What is an ecommerce cash cycle?
A cash cycle, also referred to as a cash conversion cycle, is essentially the length of time it takes a business to convert inventory to cash.
Measured in days, this cycle can vary greatly depending on the type of business you have.
When businesses sell on marketplaces specifically, cash cycles can be particularly long because unlike traditional retail or direct websites, businesses aren’t receiving payment from their customers at the exact moment they sell.
When consumers purchase from marketplaces, the marketplace will hold the funds back before paying the seller to allow for refunds and returns. These are their ‘payment terms’, and they differ on each marketplace, but can be up to 60 days, which means a seller’s cash cycle (number of days from paying their supplier for stock to receiving payment from the marketplace) can be up to 100 days.
Why a shorter cash cycle is better
Clearly, a shorter cash cycle is better than a longer one; the less time that you have cash tied up in inventory, the more sales and profit you will be able to make.
Shorter cash cycles can help your business to:
- Meet demand
- Increase profits
Faster payments = shorter cash cycles = higher profits.
Cash cycle video
In this video example, with a 50-day cash cycle and sales of £10,000, you would have seven cash cycles and £70,000 in sales over a one-year period.
If you shortened your cash cycle by 15 days (i.e. ordered more inventory to sell 15 days earlier), you would have ten 35-day cash cycles in the same year, and £100,000 in sales.
Akbar Ahsan,
Co-founder“Shortening your cash cycle even by a few days can make a significant difference, especially if your business is growing”
How to shorten your ecommerce cash cycle and improve cash flow
To bridge the gap (therefore shortening the cycle length) between purchasing inventory and getting paid by your marketplace, sellers can use personal savings, credit cards and cash flow financing solutions.
The Storfund service helps businesses increase cash flow and at the same time grow at pace, because you are only receiving money advanced to you on what you have already sold. As we typically pay 15 days quicker than marketplaces, if you currently have a 30 day cash cycle this will be halved by Storfund; translating into a 100% increase in annual sales.
Getting paid for your marketplace sales as soon as you sell, and therefore being able to restock quicker is a key way to shorten your cash cycle. But there are also other things you can do:
- Understand your inventory – your stock is essentially tied-up cash until you sell it, so by optimising your inventory you should only be carrying what you really need, and more or less depending on the popularity of your product. A lean inventory will also allow you to quickly respond to trending products and changes in the market. More on inventory management.
- Negotiate with your suppliers – Build good relationships with your suppliers so you can ask for better payment terms. An extra few days or weeks can make a big difference to your cash cycle.
Long payment terms mean having to wait for cash to restock, but by getting paid faster for your marketplace sales you can restock immediately.
