Exponential growth often means prepayments, how can an organisation best handle such a situation?
Marketplaces often cause exponential growth for many brands, wholesalers and other types of marketplace sellers. However, prepayment expenses also increase when exponential growth is realised. And marketplace earnings are often paid only once a month. How can an organisation control its cash flow position in this case?
I put my account on hold, because it went a bit to fast
We dealt with marketplace sellers who became very successful on marketplaces more than once within EffectConnect. A jump start and significant growth in revenue. The perspectives were great.
This enormous growth also causes a large increase in prepayments as purchased goods need to be paid. It could be the case that a seller chooses to slow down or put a hold on marketplace sales when growth results in larger prepayments than preferred. This slows down growth and turnover remains flat.
What are the reasons for cash flow strains?
When cash flow is under pressure due to growth, it often holds more than one reason. Below you will find an overview of a few well-known cash flow culprits:
Supplier payment terms for the payments of goods
Supplier credit limits
Payment terms for disbursement from marketplaces to the seller
Supplier payment terms
Payment terms are agreed when you purchase goods with one or our multiple suppliers. This could range from 14, 30, 60 days or even longer. The payment terms are dependent on your relationship with your supplier. New suppliers often maintain short - or even prepayment terms. Do you have a long term relationship with your supplier, then this often results in longer payment terms.
The challenge is to adjust supplier payment terms to disbursements from the marketplace. Cash flow pressure following growth increases when this adjustment fails to succeed.
Supplier credit limits
Supplier credit limits are in line with supplier payment terms. For example: your monthly credit limit is 100,000 euro with a payment term of 30 days, but your turnover increased to a purchase value of 150,000 euro. Your supplier credit limit is exceeded by 50,000 euro. This can be extended when you have a healthy, long term relationship with your supplier, but if you don’t, it might be the case that this results in direct payments. This means that 50,000 euro needs to be financed by the marketplace seller as a “cash-out”. This could put a brake on turnover growth when personal cash-out is not feasible, which is a pity!
Payment terms for disbursements from marketplaces
The consumer often pays directly to the marketplace, but the marketplace seller does not receive their earnings directly. The payment interval differs per marketplace: once or few times a month is common. A monthly payment term could put a strain on growth when turnover increases significantly.
Solutions for cash flow problems
A solution is necessary to keep a healthy cash flow position if you choose not to put a hold on growth. This solution could reside in the following 3 options:
Try to improve supplier payment terms and supplier credit limits.
Try to arrange financing that ensures growth continuity
Decrease overhead costs by means of automation. Increasing automation leads to decreasing administrative activities which has a positive impact on overhead.
Supplier agreements should always be on top of your mind, so we will not zoom in to this topic. Automation can be arranged very effectively via smart automation. Financing is another subject, which needs further explanation.
There are multiple ways to finance growth. Some have more impact than others. “Venture capital” is a term which is often used in the online world. This kind of financing impacts the organisational structure and control, so we will not focus on this.
There are simpler ways to arrange financing for your exponential growth.
Growth financing can also be realised by advance payments, for which you pay a small fee.
Capital providers assess your turnover volume or credits with the marketplace and based on that, they will provide available funding before disbursement from the marketplaces. This enables you to continue growing your business and making sure supplier payments are paid in time.
You don’t want to put a strain on growth, but it should also not come at every expense. Think carefully about below matters, so cash flow pressure is reduced:
Stay in contact with your suppliers about payment terms and credit limits.
Adjust supplier payment terms to disbursement from marketplaces.
Optionally work with ‘advance financing’
Reduce overhead costs, so your cash flow position remains healthy. This can easily be achieved by using a powerful Marketplace Integration Platform such as Effect Connect
Rabobank for bol.com entrepreneurs
Rabobank now offers a special service for bol.com entrepreneurs: Flexible Financing. This is a monetary loan which is connected to your turnover at bol.com. Is your turnover lower in one month, then your repayment is less. Did your turnover increase in the next month? Then you can increase your repayment again. There are several criteria that need to be met in order to be eligible for this type of financing.
Payoneer, a well-known international player in the field of payments and financing, offers financing based on monthly sales with their Capital Advance cash flow management solution. You can receive funding up to 460,000 euro.
This company from s-Hertogenbosch in the Netherlands offers prepayments from marketplace revenues against a small fee. Prepayments are determined by the credit on marketplaces. The Factor Company receives the disbursement from the marketplace and pays you as a seller. At this moment, the Factor Company is only working with bol.com.