Keeping the cash flow up – especially relevant for the e-commerce sector
There is hardly any other sector with a faster flow of money and goods than e-commerce. Thanks to the optimization of supply chains, warehousing, ordering and payment processes, e-commerce allows very profitable business models to be established. However, the high volatility in the business bears risks for the cash flow. One of the main concerns of liquidity and financial planning in e-commerce companies is therefore to maintain a maximum of free available cash flow and to minimize the amount of “dead” capital, e.g. tied up as unsold goods in the warehouse. This can be achieved by optimizing the so-called cash conversion cycle. The CCC is a key figure that indicates how long it takes for a company to convert its investment in inventory back into incoming liquidity.
Illustration: How the Cash Conversion Cycle is Calculated
The shorter the CCC, the higher the available liquidity. Some e-commerce companies like Amazon even have a negative cash conversion cycle. This means that Amazon only pays its suppliers after the money has been earned from sales. The question of warehousing is also very cash-flow relevant for e-commerce companies. A well stocked warehouse guarantees short delivery times for the customer, but causes high running costs and ties up a lot of capital. Long storage times therefore generally mean a lower level of liquidity.