E-Commerce Cash Cycle Model 📊

Hey, my name is Joey.

I'm the founder of Agent cfo.

We're a CFO firm specialized in the E Comm and agency space.

I'm going to talk you through the E Com cash cycle model here.

This is an extremely powerful and important tool because as you're thinking about scaling your brand, you know the number one constraint that you're going to face is most likely not your ROAS or the CAC that you can hit, but it is going to be your cash flow.

Because whether you're actually buying inventory or whether you're dropshipping, you're still going to find that every time you want to grow, you will need more and more cash.

That is what makes scaling an ecom rent so incredibly difficult and stressful from time to time because you always have to reinvest more and more and more scaling so that you can buy more stock or like get more, more stock allocated to you and then you can sell more.

so in this model you can very quickly calculate what your cash conversion cycle is.

And so this helps you understand how casually moves through your business and it highlights where you can maybe make some improvements that can free up more cash for you so that you can reinvest this cash more quickly and make more money.

So let's go through it.

Step one here is put in your numbers.

No complicated numbers are needed here.

We're going to put in your monthly revenue, your current cogs that you have, and then the net profit that you're making on this after paying yourself.

Then you have to put in a couple options around your supply chain.

So first is the days that it takes to get get your products delivered.

If you actually have to place an order and get it shipped to a warehouse, that will be the days that it takes to receive your goods.

If you're dropshipping these products stay with your supplier.

This may be zero because you don't actually need to get anything delivered to you.

For now, I'm going to keep it at 25 days.

Then here you input how your payment terms are structured with your supplier.

Like do you get the invoice at the moment you place your order?

Do you get the invoice the moment the delivery has been made?

Or do you split this and you have to pay a deposit first?

So let's say you have to pay 50% upfront and then 50% when you actually receive the order.

Let's assume we just have to pay upfront, then we do hopefully get some payment terms.

So let's say it's okay we do get the bill as soon as we place the order, but we have seven days to pay it.

That's what you put in here.

Then we look at your sales cycle here.

So how many days does it takes to sell through the order that you've placed?

So once this arrives at your 3 PL, your warehouse, or when your supplier tells you the goods are good to go, you can sell this.

How long does it typically take to sell through this whole order?

Might be 30 days, might be 60 days.

You know, what is just the average number that you have?

and then lastly how long does it take for your payment processor to pay out?

Typically three days.

sometimes this can be same day, sometimes this is much longer.

Just put like how long typically takes to get the cash from a sale into your bank account.

Those are the only inputs you need.

Then let's move to the timeline.

So what we see here is this whole flow that we've just put in.

So we're placing an order on day zero.

That's where we're starting.

You know, an order has to be placed, you know.

Then the next point we see is when we have to pay the supplier.

So because we said seven day payment terms, full, like full full payment on the order after seven days we see we have to pay for our full, our full cogs here.

If this was zero, it will be on day zero.

We have to pay 100k, which is our typical cogs that we have.

so let's keep this in zero.

And the next point is when the stock arrives, this is the 25 days that we see here.

Then we see when we've sold through most of this inventory.

So how you can think about this is that like, you know, if you say, hey, in 30 days I'm going to sell through everything.

Then like in 15 days or like halfway through that is when you've kind of like sold, you know, on, on average because like you're going to collect some of the cash immediately.

Like you know, as soon as you start selling the stock, you're going to be making sales some fall later.

So a good way to think about it on average, you know, halfway through your sell through period is when you've collected the cash.

and then we just add three days in this case for the cash to actually land in the bank account.

What we see here is that it roughly takes 36 days to have our cash cycle completed.

So this is the number of days from when we actually make a payment to when we receive this cash again.

And so of course like when we change anything here, you know, this is going to make it longer.

if our payouts take longer, it's going to make it this again longer.

And so you can like really see, you know, and understand where your cash stays trapped.

And so you know, if you can discuss with your, your supplier to get maybe 14 day payment terms now you already see that your cash will move a lot faster.

