Why Your Online Business Might Be Running Out of Cash (And How to Fix It!)

Ever wondered why your business seems to be making good money, but your bank account isn't growing as fast as you'd expect?

Many online store owners face this exact problem. In fact, I dealt with this exact situation on more than one occasion when I was running my own eComm business - I get it. 

The Mystery of Disappearing Cash

Think of your business's cash like water flowing through pipes. Sometimes, this cash can get stuck or move really slowly through your business. It's frustrating when you're working super hard, but feel like you're just running on a treadmill - lots of movement, but not getting anywhere!

There are really only two ways to free up cash in your business:
1. Make your operations more efficient (measured by something called the Cash Conversion Cycle)
2. Cut down on your regular expenses (things like software subscriptions, office costs, and overhead)

Let's look at each of these in detail.

Understanding the Cash Conversion Cycle (CCC)

Imagine starting a stopwatch the moment you pay for your products. The Cash Conversion Cycle measures how long it takes for that money to come back to you. It's like tracking a boomerang - you throw it out (spend money), and you want to know exactly how long it takes to come back to you.

The cash conversion cycle has three parts:

1. Days Inventory on Hand: How long products sit on your shelves (storage time)
2. Days Sales Outstanding: How long customers take to pay you (payment time)
3. Days Payables Outstanding: How long you take to pay your suppliers (payment delay)

Let's use a real example: Say you're selling sneakers online. You order 100 pairs and store them in your warehouse. If these sneakers sit on your shelves for 90 days, customers take 30 days to pay, and you pay suppliers after 30 days, your cash is tied up for 90 + 30 - 30 = 90 days. That's three whole months where you can't use that money for other important things like advertising, creating new products, or growing your business.

8 Ways to Get Your Cash Moving Again

1. Get Better Deals from Suppliers

This strategy helps reduce how much cash you need to tie up in inventory. I encounter a lot of founders who feel awkward or uncomfortable about asking for a better deal. My Mom used to say to me "if you don't ask, you'll never get!". Remember - they want you to succeed because when you sell more, they sell more too.

In my personal experience the most effective way to negotiate better payments terms was by positioning it as a win-win. With lower costs you have more budget to spend on marketing. More marketing equals more units sold. More units sold means more business for your manufacturer!

2. Clear Out Slow-Moving Products

Founders, especially those who are heavily involved in product, often develop an unhealthy obsession with accumulating old inventory. I get it. It's your baby. You designed it and you gave it life. But the truth is when it comes to improving your cash flow there's a LOT to be said for clearing out your old baggage!

Sort your products into three groups:

• A-Grade: Your superstars (top 20% of products making 80% of your money)
• B-Grade: Solid performers (middle 30% making about 15% of your money)
• C-Grade: Slow movers (bottom 50% making only 5% of your money)

For those C-Grade products, try bundling them with popular A-Grade items or having a clearance sale. Remember, these slow-moving products are like paying rent for roommates who aren't contributing to the bills - they're taking up expensive warehouse space.

This directly reduces your Days Inventory on Hand by getting products off your shelves faster.

3. Work Out Better Payment Terms

This strategy increases your Days Payables Outstanding, giving you more time with your cash. Talk to suppliers about:

• Volume-based terms (the more you order, the more time you get to pay)
• Seasonal payment plans (longer terms during slow seasons)
• Early payment discounts (save money by paying faster)

4. Get Paid Faster by Customers

This reduces your Days Sales Outstanding - the time between making a sale and getting the cash. Offer small discounts for early payment and set up automatic reminders. Think of it like training your dog - consistent, clear expectations get the best results!

Pro tip: Even a tiny 2% discount for early payment can make a big difference. If someone owes you $10,000, they might pay early to save $200!

5. Order Smart Based on Seasons

This strategy helps optimize your Days Inventory on Hand throughout the year.

Instead of thinking about your buffer stock in absolute terms (say 1,000 units) think about it in terms of days/weeks of coverage. For seasonal businesses there might be times of year then 1,000 units is a mountain of product. Other times it could only represent a few days of supply. 

This math is easy enough to do in a spreadsheet, but in my experience a lot of professional ERP/IMS tools don't do a great job of it. 

6. Use "Hold and Release" Deals

This clever approach reduces your Days Inventory on Hand by having suppliers hold stock for you. It's like having a personal warehouse at your supplier's place. They still get to enjoy the economy of scale benefits of large volumes, but they only send and charge you for smaller amounts as you need them.

Effectively what Hold and Release does is allow you to 'borrow' your suppliers' balance sheet capacity. There's a good chance that they are a larger more established company than you, and will therefore have a lower cost of capital. 

7. Turn Future Payments into Quick Cash

This strategy, called factoring, reduces your Days Sales Outstanding to nearly zero for wholesale orders. Special lenders called factoring companies can give you money right away instead of waiting months for stores to pay you. Yes, they charge a fee, but sometimes having cash now is worth more than having slightly more cash later.

8. Cut Unnecessary Costs

This addresses the second way to free up cash - reducing overhead costs. Start fresh each year by questioning every expense. We call this "zero-based budgeting" - fancy words for "justify everything." Rather than use last year's expenditure as your baseline, set budgets for everything to zero. No expense is allowed back unless someone on the team can communicate a clear business case for it.

What Should You Do First?

The key is to tackle these changes in the right order:

1. Quick Wins (1-30 days)

• Clear out old inventory (reduces Days Inventory on Hand)
• Cancel unused subscriptions (reduces overhead)
• Ask for better supplier prices (reduces cash needed for inventory)

2. Medium-Term Projects (1-3 months)

• Negotiate payment terms (increases Days Payables Outstanding)
• Set up early payment systems (reduces Days Sales Outstanding)
• Organize inventory better (reduces Days Inventory on Hand)

3. Long-Term Solutions (3+ months)

• Develop seasonal ordering plans (optimizes Days Inventory on Hand)
• Set up hold and release agreements (reduces Days Inventory on Hand)
• Build better supplier relationships (improves overall cash cycle)

Remember, every successful online store has faced cash challenges at some point. The key is understanding where your money gets stuck and taking smart steps to get it moving again. Think of it like being a money detective - first figure out where the cash is disappearing, then use these tools to fix the leaks.

By following these tips and staying patient with the process, you can turn your cash flow problems into opportunities for growth. Just remember: small improvements to your Cash Conversion Cycle add up to big changes over time!