COVID-19 has completely changed consumers’ lives and their buying habits, which has created a lot of uncertainty for consumer-based eCommerce businesses.
In recent posts, we’ve shared what other eCommerce businesses are doing to get through this challenging time and what marketing strategies you should consider for your eCommerce business during this crisis. But in the end, the most important decisions you’re going to make right now are financial.
Your financial situation is either going to get you through this crisis or potentially take down your company. That’s why it’s critical to take immediate steps to give your eCommerce business the best possible financial footing during the challenging weeks and months ahead.
I’ve been the CFO of Inflow for 10 years, and I’ve had a financial consulting business for 19 years — a consulting business I actually started during a recession. From all this experience, I’ve learned how businesses can weather this storm and make it out on the other side.
In this article, I’m going to discuss the steps I recommend to keep your eCommerce business financially afloat during this downturn.
Use Projections to Look into Your Financial Future
To plan for the challenging months ahead, the first thing I recommend all eCommerce management teams do is get a handle on how much financial runway they have. To do that, I suggest you model out different scenarios based on three different levels of financial impact: (1) the worst case cash flow scenario, (2) various tough scenarios that fall somewhere in the middle, and (3) the most realistic scenario based on your specific business.
Eventually, you’ll use these scenarios to implement cost cutting and other financial strategies to get your business through this downturn. But right now, you’re just trying to wrap your mind around some of the difficult financial scenarios that could arise in your business. It’s also important to note that these scenarios will change frequently under the current conditions, and that’s okay. You’re just trying to get as much clarity as possible in this time of uncertainty.
(1) Worst Case Scenario: All Revenue Stops
Your first step is to create a model that depicts what would happen in your business if sales stopped completely but you still had to pay for all the essentials. How long could your business operate before you ran out of cash?
Most businesses I’ve worked with have less than six months worth of operating costs on hand. With no revenue coming in, many of these businesses’ cash supply would dry up in a month and a half to two months max.
Luckily, the worst case scenario isn’t likely for most eCommerce businesses. But we have seen the worst happen to businesses we work with. We have one client whose business completely shut down because they’re under such a severe lockdown that no one can go to their warehouse to stock orders that people are putting in on their website.
That’s why, even though looking at the worst case cash flow scenario for your business is hard and uncomfortable, it’s necessary. It’s better to know where you stand if the worst happens, so you can prepare.
(2) Tough — But Not As Bad — Scenarios
More likely than not, sales won’t completely stop for your businesses. However, a variety of other bad financial situations could arise. To prepare, you’ll want to model any potential financial situations that could happen as a result of this crisis.
I recommend brainstorming all the potential supply and demand issues your business could face. On the supply side, think about all the possible ways your product supply could be impacted by the current crisis throughout the entire supply chain.
What if your container ship gets stuck in the middle of the ocean because the US ports won’t let it dock? Or what if, like the client I mentioned above, you’re under such severe lockdown that no one can get to your warehouse temporarily?
On the demand side, you can use historical sales data to sort your products into three categories: (1) low demand, (2) moderate demand, and (3) high demand. Then, using SEO, conversion, and paid search data, get a better idea of where demand stands for these products right now. Model potential demand scenarios based on the changes you’re seeing in the data.
For example, if you notice that demand for a typically high-demand product has dropped by 20%, create a model forecasting how this will impact your business financially in the months to come. For each scenario you model, you’ll want to calculate projected monthly revenue and compare it against operating costs.
(3) The Most Realistic Scenario for Your Business
After you’ve fully immersed yourself in the worst case scenario and other bad scenarios that could arise, do something a little less scary: model a more realistic scenario based on current factors in your specific business. Start by thinking about:
- How much supply you have available
- How much supply is set to come in
- How much revenue you can produce based on your current supply
You can also go back to that PPC, SEO, and conversion data to get a realistic picture of what people are searching for and buying right now and how those trends have been shifting in the past few weeks or months.
We’ve written another article sharing what some of our eCommerce clients are seeing and doing right now as a result of the COVID-19 economic downturn. If you need help determining what your PPC, SEO, and conversion data means for your business, reach out to Inflow. We’d be happy to help.
In the end, these scenarios should give you a range of possible cash flow situations for the next few months. This will allow you to match those range of scenarios with a range of different expense saving actions you could take if any of them actually happen, which we’ll discuss in the next section.
Look for Ways to Extend Your Financial Runway
Once you’ve modeled the different cash flow scenarios above and have a sense of the range of “runway” your business may have, the next step is to brainstorm and take action to extend your financial runway. Here are the steps I recommend:
#1: Apply for a Line of Credit
You might be tempted to wait to apply for a line of credit until you actually need the money. Don’t wait. You’ll only get approved for a line of credit if you have a reasonable amount of cash already, so the sooner you do this, the better.
