InventoryLab and bookskeep Answer Your Ecommerce Questions!
It was such a pleasure to visit with Andrea and Jeff from InventoryLab recently on their OpenLab webinar series. We had some great questions about how to prepare for Q4. I believe when one person asks, many typically have the same question, so I’m picking out some of the most common ones for discussion here. If you want the full experience, hop on over to the recording on the InventoryLab Facebook page.
1.) What should I be doing now to prepare for Q4?
Now is the perfect time to plan your strategy and get your house in order, so to speak. Make sure you understand your gross margin on your products. It is vitally important this year as Amazon has announced tighter inventory limits. You want to make sure you are spending your cash and using your inventory space for products that will bring you the highest return. The days of ‘just send it in and it will sell and make money’ are gone. You must be strategic about how you use your cash, the timing of sending in inventory, and how you will be using advertising.
Here’s a way to get started:
Look at your selling products and consider your margin. I suggest thinking of this in two ways. 1) Look at the top 20% of your orders. 2) Look at the top 20% of products from revenue generated. If you’re in RA or OA and are sourcing, look at your criteria for shopping. Make sure that your top sellers are in fact generating the profit level you need to fuel your business. If most of your orders are from a product that generates low margin (say below 25%), and you’re then spending several dollars on advertising, this is not helping you accumulate cash to grow your business. Reconsider whether this is a good use of your cash and your inventory space. Perhaps a product on your top revenue dollars generated didn’t sell but a few items, however, it generated 45% gross margin and a low PPC cost. This is where you want to focus your efforts.
After you have looked at the top 20%, then dive into the bottom 20%. If they are not moving and your margins are low, then they are costing you cash and inventory space. Consider how you can eliminate them and improve your overall situation.
2.) What are some of the biggest misconceptions people have when they start an eCommerce business as it pertains to managing their money?
I see many people start and invest their entire “nest egg” into inventory. Then because of timing, they need to replenish that inventory to keep the sales engine going. The problem is that they have no money to replenish because is it takes time to get your money from Amazon. They typically only pay out every two weeks, then for new sellers they hold a reserve because they don’t know the return patterns on your account yet. I suggest holding some money back for replenishing or purchasing. You’ll learn a lot from that first investment, and you may have a different strategy going forward.
Second, these same people sometimes think they can cut the price and make it up on volume. While that strategy works for Walmart, most new sellers just don’t have that kind of volume. The key metric for all sellers should be gross margin and then cost of advertising. So first, look at your revenue less your Cost of Goods Sold, including shipping packaging, etc. If should be 30% or better. Then look at how much your advertising is costing you. Get that dialed in and understand it before you get too fancy.
3.) What are some of the most common mistakes you see people make when it comes to managing their finances?
One of the most common mistakes is not managing to a gross margin number. If you can achieve the 30% or more gross margin, you will have the cash to grow your business, IF you also monitor your advertising and keep that in check, and you are keeping your operating expenses in line.
Finally, be sure that you are looking at any owner draws you are making. These don’t hit the P&L, and I’ve seen clients fail to realize that the number on the bottom line doesn’t equal the cash in their bank because they have taken draws from the bank. Owner draws will show up on the balance sheet for most small businesses, so be careful how you think about your cash balances.
That’s why I love Profit First; it sets up bank accounts for specific purposes and you can tell from your bank balances how your business is performing. I’ve talked a lot about Profit First, and you can learn more about Profit First and how it works for eCommerce from many blogs and my book, Profit First for Ecommerce Sellers.