eCommerce businesses have a ton of Cash Flow issues
Understanding the Cash Conversion Cycle (CCC) can help solve these issues
Here is how:
Understanding the Cash Conversion Cycle (CCC) can help solve these issues
Here is how:
Most accountants explain the Cash Conversion Cycle (CCC) like this:
CCC = DIO + DSO - DPO
If that looks confusing, don’t worry
There is a much more intuitive way to understand CCC
CCC = DIO + DSO - DPO
If that looks confusing, don’t worry
There is a much more intuitive way to understand CCC
At it’s core CCC is calculated as:
# of days it takes you to sell your inventory
+
# of days it takes to collect cash from customers
-
# of days it takes you to pay your bills
# of days it takes you to sell your inventory
+
# of days it takes to collect cash from customers
-
# of days it takes you to pay your bills
For most eCommerce businesses,
Receivables aren’t an issue because you get paid around when you sell inventory
Receivables aren’t an issue because you get paid around when you sell inventory
So a modified version of the above would be something like this:
CCC =
# of days it takes you to sell your inventory + collect cash
-
# of days it takes you to pay your bills
Here is a graphic that illustrates CCC visually:
CCC =
# of days it takes you to sell your inventory + collect cash
-
# of days it takes you to pay your bills
Here is a graphic that illustrates CCC visually:
Take note of the cash events in that graphic:
1. A Cash Outflow occurs when you pay for inventory of $100
2. A Cash Inflow occurs when a customer buys goods from you for $150
1. A Cash Outflow occurs when you pay for inventory of $100
2. A Cash Inflow occurs when a customer buys goods from you for $150
The Cash Flow problem arises because
You have to PAY $100 for inventory
BEFORE you collect cash from a customer of $150
You have to PAY $100 for inventory
BEFORE you collect cash from a customer of $150
How do you pay for this inventory?
Assuming you :
- Don’t have investors
- Can’t borrow
You have to use your own savings!
Assuming you :
- Don’t have investors
- Can’t borrow
You have to use your own savings!
This really sucks
You have to dip into your own savings to buy inventory
So that you can sell it and collect cash
You have to dip into your own savings to buy inventory
So that you can sell it and collect cash
Most eCommerce businesses have a positive CCC
This means it takes them a certain # of days to convert an inventory purchase into cash
But what if we changed this up?
This means it takes them a certain # of days to convert an inventory purchase into cash
But what if we changed this up?
What if you could buy the inventory, sell it, collect cash,
BEFORE you have to pay for it?
This is a GAME CHANGER!
BEFORE you have to pay for it?
This is a GAME CHANGER!
This would create a negative CCC which means:
You collect cash from your customers before you pay for inventory
Here is a graphical illustration of this:
You collect cash from your customers before you pay for inventory
Here is a graphical illustration of this:
You might be asking yourself:
That’s cool, how do this?
There are two ways:
1. Negotiate with your supplier
2. Use financing
That’s cool, how do this?
There are two ways:
1. Negotiate with your supplier
2. Use financing
1/ Negotiate with your supplier to pay them later
Instead of paying for your inventory before you collect cash
Ask for longer payment terms and pay your supplier later
Ideally after you collect cash
If this isn’t possible…
Instead of paying for your inventory before you collect cash
Ask for longer payment terms and pay your supplier later
Ideally after you collect cash
If this isn’t possible…
2/ Use financing
Get a credit line or some sort of financing to pay for the inventory purchase
Ask for terms that allow you to repay the financing after you collect cash from your customers
Here is what this would look like:
Get a credit line or some sort of financing to pay for the inventory purchase
Ask for terms that allow you to repay the financing after you collect cash from your customers
Here is what this would look like:
@jayvasdigital TL;DR
1. eCommerce businesses have cash flow issues
2. You pay for inventory before you collect CASH
3. Understand your CCC
4. Ideally collect cash BEFORE you pay for inventory
5. Ask your supplier for longer payment terms
6. Use financing and repay it after you collect cash
1. eCommerce businesses have cash flow issues
2. You pay for inventory before you collect CASH
3. Understand your CCC
4. Ideally collect cash BEFORE you pay for inventory
5. Ask your supplier for longer payment terms
6. Use financing and repay it after you collect cash
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