There are two reasons I recommend all businesses apply for a line of credit during a downturn (even if they’re not sure they’ll need one). First, a line of credit has a much lower interest rate than credit cards. So, it will prevent you racking up high-interest credit card debt if you find yourself in a financial pinch.
Second, you don’t have to use it, this just gives you the option of using it if you need it. You’ll only be charged interest if you actually draw from your line of credit. If you don’t use it, the most you’ll have to pay is a low annual fee (usually between $99-$200 per year). So, you don’t have much to lose by having this option waiting in the wings.
If you’re a new or small business, you might have trouble getting a line of credit. But if you own a home, you can get a line of credit against your home and make it available for your business.
#2: Cut Expenses to Slow Your Burn Rate
No one can truly predict what’s going to happen in the weeks and months ahead. A good practice in these situations is cutting expenses now, even if you don’t necessarily need to yet.
In terms of what to cut, all the business owners I’ve talked to have said they don’t want to eliminate staff. They want to take care of their people, and they don’t want to contribute to the unemployment problem. So, start by putting every expense you have (other than staff) into three categories:
- Absolutely essential to my business
- I can reduce this cost or pause this cost.
- I can completely eliminate this cost.
If you’re struggling to think of expenses you can completely eliminate, start with the lowest hanging fruit. For example, right now, nearly everyone is working from home. So, what are some expenses that are unnecessary when no one is in the office? The office streaming service or other shared subscription services are the first ideas that come to my mind.
As far as pausing or reducing costs goes, the biggest wins here have typically been found by reaching out to landlords and suppliers. In many cases, companies are able to negotiate equipment, rent, and warehouse lease agreements.
You could ask to reduce your lease payment for the next four months, and then catch it back up over a twelve-month period. And you could ask suppliers to temporarily extend your payment terms. Obviously, there are no guarantees you’ll get a “yes.” But I’ve seen it work over the years for many businesses.
If reducing staffing costs becomes absolutely necessary, you have options besides laying people off: furloughing staff or reducing salaries temporarily. Furloughs can take many forms. But one way to implement a furlough would be to reduce the days staff work to four days of work per week rather than five and prorate salaries accordingly for a set period of time or until net profit reaches a certain amount.
Salaries can also be reduced by a specific percentage to preserve cash. The federal government CARES Act SBA Payroll Protection Program Loans can also provide some relief for businesses to enable them to continue to pay their employees. You can find out more about SBA Payroll Protection Program Loans here, and the application form can be found here. The SBA also has an Economic Injury Disaster Loan Program for businesses impacted by the crisis, which you can apply for here.
I do have a few words of warning when cutting expenses, though. Approach expense cutting like solving a Rubik’s Cube. Rather than cutting a lot of expenses simultaneously to achieve profitability, identify your first move (expenses to reduce) and then consider all the other impacts to this change.
A few things to think about:
- Will these cuts impact your ability to come out of this quickly or successfully?
- How will these changes impact the customer’s experience?
- How will these changes impact the remaining staff?
Anything that’s critical to business should be seriously considered before it’s cut. For example, we have a staff member whose computer needed to be restarted four times a day. He put in a request for a new computer, and we’re buying him a new computer despite the current economic situation, because he needs it to do his job effectively.
Unless you’re really in a high-risk financial situation, try not to cut things that your business needs to emerge intact from this downturn, such as marketing. Some expenses may eventually need to be cut, but cut them later on rather than first.
#3: Do Everything You Can to Keep Cash Coming in
To keep cash coming in during this crisis, you may have to get creative. I suggest making the best of whatever you have. Ask yourself what products you have in your possession right now, and what creative tactics you can use to market and sell them.
That may mean using paid search to promote less popular products. It may also mean thinking about substitute uses or marketing angles you can use to sell low-demand products.
For example, in many areas, it’s still cold outside, so suntan lotion isn’t a hot seller. But with school and business closures happening around the country and people looking for safe ways to get out of the house, more people than ever are spending time outside. You could develop a marketing campaign that points out the importance of protecting yourself from UV exposure even when it’s not hot and sunny.
If you want more help marketing and selling your products, we’ve shared detailed guidance in our recent posts about what other eCommerce businesses are doing to get through this challenging time and what marketing strategies you should consider for your eCommerce business during this crisis.
Be Ready to Emerge from This Downturn Strong
There’s something important I want you to remember here — this is a self-imposed recession. It isn’t based on financial factors like the housing crisis in 2008 or the startup bubble in 2001. Once COVID-19 is under control, the economy could bounce back quickly. And when that happens, you want to be ready. This means only cutting where needed to get through the crisis, getting creative with selling your product to keep cash coming in, and supporting each other.
Beyond the basic cost saving functions, businesses that work on SEO, get conversions in line, and get content up-to-date now will be ready to maintain (or increase) their market share when the economy rebounds. This could be key in rebounding faster than your competitors. Keep this bigger picture in mind, and reach out to us if we can help you in any way as you navigate the tricky financial waters ahead.