Making the most out of the money is a key part of growth. Business multiplies money – if you put 100 in a business, after 1 month it will multiply and become 110 or 120 depending on the return on investment, which is NOT equal to the gross margin or gross profit on product or service sales. Meaning, if you buy a product at 100 and sell at 120 then your gross margin is 20 and your 100 will become 120 after the sales. For a single transaction the return on investment is 20% – your money is multiplied by 120%. But if you can make 10 transactions in a month – one after another, in one month your total profit becomes 200 with the same investment of 100. So your Return on Investment (ROI) becomes 200%. Your 100 becomes 300.
A business that can roll the money 10 times in a month does things very differently than the business that rolls money once a month. And with the same amount of money the 10 times more efficient business will grow faster and bigger in a very short span of time – to be specific will become 10 times bigger in less than 3 months.
The more efficient you are in rolling your cash the more opportunity will be there for you to grow bigger and faster. The name of the game is speed and being efficient. Nothing can be more important than saving time to do an activity in your business that rolls the cash faster.
If you are in e-commerce or online selling – customers buy from you for convenience primarily, unless you are undercutting the market and selling at a lower margin compared to your competition. If you are selling at lower margin than your competition, this will help you to grow faster ONLY if you can roll the cash faster than your competition. That way you will be able to serve more customers than your competition in a given period and capture more market share faster. That will only happen if you are more efficient and able to roll the cash faster than your competition.
Micro and Small businesses operating in digital or online sales can improve their cash rolling cycles by automating their business processes. There can be many areas to improve the efficiency, but what we found is most effective is to improve Cash Collection Cycle. Asia as a whole is a Cash on Delivery market – Cash is King here. People like to pay Cash even in online purchases. Essentially business has a relatively longer Cash Collection Cycle compared to physical retail.
Based on our experience working with online sellers, we have seen, 1 day reduction in Cash Collection Cycle improves ROI by 6% and reduces Cash Requirement in business by 7%. Automation can improve cash collection cycle for Cash On Delivery Online Businesses by 6 to 8 days easily – which can nearly double the ROI and reduces Cash Requirements by 40%.
There are four parts of Cash Collection Cycle – Time to Ship, Time to Deliver, Time to Collect Cash and Credit Days with Suppliers.
Cash Collection Cycle = Time to Ship + Time to Deliver + Time to Collect Cash – Credit Days with Suppliers
So if your Time to Ship is 2 days, Time to Deliver is 3 days and Time to Collect Cash is 7 days after delivery and you don’t have any credit from your supplier – your Cash Collection Cycle is 12 days.
If you can manage a 15 days Credit from your supplier, your Cash Collection Cycle will be -3 days. Meaning you will have extra cash to use to grow your business.
If you cannot negotiate good credit terms as your volume is small with your supplier, the only choice you have is to focus on other parts of the equation.
A great part of Time to Deliver is influenced by market condition – the logistics infrastructure. However, just by coordinating well between Customer and Delivery Partner. Regular tracking and following up with delivery partner and customer can improve the time. But you need to have a near real time system to track the parcels so that you can be proactive to monitor and coordinate for timely delivery. You need to see in real time – which customer didn’t pick up the call when delivery man tried to reach out, or which customer is rescheduling the delivery or having dispute with delivery man. If you can get these information in real time or can at least monitor proactively instead of reacting to customer complain or reacting to return orders – you can improve the delivery time and success rate both.
Time to Ship can be improved significantly by establishing proper inventory, packing and send to delivery partner process. A proper order and delivery management system is key to this. One of the main reason shipping gets delayed is Out of Stock or delayed stock. Sales trend and real time stock level can give an idea what to keep in stock to fulfil the orders. A significant time consuming work is submitting orders to delivery company system. Automating that saves a lot of time. Printing Consignment Notes, Packing List and Invoices in bulk saves a lot of time as well. These simple automations can improve your Time to Ship significantly. These simple automation can free up time and resource cost to a great extent e.g. from a full day work to less than an hour per day.
Time to Collect is improved through partnering or contracting primarily. However, regular/real time reconciliation with delivery partners also improve the time to collect significantly. Regular and real time reconciliation needs proper technology and information systems support. It is imperative to have real time information on which are the orders delivered, rejected by customer, on the way to return, not yet picked up by delivery company and cash not collected. Having a clear real time picture of this is essential to ensure timely collection and return of product for Cash On Delivery Online Business.