How E-Commerce Brands Can Drive Working Capital Efficiency

Working capital (WC) is the lifeblood of e-commerce brands, and the need to manage WC effectively and efficiently ensures brands can meet their obligations, pay their bills on time, and continue investing in growth.

E-comm brands have totally different WC challenges compared to other verticals (e.g. SaaS). You’re paying for products typically weeks in advance, storing inventory and then eventually selling it. Capturing all the cash outflow before you’ve made the sale; then you have to pay for marketing, wait for payment gateways to release payments, etc. There’s a lag between money going out and money coming in.

For starters, your working capital is your current assets – current liabilities. Ideal working capital ratios are category dependent.

Things that drive enterprise value creation for brands: profit optimization, growing free cash flow, working capital management, and how it all ties into their cash conversion cycle (CCC). I wrote about it in one of my previous letters. Link here.

Here are some ways brands can tackle WC management:

Optimize inventory management

Brands need to balance their inventory levels to ensure that they have enough stock to meet demand while avoiding overstocking, which ties up WC. To achieve this, brands should work closely with their demand generation and customer acquisition teams to forecast demand. The better demand forecast you have, the better you can analyze customer behavior, which helps optimize inventory levels. This will help reduce inventory holding costs and improve cash flow. In your CCC equation, this impacts your Days Inventory Outstanding (DIO).

ABC analysis: Use the ABC analysis technique to categorize products into three categories based on their sales volume. This helps you prioritize inventory management efforts, focusing on high-value products.

Future essay topic: financing interim. Typically relevant for high growth brands.

Optimize payment terms with suppliers

Every brand should negotiate favorable payment terms with suppliers to improve cash flow. This can include extending payment terms, negotiating discounts for early payment, and using optimal payment methods. In your CCC equation, this impacts your Days Payable Outstanding (DPO).

I recommend doing negotiations via phone if that’s manageable. It’s easier and aligns better with partnership goals.

If you prefer email or if you’re running a large brand (with dozens of suppliers/vendors), then here’s a template you’re welcome to use. Massage the wording as you wish.

Please note: this is a delicate topic, so ensure you have good rapport with your suppliers/vendors before negotiating payment terms. If you signal to them that you’re at-risk of bad debt for them or historically haven’t paid on time, they will not have an incentive to extend terms and may even accelerarte payment schedule on existing balance or hold back services/shipments, etc.

Optimize pricing strategies

Brands should regularly review and adjust pricing strategies to maximize revenue while remaining competitive. Run A/B tests against offers, do bundles to expand value creation for the customer, upsell/cross-sell, increase free shipping thresholds, experiment with free trials if you’re a subscription brand, etc. Gross margin expansion is the single best way to improve profitability, and as a result, open up free cash flow.

Optimize your fulfillment processes

Brands need to ensure that they are fulfilling orders efficiently and cost-effectively. Streamline your order management processes, shipping methods, and if you’re working with a 3PL, audit their performance monthly. Additionally, identify optimal distribution centers if you’re shipping high volume from coast to coast. And be sure to also run reverse logistics analysis on returns management.

If you are fullfilling in-house, then optimize warehouse layout, train employees properly, and closely monitor performance metrics. You should also offer multiple shipping options if it makes sense for your business.

Fulfillment budgeting is an activity we call part of our “above-the-line analysis” at FinanceWithin. It’s a “margin tax” all brands pay, so finding even basis points of improvement help your gross margin.


For e-commerce brands, working capital investment includes buying raw materials, production of finished goods, storage of inventory, AP and vendor payments. Working capital harvesting includes driving sales, AR, collections and turning it into cash & cash equivalents.

So, keep it simple. Spend time in areas that move the needle. Doing the things above will help you drive effective working capital management, and as a result, a better business.

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