So this is where this becomes so powerful because you can really start to understand, you know, where in your supply chain and like, you know, your real business function, your cash may be trapped.

Then once you have these inputs and you understand this process, go to step three and this is see how much cash is tied up.

And so based on your numbers, this will tell you at any point in time, roughly, you know, how much cash do you have trapped?

Like how much is indeed sort of stuck.

Either you know, in delivery, it is in, in stock that hasn't sold yet, or it's in like waiting to be paid out.

based on your numbers, you know, this calculates it as, you know, your, your typical monthly Cokes, divide or multiplied by your cash cycle divided by 30 to make it, to make it monthly.

and so like when it's when it's 29 days, you know, it's almost equal to an exact month.

So you pretty much have one month of Cokes is always out there, you know, because you need to keep placing that order and it takes you 30 days to get the cash collected again.

so this is a important number to look at.

And now you can think of like, all right, I always need to have at least 100K.

You know, this sits in my cycle.

I cannot touch this.

I need to have this available.

So now you can start to think like, hey, how can different things free up?

my cash, you know, maybe if I sell through it faster now, maybe I place smaller orders which sell quicker.

So it's like, maybe if I can sell through an order in 15 days, you know, now you have less cash that is trapped because your cycle moves faster.

You don't let stock sit there for 30 days.

and so this, you know, this number itself may not tell you like as much, but it's really like understanding how different levers move this number to know what you can improve in the business.

Then the last thing is see yourself funded.

Growth rate.

This is a very interesting number to know.

and this essentially looks at your monthly profit and then divides this by how much cash is tied up what this gives you is the growth rate you can afford right now based on your profits.

So like here you can see the quick breakdown.

you know, right now you see that like based on your cash cycle, you know, we know there's just under 100k cash trapped.

That is just like how our cash conversion works.

Because it's roughly a month outstanding.

There's always roughly a month worth of corks like outstanding.

We need to keep placing that order.

But now we want to grow, of course.

And so what this self funded growth rate looks at is like at our profit.

So like we're making 25k profit, you know, 10% of our monthly revenue.

We have 25k profit.

If instead we put all of this profit back into growth, so we're going to place just, you know, increase our inventory order, then we can calculate that this would roughly unlock 65k in additional revenue.

if we make these numbers a little bit simpler, this might be easier to, to interpret.

So like, let's say we do 100k with 10%, profit, 50% goes to COGS.

So now what we see here is indeed we have our 10, 10k in profit.

This buys more stock and it's like roughly 20k because it's like, you know, this was 50, so if we put 10,000 in, we can buy 10k worth of stock.

And so we will make, you know, because it's like 50 cogs, we will make around 20k in new sales and that will form a 20% growth rate.

Because now we're doing 100k.

If we reinvest this 10k that we have in profit, if you reinvest that into more growth, we can generate roughly 20k in additional revenue, which is a 20% growth rate.

So this is a very cool number to note because if you fill this incorrectly, you will not see it's okay.

What is a realistic growth rate that you can sustain if you're reinvesting your profits?

And again then you can start to ask some questions like, well, how can we grow faster?

Like if you want to grow at 30%, you know, what needs to change?

Do you need to place smaller orders?

Like yes, that has a massive impact.

Or what if you can get even more, terms from your supplier?

Maybe you can go to 28 days.

And now indeed you free up cash so you can reinvest faster and you can grow faster.

And so it's really like understanding how these different things move, you know, both your cash trap number and your growth rate that it makes it so powerful.

And it's going to really help you scale scale faster and with fewer cash issues.

So play with these numbers, see exactly where your cash gets stuck, and see indeed how different changes can shorten your cycle, increase your growth rate, and help you build a bigger business faster.

Let me know of any questions.

You can book a call of me by just pressing here.

Book a call or book a call there.

You can see some of our case studies here.

you can also just DM me on X if you'd like.

So I hope this is useful.

Let me know of any questions and I'll be happy to chat if you want.