How Steady Financial Management Can Support Ecommerce Growth

By Julie Rains on 22 October 2010 (Updated 5 January 2011) 0 comments
Photo: TPopova

The pursuit of bank financing can be a boon to a small business or a waste of time. Results may vary, depending more on credit underwriting practices than financial soundness and business-plan worthiness. Fortunately, steady financial management can drive growth, support timely repayment of credit lines and loans, or bypass the need for traditional financing altogether.

Recently, I spoke with ecommerce business owners Steve and Kathy Elkins, who run WEBS - America's Yarn Store, and Zach Piech, who oversees ValuePetSupplies.com, about their approaches to supporting growth.

How growth can be supported by bank lending

Steve and Kathy took over the yarn reseller, a family business consisting of a retail store and catalog, in 2002. In the ensuing years, they funded the ecommerce segment along with business upgrades through a credit line and a longer-term bank loan. Building the online infrastructure with a point of sale (POS) system was the first step in establishing the ecommerce business and positioning for long-term growth, made possible due to the credit line.

More recently, they obtained a traditional loan to finance a facility renovation that included a distribution area with shipping stations separate from the store selling space. As the volume of the ecommerce business grew, the need for greater efficiency in fulfilling orders increased. Being able to pick and pack orders quickly and accurately has yielded enormous benefits, allowing the company to pay off the loan at a faster rate than originally envisioned.

Conservative by nature, Steve told me that the business expansion and renovations were funded in part by bank financing. Cash generated from ongoing operations accounted for the rest of their financial needs. Management techniques that have contributed to profitability and positive cash flow include:

Early-pay discounts. The company gets 2 percent discounts on product purchases with credit terms of "2/10, net 30," meaning that the business can deduct 2 percent of the total amount due to vendors if payment is made within 10 days. (If the payment is made after 10 days, the full amount is due within 30 days.)

Reduction in business seasonality. Consumers tend to buy yarns in the fall and winter months from September through March. By adding sales promotions in the springtime and summer, Steve and Kathy have been able to boost sales and reduce the seasonality of the business. Steadier sales have led to smoother cash flow and reduced the need to tap the credit line.

How growth can be supported by internal resources

Just as his company was experiencing significant growth in the past few years, Zach was disappointed by the tightening of credit availability. Even a financial-services suitor reversed its position when an underwriting requirement (relating to historical sales, an element out of ValuePetSupplies.com's control) changed unexpectedly. To cover business needs, Zach focused on increasing profitability and cash flow to support growth using these techniques and more:

Early-pay discounts. Like the Elkins at WEBS, Zach cited early-pay discounts as a major contributor to better profit margins, which have fueled and sustained growth.

The ecommerce company combines the early-pay strategy with proactive vendor communications. Employees call vendors to let them know when to expect payments and which invoices the payments apply to. This extra step may seem unnecessary. However, matching payments with invoices can be time-consuming for accounts payable (A/P) staff as there are often discrepancies between checks or ACH amounts and invoice totals. Differences occur for many legitimate reasons such as discounts for special promotions as well as shipment shortages that may not be reflected in invoice totals at the time of mailing or electronic transmission.

Vendors have been more than willing to develop programs beneficial to ValuePetSupplies.com because of its outstanding credit record, further fueling this ecommerce business's growth.

Control of shipping costs. Zach revisits the company's arrangements with its major shipping vendor every six months. Objectives are to 1) identify methods of organizing shipping operations for greater efficiency and better service to consumers, and 2) renegotiate contracts to accommodate rapidly growing sales volume. (Read about methods for lowering small-package shipping costs by understanding the shipping environment and collaborating with service providers).

Strategic merchandising. The company is focused on products and programs that generate the highest profit margin. This approach has meant eliminating lower-margin categories to free up funds for higher-dollar items. Ongoing financial analysis of product costs along with expenses required to service the business (such as a merchandise category that represented 1 to 3 percent of sales but accounted for 50 to 80 percent of returns) has aided in making this decision.

The lack of bank financing hasn't stalled ValuePetSupplies.com's consistent double-digit growth or prevented the company from setting sales records. A new product launch may be delayed for a couple of months to build cash reserves, but Zach has found that he prefers staying in control of all aspects of his business.

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