always need to know when you can afford to reorder or develop more products or add them to your range.
Although the internet giant Amazon pays out every 2 weeks, selling products on Amazon is 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 All Costs and Revenues in View
Even if business is going well and enough money is flowing into the cash register, which makes the scenario of a liquidity shortfall seem far away, it is advisable to regularly review your revenues and costs. On one hand, this gives you a deeper insight into your business, and on the other hand, it 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 into 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):
In contrast, you present the revenue side of your business, for example:
It is important that you consider all your revenues and expenses during a specific period (e.g., a month) in this breakdown. Over time, you will recognize recurring patterns, making it easier for you to estimate what revenues and costs you can expect in the coming months. This breakdown 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 is regularly compared with reality and adjusted. Especially with fluctuating demand, as can occur with seasonal products, weekly or even daily liquidity planning is advisable. This gives you the best possible flexibility 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, such as:
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 as accurate actual values as 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 out the revenues 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. This 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 taken into account.
The same applies to your expenses, i.e., the invoices you have to pay. Include the payment term in your liquidity planning, 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 Out Different Liquidity Scenarios
It may seem unnecessary to play out the best or worst case when liquidity planning is supposed to be as realistic as possible, as mentioned earlier. However, playing out different scenarios 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 arises. If such a case does occur, you will already have a rough idea of what to expect, and you won’t panic.
In advance, you can then consider what to do in the worst-case scenario or how to better prevent it, for example, by gradually building reserves. The same applies to optimistic scenarios. These allow you to think ahead about what you could do with surpluses to ensure your business continues to grow optimally.
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 manually reviewed and then entered into the spreadsheet. Additionally, errors can easily creep in, which can subsequently distort the liquidity plan.
Digital tools specifically designed for liquidity planning provide a solution. Such liquidity management software automatically connects to all your business accounts and retrieves account transactions daily. The liquidity planning is updated based on the new data, allowing you to always view 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 effectively as possible for the future.
It is important that you consider all income and expenses, as well as 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 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 to become even more successful in e-commerce.
Image credits in the order of the images: ©Dilok – stock.adobe.com
