A majority of e-commerce companies rely on current revenue run rates or cash burn rates to as part of their forecasting exercise.
Cash flows can be the one of the strongest indicators of an e-commerce business’s success or failure. Cash flow in simple terms is the difference in time between when you get paid and when you pay. The sector has been in the news and is seen as one of the fastest growing amongst new age industry sectors in the next decade. With significant foreign investments in the sector in the last three years alone, large players coming together, interesting models being tested (marketplace vs inventory, e- model vs. hybrid) and the prospect of the government opening up the B2C segment for the foreign players, this sector is at a tipping point for a paradigm shift. The current levels of internet penetration coupled with the number of consumers using the internet to transact online has led many people to believe that this could see the same dizzying levels of growth that the telecom sector witnessed in India. Given all the public attention and the anticipated growth rates, the CEO’s of e-commerce companies are under constant pressure to raise, manage funds and to closely monitor their cash flow position.
What sucks cash?
The drains on cash flow for an e-commerce venture could be logistics, warehousing, working capital, people cost, technology, brand building amongst others. Consider for instance delivery of orders on time; this impacts not just the overall brand perception of the company as they are on the actual cash inflows and consequently working capital (considering a whopping 80% of the deals are cash on delivery). Therefore a robust logistics and supply change management system are key to the success of the e-commerce site and thus a key area of investment. Technology plays a very important role in both ensuring that the delivery is tracked and managed to the end of the cycle and to ensure that the business is running on robust infrastructure and the user has a superior buying experience ensuring repeat customers.
Of ‘Run Rates’ and ‘Cash Burns’
Businesses like e commerce which does not have the luxury to rely on past performance alone to budget revenue projections, cost and cash flow estimates. A majority of these companies rely on current revenue run rates or cash burn rates to as part of their forecasting exercise. It is important for the CFO to monitor and recalibrate the run rates/ estimate cash burns on a regular basis. The focus on all key elements of costs to keep these under check on an ongoing basis is one of the biggest drivers for a CFO especially where the company is not venture/private equity backed. Tracking and monitoring some of these metrics becomes important for a CFO. For instance measuring product profitability; E – commerce business has the advantage of capturing important business intelligence about buyer behavior online. Most e-commerce companies today have built a reasonably strong back end that allows them to analyze, slice and dice the data that gets captured when a potential customer visits the site or buys online. This information can be used to analyze trends by product, customer segments, order size, average transaction value, geographical hubs of customers, age groups of customers, gender and so on. This business intelligence will provide key inputs into making investment decisions, building the right type of ‘merchant’ partnerships in key geographies or even help in identifying products where inventory levels needs to be stocked at higher levels.
Operational viability and cash generation relevant in e-commerce
Given the interest of the investors in this segment, there is a strong case for investment in those that have managed to stay financially afloat thus far. In a business where margins are constantly under pressure, should e-commerce companies also think of ways of improving their operating efficiencies, forego the flashier means to attain growth and market share (mergers, acquisitions) and simply try and be cash positive rather than only focusing on growing top line? There are numerous examples of what some of the e-commerce companies have done to make them operationally viable, leverage technology better and to be able to partner with specialist third party service providers in areas where they lack the skills. Some of these examples include:
• Forging new partnerships in the lines of products that are doing well like MakeMyTrip did with extending travel bookings business to hotel bookings bringing them better margins
• More investment in technology - CRM for example to capture useful business intelligence and target and retarget their customers through more effective, customized and less costlier means of marketing. Shop for Nineteen, for example, relies only on word of mouth to do its marketing and has invested in an own manufacturing facility and a state of the art data analytics system where it tracks buyer behavior and identifies products that are fast moving as also the online media activity that has brought them most conversions.
• More effective cash management systems and more easy payment options to address the cash on delivery issue or alleviate risks by getting a fraud insurance to cover their receivables or looking at receivables management options. Today there are specialized companies like Delhivery (after the acquisition of Gharpay) which, operates logistics and order management system in 150 cities processing about 50,000 orders a day from 600 e-commerce sites or GreenDust which works with FlipKart, HomeShop18 and others. Working with companies like these would help the business free up resources and more importantly management bandwidth to focus on the ideal product mix
• Newer areas of expansion to provide products and services that are currently being offered online – like what Lenskart did with eyewear and Bigbasket are doing with groceries.
With the e commerce business growing and moving from Tier 1 to Tier 2 and Tier 3 cities, from the brick and mortar to web to mobile platforms, delivery speed and accuracy are becoming key differentiators and with newer business models evolving, it is imperative for the CFOs of such companies, whether bootstrapping or invested to keep an eagles eye on the next rupee they spend. In the industry where increasingly real time information availability and analysis is becoming the ‘King’, the CFO’s ability to dig ‘inch wide mile deep’, mine and analyze data, allowing companies to become nimbler and take quicker decisions which will in turn separate the infants from the men.