When you go around the echo chamber of Twitter, 90% of the tweets you read are about all the different ways to scale your ads or find influencers for UGCs, yet people rarely talk about the lifeline of any business — cash flow.
A more specific way to measure your cash flow is to look at the operating cash flow. This is looking at the cash generated by the normal operations of your business, which if you’re a DTC brand, should be from selling products.
Net cash from operations = cash receipt of operations - cash outflow of operations. Simple math right?
The part that I want to focus on today is how you can reduce the cash outflow of operations, specifically, the amount of cash that you are tying up in inventory.
When dealing with suppliers, there are few variables you can negotiate. There are quantity, unit price, and payment terms. Now, let’s talk about how we can negotiate each of these variables.
Quantity is the number of units you’re buying in a PO. This is a number dictated by you unless you’re only hitting the minimum order quantity (MOQ). If you’re ordering the minimum order quantity and want to order less than what they’re asking, there’s a way to negotiate.
In this situation, you could ask the supplier to break down the components of your product to understand which component is the one setting the minimum quantity. Suppliers typically set the MOQ based on the raw material MOQ they have to order from their sources. For example, in apparel, suppliers buy rolls of fabric at a time and each roll of fabric can make a certain amount of shirts. The MOQ is set to ensure all the fabric is used because they might not be able to use the same fabric for another order. Once you figure out which component is pushing the MOQ high, you can now make the decision to choose an alternative option to lower MOQs such as compromising on custom material or a different color option to reduce PO size.
Unit price refers to the cost of the complete individual unit out the door. The unit price usually decreases on a sliding scale based on the quantity you order, also known as, quantity breaks.
First, ask your supplier what the quantity breaks are for this product. If the difference is significant enough and the next quantity break is within your budget where you are confident enough to sell through the inventory, then it’s worth to consider ordering more.
Of course, this goes against the idea of reducing PO, so here’s another thing I do if I have a history with the supplier. Once I know what the quantity break is, I talk to the supplier to order an amount that is lower than the next price break. In return, I promise them the order of the remaining units within the next 3 months.
This allows me to get a lower per-unit price without paying for the full size of the PO, while the supplier gets a commitment from us that we’ll return for future business.
Note that this would only work if you already have momentum and a good relationship with your supplier. Suppliers are people just like you and when they see our growth, they will consider this deal an investment they’re making into our business. If they starve us to death, we won’t ever place another PO, so the incentives are equal here.
The payment term is the schedule of paying your supplier. It’s usually a percentage of the payment for each stage of the transaction:
- Placement of PO
- Product completion
- Product arrival at the departure port
- Product arrival at receiving port
- Product arrival at the destination
- Product post-arrival
The typical payment term that you might be able to get with your supplier at the beginning is 40% down at PO placed and 60% upon shipment completion. As your relationship with the supplier progresses, you can reduce the down and increase the second part of the payment. Based on all the stages I just mentioned, there are a few ways for you to shift payments in different stages to give yourself more time before the cash starts to flow into your account. The later you can push to have money debited, the better it will be for your cash flow. Big companies like Gymshark are even negotiating terms where they’re not paying the vendors until months after they received the shipment. Crazy right?
Something you can consider when facing cash flow concerns is pre-selling the products to collect cash earlier before you have the product on hand to ship. You should only do this if you are able to give accurate delivery time for your customer. Customers who want your product typically don’t mind waiting, as long as the expectations are set correctly. Both parties can win in this situation.
I can’t stress enough the importance of building a good relationship with your supplier for all of the above to work. Suppliers are people just like everyone else, and rules can always be flexible if they like you enough. Add them on WeChat, send them greetings, make them laugh, befriend them, be kind and understanding. Having your account manager on your side when you are asking for payment extensions or a lower price will help in your favor.
At doe, we’ve been able to increase our cash flow by being careful with how we use different financing solutions and there are a few out there I’ve really enjoyed working with.
For larger inventory purchases or invoices, I use a platform called Settle that pays my vendors on my behalf and I only have to pay back Settle in 30, 60, 90, 120 day terms for as little as 1.5% per 30 days. They have been super helpful in helping us through large POs that we don’t immediately have the cash for by giving us extra time on top of the terms that we have with our suppliers. If you’re interested I’m more than happy to make the introduction to the team, just shoot me an email back.
Another option we use is the card from Parker. The Parker card offers 60 days rolling in interest-free terms, which means whatever you get charged on day 1 can be paid on day 60. While other card companies offer a 60 day interest free term, it’s still based on a fixed billing cycle, meaning if you charge something on day 59 of the billing cycle, you’re still paying for it the next day. We use parker for everyday charges and paid ads which give us ample time to make a return on the ad spend. Same as Settle, just email me back if you’re interested and I can make the introduction.
Understanding how to negotiate and padding your bottom line is equally important in making more revenue. Make sure you keep an eye on your finances and have a good grip on your cash flow to really scale your business.