It is a reality that very few numbers of E-Commerce businesses survive beyond their initial years. The failure rate exceeds the success rate in this regard. The key reason for this failure is intense competition and mismanagement of working capital. Prudent management of capital constitutes an essential part of strategic decision making. There are two types of capital namely fixed capital and working capital. Fixed capital refers to the amount of investment one needs to establish the infrastructure of the business. For example – purchase of office space, computers & peripherals, furniture, etc. The other form of capital is working capital. As the name suggests, working capital is applied to fulfilling the routine obligation. Simply speaking, working capital is the excess of current assets over the current liability of the business. One must not confuse it with cash flow.
The most common error E-Commerce Businesses Make
The key to an effective working capital management is based upon two main factors –
- Inventory Management
- Vendor Management/Terms of Payment
The success of any E-Commerce business is incumbent upon its ability to strike a balance between the time it requires to liquidate its inventories and pay the vendors for product. For instance, if business generally requires 50 days to sell one product, it must negotiate a credit period exceeding 50 days with the vendor. This ensures that the business does not face any short-term financial crunch owing to the working capital shortage.
Steps to improve Capital Management
- Applying proper and data-driven inventory management processes allows the business to reduce the strain on working capital. Maintaining a large amount of inventory is not prudent and can result in huge losses. Proper accounting and adequate control ensure that the business is not under immense pressure to sell.
- The business must have all relevant financial information available on a real-time basis which will help it to forecast its future needs. This will ensure that the business can order inventories in a more orderly manner.
- Negotiate proper terms of payment with the vendor.