Is Your E-Commerce Business Profitable?
Well, is it? If you are struggling a little with that let’s talk about how to turn that around.
Online businesses have two main challenges:
- Inventory Management
- Promotion/advertising Management
Really both of these areas stem from the same core problem. What’s that you say? Allright, I’ll just say it again. In order to have a successful online business, you only need to solve one problem.
What is that one problem? Cash Management!
So what are you thinking at this point? You probably want to ask, “Ok smarty pants, why do you think that’s the problem?” Fine, I’ll tell you…
What is the definition of inventory? Most people think inventory represents physical goods sitting on a shelf ready to be sold. And if you think that way, you should change your perspective. Inventory is really a “TIME BUFFER.” It is a time buffer between the time it takes to manufacture and deliver it to the shelf, and the market demand for its sale.
When too much cash is tied up in inventory sitting on a shelf waiting to be sold, the business will experience cash flow challenges. On the other hand, not having enough inventory on the shelf means sales will be missed, and cash flow will suffer from that as well. So a delicate balancing act must be put in place to manage this.
Using our Profit First Cash Management System (PFCMS) greatly assists you in managing this balancing act. Here’s how… When a sale occurs, it’s critical that you take the cost of replenishing that inventory and put it in a separate account. That way, when it’s time to repurchase the inventory, the cash will already be available.
Another way of looking at this is to say that you should never eat the seed corn. Why? Because you need the seed corn to plant the next crop.
An important component of an e-commerce business is to make sure the right market segments know you exist. That is typically done through advertising and social media channels. And of course, that all costs money. The problem here is simple. How do you know which marketing campaigns are producing much much more profits than their cost?
Most marketing companies proudly call it a conversion when someone clicks on your link. But you should, instead, call it a conversation when a purchase is completed. My experience is that most marketing companies do not properly calculate return on investment when displaying results. That needs to change. If you're currently working with someone that likes clicks more than completed sales, do not walk away from them, RUN!!
Each of your marketing campaigns should measure financial gain instead of clicks.
Finally, when managing cash in an e-commerce company, it is critical that you take a part of sales and segregate it into a separate marketing account. That becomes your marketing budget. Using our PFCMS ensures you have the cash available to consistently continue proper marketing activities.
Need some help setting up your own PFCMS? We are experts, so call us…