Photo by rupixen.com on Unsplash
Working capital management is a fundamental part of running an online marketplace business. Ineffective practices can lead to a myriad of problems. These can include low levels of inventory, annoyed vendors, poor rankings for product listings, disgruntled staff, and more.
If you haven’t already established well-thought-out processes and contingencies in relation to working capital, you could be setting yourself up for a big fall in the future.
The simple truth is that most marketplace sellers don’t fully understand the concept of working capital. As a result, their businesses are vulnerable.
In this post, we look at the topic in depth. We also suggest some simple but effective processes you can implement to better organize and control your working capital.
What Is Working Capital?
Working capital is simply a company’s current net assets. In other words, it’s all the value in a business that can be “set to work” in a short period of time, usually less than a year. Typically, current assets consist of cash in the bank and unsold inventory.
For example, say an online marketplace seller has $20,000 in the bank and $5,000 in unsold inventory. Therefore, their total amount of current or liquid assets is $25,000. Suppose they also owe their vendors $4000 and must repay a short-term loan of $1000 within the current month. This means they have current liabilities of $5000. Then, the business’s working capital is, therefore, $20,000.
RELATED ARTICLE: PRODUCT PAGE VIDEO BOOSTS YOUR ECOMMERCE SALES
What Are the Benefits of an Effective Capital Strategy?
A robust working capital strategy is an asset to any marketplace business. Moreover, there are three main benefits that a steady stream of cash entails:
- Resiliency – Companies that have consistently high amounts of working capital are much better placed to respond to emergencies and unexpected events.
- Operational flexibility – A steady flow of cash doesn’t just make it possible to adhere to established business practices. With a large amount of working capital, retailers can quickly adapt to changes in demand, unforeseen opportunities, and better-than-anticipated performance.
- Investment opportunities – Companies that don’t need to worry about day-to-day operations can safely allocate money for investment, leading to faster and more sustained growth.
How Can You Manage Your Working Capital?
You’ll probably be asking, “How much working capital should I have at any given point?” Fortunately, there’s a simple rule you can follow to ensure you’re on the right track.
A company’s “working capital ratio” is the ratio of current assets to current liabilities. For example, if a company has $10,000 cash in the bank and $5000 of unpaid invoices for that month, it has a working capital ratio of two.
Generally speaking, you should aim to maintain a ratio of between 1.2 and 2. Anything below 1.2 indicates that you will have trouble paying off your debts. Above two and you’re likely not investing enough in growth.
Here are some of the main things you can do to ensure a steady supply of working capital:
- Maintain the correct level of stock – While excess stock comprises working capital, it is less liquid than cash. Ideally, you want the bulk of your working capital to be money in the bank.
- Build good relationships with vendors – Solid relationships with suppliers are an excellent safety net in unforeseen negative circumstances. For example, the ability to purchase inventory on credit or to delay payments are useful options to have.
- Collect payments as soon as possible – Ensure you have a well-oiled system for collecting payments so that your cash-flow isn’t affected.
- Forecast seasonal variance – Account for ups and downs in the buying cycle, especially for buying holidays, and adjust your cash reserves accordingly.
- Create supply chain contingencies – You will likely experience disruptions to your supply chains at some point. Therefore, create and test backup plans, especially in relation to vendors and delivery companies.
How Does a Merchant Capital Advance Work?
For companies that need a temporary boost to their working capital, a number of solutions are available. One of the most innovative and risk-free is called a merchant capital advance. Several lenders are offering tailored solutions for Amazon and Walmart Sellers.
So how exactly do they work?
Let’s look at an example from Payoneer, a recent entry into this space that works exclusively with Walmart and Amazon marketplace merchants.
Screenshot from: https://www.payoneer.com/solutions/working-capital/
Unlike a business loan, which usually requires collateral, a merchant advance is an advance based on a store’s existing revenues. The lender essentially purchases a portion of the store’s monthly income until the total borrowed amount, plus a fee, is paid back.
For example, say you need $10,000 to deal with extra seasonal demand. Payoneer will look at your Amazon store’s performance to check if you qualify. If you meet their criteria, you will receive the option for an advance in your business account. Then Payoneer will take a percentage of your future monthly earnings until everything is paid off.
It’s a straightforward form of funding. Moreover, because financial companies evaluate retailers based on their store’s performance, merchant capital advances (MCA’s) are usually easier to obtain. Fees are also often low. Payoneer, for example, offers rates as low as 2.5%.
So if you’re a marketplace retailer, merchant capital advances are worth knowing about. They’re a great option if you ever need fast and relatively inexpensive working capital.
Working capital is the lifeblood of any business. Moreover, online marketplace store owners face an added set of challenges. They must manage large levels of inventory, often-unreliable supply chains, and volatile markets. Additionally, because of the nature of payout structures, they might not always have direct access to cash.
Therefore, knowing how to manage working capital effectively, along with an awareness of contingency solutions, is one of the best safeguards against potential problems. It’s a skill that’s also absolutely essential for consistent growth.