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Why Shopify Ecommerce Owners Need Working Capital 

A woman in a yellow jacket works on a laptop at a desk with cardboard boxes, suggesting she is managing her ecommerce business or shipping orders through Shopify.

Managing working capital is one of the most important aspects of running an ecommerce brand.

Putting products up for sale means ecommerce merchants incur costs. These costs range from pallet orders of home goods to a single drop-shipped t-shirt. Suppliers need to be paid before the items are sold. This leaves the average ecommerce merchant in a cycle of cash conversion. Cash flows out of the business as the merchant pays for inventory. The inventory purchase is followed by a waiting period while the inventory is shipped and stored. Finally, the merchant sells the item and receives cash from customers.

For some business models, like dropshipping, this waiting period doesn’t last long. Once ordered, these items are shipped and paid for within a matter of days. For other ecommerce merchants, inventory can sit for longer than anticipated. Sales volumes may increase as the business grows. Merchants often need to order additional supplies before a period of high sales, or spend on marketing to procure them. In these situations, more cash can be spent before the initial outlays are repaid. These cash outflows could leave the ecommerce owner unable to fund other business needs during that time. 

The cash conversion cycle is why many ecommerce businesses seek outside funding. Uneven cash flows put pressure on working capital. When cash is tied up in costs such as inventory, the business will need to wait before buying additional goods or doing a marketing push at a key time. Additional costs can also arise while waiting for the goods to sell, such as shipping the item to the customer or paying sales tax. 

Shopify Ecommerce Owners Need Working Capital For Growth

Cash is necessary for marketing your ecommerce business or purchasing inventory at scale. Even holding promotions or adding new items is tough with a cash shortage. Cash is necessary for Shopify stores starting out. Yet these cash flow needs continue once the business starts making sales. Even with plenty of orders coming in, the ecommerce store will need cash to keep the store stocked and pay its vendors.

Without working capital, 38% of new businesses or startups don’t survive. This figure is irrespective of revenue, which can still be high despite capital shortfalls. Marketplace sites like Amazon or eBay have thousands of customers already browsing, but Shopify merchants need to bring customers in themselves if they want sales. 

Shopify stores spend 10-30% of gross sales on marketing. Online merchants especially tend to focus on online or social media ads. Like inventory, these need to be paid for prior to making sales. Ecommerce merchants use various search platforms, social networks, or influencer partnerships to sell goods, often with great success. For example, Dyson saw a 103% boost in online sales for its Dyson airwrap after it went viral on TikTok

Strategic marketing spend helps speed up growth in sales, customers, and the Shopify store. To make the most of this growth, the merchant needs to have orders in stock – which means more inventory, and more cash!

Shopify Ecommerce Owners Need Working Capital For Logistics

Free shipping is an expectation for many customers. Over 90% of respondents to a Walker Sands survey said free shipping was the biggest incentive to buy more. 74% of customers surveyed at a different time would abandon their cart if they found delivery costs too high. ‘Surprise shipping costs’ at the checkout are the #1 reason for abandoned carts. 

However, ecommerce merchants need to be prudent when promising free shipping. Logistics itself is a major cost for ecommerce businesses. It’s easy to want to compete with Prime shipping, but not if the margins don’t support the cost. 

Keeping an eye on profits, inventory levels, or warehouse locations can help reduce shipping costs. Even in peak periods of sales, it’s possible for an ecommerce company to get swamped by shipping fees. Some strategies to manage costs include costing out the average (or median) order value, and offering free shipping once the cart price exceeds that cost. Setting up a script for your Shopify store can lower costs by choosing the cheapest shipping option based on customer location. 

Using location-specific warehouses or third party logistics companies helps lower costs. Getting advice from shipping experts or purchasing warehouse space costs money now, but can help save money as the business grows.

Shopify Ecommerce Owners Need Working Capital To Fill Orders

Inventory is the main driver for the cost of goods sold at an ecommerce business. In order to make sales, ecommerce merchants and Shopify owners need to stock the goods they sell! This inventory has costs, not just for purchasing, but also for sales, storage, and shipment. Without enough working capital, the merchant may miss out on peak periods, such as an unexpected  ‘viral boost’ on Instagram. Even as customers are lining up out of the (virtual) door, sales will slump with no products to buy! 

Invoice Funding and other kinds of ecommerce funding go far to reduce these uncertainties and costs. Without needing to carry debt, these funding alternatives help ecommerce owners cover costs. From inventory to ad spend, working capital makes it easier for ecommerce businesses to grow – and makes the process a lot more fun. 

Author

Samantha Lloyd – Clearco

Samantha Lloyd is the Director of Marketing at Clearco. Samantha is a long-time marketing expert and advisor. She has over a decade of experience building organic growth, brand, and digital marketing for technology companies.

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