The likelihood of internal or external factors causing lower-than-expected profits or threatening a business’ existence is known as business risk. While it would be nice to avoid, there is some element of risk involved in any business venture. Changes in demand, shifting economic climates and global events bring a degree of uncertainty to businesses across the board.
Ecommerce is generally considered a high-risk venture. Most ecommerce businesses are small- to medium-sized, many with a staff of just one or two people. What’s more, these businesses tend to have a very limited track record, which characterizes them as higher risk in the eyes of traditional financial institutions.
The complexity and interdependence of the various stages of the ecommerce supply chain further raise the risk involved. Global events can have a dramatic impact on the supply chain, causing delays, disruptions and shortages. Changes in consumer behavior, demand and the economic environment also play a role in the uncertainty associated with ecommerce.
Despite this inherent turbulence, and perhaps in part because of it, ecommerce sellers can mitigate risk and build successful, low-risk businesses. As Nassim Nicholas Taleb points out in his book Antifragile: Things That Gain from Disorder, some things actually become more resilient when faced with stress and volatility. Antifragile ecommerce businesses can grow and improve due to the uncertainty to which they are exposed on a daily basis, turning them into stable and robust systems.
Much can be learned by taking a closer look at the characteristics shared by these low-risk ecommerce businesses.
They don’t invest equity in inventory, marketing, or day-to-day expenses.
Ecommerce businesses require a significant amount of capital to invest in inventory, marketing costs, and other day-to-day expenses. This is a particularly troublesome challenge for online sellers due to the gap in time between paying supply chain expenses and receiving revenue from sales.
Many ecommerce entrepreneurs therefore make the mistake of investing equity into their daily expenditures. While this may work temporarily, it significantly raises their risk. If all equity is tied up in inventory or other aspects of the business, there is nothing to fall back on if something goes wrong. In addition, there is no capital to invest in the future of the business, limiting growth and expansion.
Instead, low-risk ecommerce businesses find other sources of cash, such as a funding partner, to pay for supply chain costs and day-to-day expenses. They then have the cash flow needed to react to any setbacks that may arise as well as to advance their business goals.
They optimize their cash flow.
A business that does not properly manage its cash flow is a recipe for disaster. Without cash flow optimization and planning, supply chain delays and disruptions, inventory setbacks, and fluctuations in demand are enough to destroy a business’ finances. In fact, insufficient cash flow is one of the top factors in small business failure.
Therefore, any ecommerce business striving to lower risk and achieve long term success must be aware of, understand and manage the details of its cash flow. This includes looking ahead to anticipate and be prepared for the business’ future needs, such as accumulating supply chain expenses and seasonality.
Cutting costs where possible, paying attention to sales analytics and forecasting, and making sure any financing is cash flow-friendly are also good cash flow management strategies.
They monitor and prioritize profit margins.
One of the common misconceptions held by ecommerce sellers is that increasing revenue is the key to success. This may lead them to overspend on marketing campaigns, price products too low or offer heavy discounts in an attempt to sell as much as possible.
Low-risk businesses know better. Instead of only focusing on sales revenue, ecommerce sellers should pay particular attention to their profit margins.
Maintaining or increasing margins over time is a key feature of low-risk businesses. This can be done by negotiating lower prices from suppliers, avoiding discounting too heavily and raising prices when necessary. Staying on top of key marketing metrics such as ROAS, TACOS, and AOV can help sellers understand if their advertising strategy is paying off or harming their margins, too.
They effectively manage inventory.
Inventory management is one of the most important aspects of running an ecommerce business. After all, order too little inventory and risk going out of stock. Order too much and valuable capital gets tied up in storage, harming cash flow. An effective inventory management strategy is therefore key to a low-risk business plan.
Securing manufacturing capabilities in advance ensures that inventory will be available when needed. At the same time, sellers should avoid paying too much up front, because then they can wind up paying for more inventory than necessary. It’s also wise to find the balance between large and small inventory orders. Large batches come with the risk of greater loss if they don’t arrive, while smaller batches lower this risk but cost more money, lowering profit margin. The ability to handle these tradeoffs judiciously sets successful businesses apart.
Outsourcing or partnering with third-party service providers such as a flexible 3PL can help business owners struggling to manage this aspect of their business with a limited staff.
They set responsible growth goals.
It’s great for ecommerce businesses to strive for growth, but it’s important to do so responsibly. Trying to grow faster or to a greater degree than the market allows raises the risk involved and can lead to business failure.
When setting growth goals, low-risk businesses take the reality of the market into consideration. This includes the seasonality of the product, competition and changes in demand. Setting growth goals should thus include data collection and analysis, research into the market and the competition, and a careful balance between equity and financing.
Don’t try to sell more than demand allows, and test out new products by starting out with smaller batches. Be wise about the speed at which the business can realistically grow to avoid overleveraging resources.
They have a flexible cash flow partner.
Finding a cash flow-friendly funding partner is a simple way businesses can lower their risk. This gives them the capital they need for the daily running of their business and allows them to invest equity in the future.
Cash flow-friendly financing means borrowing money right when it’s needed, and paying it back as early as possible. Borrowing more money than necessary or taking it too early and paying it back too late increases the cost of capital and raises the risk involved.
A flexible partner also provides a fallback when things go wrong. For example, if a batch of inventory arrives damaged, a flexible cash flow partner provides the capital necessary to order another batch.
While some ecommerce entrepreneurs might be wary of accepting capital from third parties, it’s often an essential element not only in growth but also in sustained success. That being said, take the time to find a partner that suits the business’ unique needs. Thanks to the growth of the industry, there are now several funding options built specifically for ecommerce brands
No matter how uncertain the economic climate or unstable the supply chain, ecommerce businesses can mitigate risk and reach sustainable growth and success by following good business practices. These include avoiding investing equity in day-to-day expenses, optimizing cash flow, prioritizing profit margins, effectively managing inventory, setting responsible growth goals and finding a cash flow-friendly financing partner. When businesses are able to weather the ups and downs of the ecommerce industry, they not only survive but often become stronger and more resilient in the long term.
Roei Yellin is the Co-founder and Chief Revenue Officer of 8fig, a planning and funding platform for ecommerce businesses. Following his start as an Olympic athlete, Yellin has accumulated over a decade of experience building fintech products focused on payment systems and supply chain analytics.