TSH 14: Here's How to Grow Cash Very, Very Quickly in Your Online Business

Reading time: 2 mins 30 seconds

There's a simple rule that I've created that online retailers should aspire to when it comes to ordering stock from suppliers. If successfully applied, you'll never have to pay a dollar out of your own pocket for stock again, and you'll start to accumulate cash in your business very, very quickly.

Now, it's not easy to get these terms with your suppliers, but it's also not impossible, especially if you've built a strong relationship - and remember, if you don't ask, you don't get!

Here's how it works. 

Step 1: Ordering the Right Amount of Stock

Order enough stock for 12 weeks worth of cover - or less depending on your lead times. In other words, you should aim to work out how many of each product or SKU you think you can sell each day, and multiple that by 90 (90 days = 12 weeks). 

Step 2: Price for a 70% Intake Margin on Your Products

Remember my two-step approach to pricing your product, which you can read here. Spoiler alert - you take your landed cost price and divide it by .3, then add tax, to get your 70% margin RRP (recommended retail price).

Landed Cost / 0.3 = RRP + Tax. 

Step 3: Negotiate With Your Suppliers on Payment Terms

Now here's the hard part, but you absolutely should try to get as close to these payment terms as possible, over time. Most of the time, when my clients actually take the time to try and negotiate (especially face to face) with a supplier, they get some form of favorable payment terms. 

The ideal payment terms are zero deposit, and net 30 days after receipt of shipment to pay for the order. In other words, you have 30 days after receiving the goods to pay for them.

It's absolutely possible, one of my clients pays zero deposit and the balance 120 days after receipt of goods. Now, you might not get these terms right away (although some will) but this is the gold standard, and you should be aiming for it, even if you're importing from overseas. Given the pressure that Chinese manufacturers are under, with many brands moving to Vietnam, this represents an opportunity to negotiate as the factories need to remain competitive to keep customers. 

Step 4: Hit Your Target Sell Through of 33% in 30 Days

If you're ordering enough stock for 90 days cover, then if you've ordered correctly, you should have sold how much stock 30 days after launch? 1/3, or 33% of your stock should have sold. If you're selling through your stock in 3 months, you need to sell a third of it each month.

Step 5: The Outcome

If you're paid nothing up front to your supplier, you've priced your products for a 70% intake margin, and after 30 days of receiving your goods, you've sold through 33% (one third) of the stock, then you will have paid for the entirety of your purchase order within the first 30 days, so you can pay your supplier from the sales of the stock.

The below table demonstrates a $135k purchase order paid of in Month 1 of sales at a 70% margin:

Remember, it's often cashflow that sinks a business, even profitable ones. The key to the above strategy is equal parts ordering the right amount of stock (and no cheating), equal parts the 70% margin, and equal parts the favourable payment terms.

We should always be trying to find ways to get a ahead in business, and this is a great strategy to aim for, to help you accrue lots of cash, not just revenue on paper.

Until next week,

Paul

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