eCommerce sellers can fall into debt traps easily because it’s a cash flow business. If you aren’t hitting your expected sales figures and don’t have the appropriate cash reserve, where does the money to pay vendors, suppliers, and employees come from?
Although holding debt in itself isn’t a bad thing, as debt is a top tool that eCommerce sellers leverage for effective cash flow management, too much or mismanagement of debt can put your business in a difficult position.
Here are some top tips on effective debt management for your eCommerce business.
Understand Your Expenses
Before you can properly manage the debt of your eCommerce business, you need to understand your expenses. How much are fulfillment costs? Does your eCommerce business engage in inventory advances? Knowing the expenses you can expect to incur will help you find the right solutions to maximize your debt burden.
Furthermore, monitoring internal controls, watching for unused subscriptions, and confirming that agencies you’re not working with aren’t billing your business are three areas that can help your eCommerce business lower expenses and the debt load. There are really only two ways to pay down debt: earn more or spend less. You can maximize your results by utilizing both.
Effectively Manage Your Credit Cards
Another tip for effective debt management involves credit cards. Managing credit cards can be tricky for some eCommerce business owners as it’s not uncommon to rack up credit card debt. Whether you are placing inventory purchases on a credit card or using it as a short-term funding method, the interest rates can significantly impact your cash flow and debt burden.
Make sure you are watching the balances of your credit cards and have the proper controls in place to prevent fraud and unauthorized purchases. In addition, making more than the required payment can help you avoid interest accumulation. If you notice credit card spending is becoming rampant, consider finding a financial institution to establish a line of credit or installment loan. These funding options come with significantly reduced interest rates.
Keep Track of How Much You Owe to the IRS
Tax time is one of the most dreaded times of the year for eCommerce business owners. From uncertainty surrounding how much you owe to navigating complex regulations imposed by the IRS and state agencies, working through these issues alone can be detrimental to debt management.
Working with an eCommerce CPA can give you clarity into which tax planning items you can implement and the amount of your estimated income tax bill. This allows you to obtain additional funding from financial institutions or other investors and avoid putting a large tax bill on your credit card. Moreover, if your eCommerce business has seasonality cash flow, it might be easier to remit quarterly estimated payments instead of leaving a large tax bill for year-end. Partnering with an eCommerce accountant can uncover which strategies are right for your situation.
Scale Your Margins
Another tip for effective debt management in your eCommerce business is to improve your margins. By increasing your net income, you will have more funds to pay towards high-interest debt, such as credit cards. Take a look at a recent income statement to understand what your margins are. Then, find strategies to improve those margins.
This could be negotiating new supplier agreements, increasing the return on ad spend, and cutting out unnecessary expenses. Once your profit margins begin increasing, allocate the additional funds to your debt.
Watch Cash Flow Management
eCommerce creates a cash flow complicated business model. Some sellers have deals with suppliers that they might not pay until they have the products. This can result in forgetting about these costs and being short on cash when the invoice comes due. Cash flow management relies on leveraging the right amount of debt.
For example, all eCommerce businesses should have a line of credit that they can draw on when they need short-term infusions of cash. Instead of putting $10,000 on a credit card at a rate of 25%, you can use a line of credit with a rate of 7%. Understanding where your cash level stands is the first step in implementing effective cash flow management.
Summary
The debt levels your eCommerce business retains can seem overwhelming, especially with no clear plan on how to lower your current borrowings. This is where the team at BUSINESS can help. Our eCommerce accountants can find the right debt strategies for your business, adding to the financial health and scalability potential of your business. Reach out today to learn more.
