E-commerce Working Capital: Closing the Gap Between a 'Sale' and Cash

E-commerce Working Capital: Inventory to Cash Cycle

Your revenue is growing and the Shopify dashboard looks great, but the bank account feels tight. This is a common story for e-commerce founders. The gap between a customer clicking “buy” and you having usable cash to pay for new inventory or marketing is where many businesses get stuck. Scaling can make this problem worse, as every new order requires cash upfront before you see the return.

Understanding and optimizing the time it takes to convert inventory back into cash is fundamental to sustainable growth. Learning how to speed up cash flow from ecommerce inventory is not just a financial exercise; it is a direct lever on your ability to scale. It’s about ensuring that your sales momentum translates into a healthier cash position, giving you the fuel to reinvest without constantly worrying about your runway. For more context, see the working capital optimisation hub.

Foundational Understanding: Your Business's Cash Rhythm

At the heart of your working capital is a metric called the Cash Conversion Cycle (CCC). Think of it as your business's cash rhythm, measuring the number of days it takes to turn your investment in inventory back into cash. The primary goal is to make this cycle as short as possible, freeing up capital for reinvestment. The formula is straightforward:

CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payables Outstanding (DPO)

Each component represents a critical phase of your cash flow:

• Days Inventory Outstanding (DIO): How long does your inventory sit on the shelf before it is sold?
• Days Sales Outstanding (DSO): How long after a sale does it take to get the cash into your bank account?
• Days Payables Outstanding (DPO): How long do you have to pay your suppliers for inventory?

For example, if your inventory sits for 85 days (DIO), it takes 5 days to receive customer payments (DSO), and you pay suppliers in 30 days (DPO), your CCC is 60 days (85 + 5 - 30). This means your cash is tied up for two months for every cycle of inventory you purchase and sell. A shorter CCC means a more efficient, cash-healthy business.

Lever 1: How Fast Does Our Inventory Actually Sell? (Days Inventory Outstanding - DIO)

Cash locked in slow-moving inventory is the most common and painful cash flow trap for e-commerce brands. Days Inventory Outstanding (DIO) measures exactly how long your cash is tied up in physical products before a customer buys them. This is your first, most powerful lever for improving cash flow in ecommerce and is a pillar of effective inventory management strategies.

Benchmarking and Analysing Your Stock

To begin optimizing stock levels, you first need a benchmark. For direct-to-consumer brands, a Days Inventory Outstanding (DIO) under 90 days is generally considered healthy. A DIO over 120 days signals an urgent need to investigate slow-moving stock.

A practical first step is performing an ABC analysis, which categorizes inventory based on its contribution to your revenue. The pattern across e-commerce brands is consistent, often reflecting an 80/20 rule: typically, 20% of your SKUs generate 80% of your revenue. Your ABC analysis will likely show this breakdown:

• A-Items: Your top 20% of products that generate 80% of your revenue. You never want to stock out of these.
• B-Items: The next 30% of products, making up about 15% of revenue. These are important but less critical than A-items.
• C-Items: The bottom 50% of your SKUs, often generating only 5% of revenue. This is where cash goes to die.

Case Study: Unlocking Cash from C-Items

Consider a bootstrapped US-based apparel brand using Shopify and QuickBooks. They export their sales data and realize a specific collection of seasonal t-shirts are C-items, with a DIO over 180 days. They have $20,000 tied up in this slow-moving stock. By running a targeted 40% off flash sale, they liquidate this inventory in two weeks.

While their margin on those specific items is lower, they instantly free up nearly $12,000 in cash. This newly available capital is then reinvested into a larger purchase of their A-items, their best-selling core hoodies, ensuring they do not miss out on profitable sales. The core lesson is to aggressively convert your C-items back into cash to fund your A-items.

Lever 2: Are Our Supplier Terms Helping or Hurting? (Days Payables Outstanding - DPO)

Your relationship with suppliers has a direct impact on your financial runway. Days Payables Outstanding (DPO) measures the average number of days it takes you to pay your suppliers. A longer DPO means you hold onto your cash for longer, effectively using your supplier’s capital to fund your operations. Tight or misaligned payment terms can drain cash just as you need it for the next inventory purchase.

Negotiating Better Payment Terms

Common supplier payment terms include upfront payment, Net 30, and Net 60. For a new business, paying 100% upfront is often the only option. However, as you grow and build a track record of consistent orders, you gain leverage. The reality for most founders is more pragmatic: they must initiate the conversation around supplier payment terms negotiation.

There is often a trade-off between a lower per-unit cost and favorable payment terms. A supplier might offer a 5% discount for a large order paid upfront. However, that same supplier might agree to Net 30 or even Net 60 terms on a slightly smaller order at the standard price. For a cash-constrained business, the better payment terms are almost always more valuable than the small unit-cost discount. The flexibility of holding onto your cash for an extra 30 or 60 days provides a crucial buffer and reduces your CCC.

What founders find actually works is building a strong relationship and demonstrating reliability. After placing several consistent orders and paying on time, approach your key supplier. Start by asking to move from upfront payment to Net 15. A few months later, ask for Net 30. This gradual approach shows you are a reliable partner and makes it easier for them to extend credit, directly improving your cash flow.

Lever 3: How Quickly Does a "Sale" Become Usable Cash? (Days Sales Outstanding - DSO)

Every founder has felt the frustration of seeing a high-sales day in Shopify, only to realize those funds will not be available for days or even weeks. Days Sales Outstanding (DSO) measures the time between a customer making a purchase and that money becoming usable cash in your bank account. Delays from payment gateways and modern payment options like Buy Now, Pay Later (BNPL) can significantly stretch your ecommerce cash conversion cycle.

Managing Payment Gateway and BNPL Delays

Your DSO is a blend of your different payment methods. For instance, standard payment processors like Stripe or Shopify Payments typically have payout schedules of 2-3 business days in the US. This is usually manageable. The real complication for accelerating receivables comes from the increasing popularity of BNPL services.

The trade-off is clear: BNPL services can increase conversion rates and average order values, but they come at a cash flow cost. Services like Klarna and Afterpay can have payout schedules of 7, 14, or even 21 days. This is a significant delay. The impact is not trivial; according to Adobe Analytics, in November 2022, BNPL accounted for $1 of every $8 spent online during the US holiday season.

A scenario we repeatedly see is a brand running a successful holiday campaign, with 40% of its sales coming through BNPL. While revenue is high, their cash position becomes strained for weeks, making it difficult to pay for shipping costs or place reorders. Reducing days sales outstanding means understanding this blend and forecasting your cash flow based on the realistic payout schedules of your payment mix, not just the top-line sales number.

Practical Takeaways to Improve Cash Flow

Improving your cash flow is not about finding one magic solution. It's about making small, consistent improvements across these three levers. Here is how you can start today using the tools you already have, like Shopify and QuickBooks or Xero.

1. Calculate Your Starting CCC: Pull your numbers to establish a baseline. Use your average inventory value and cost of goods sold from the past quarter (from QuickBooks or Xero) to estimate your DIO. Check your supplier invoices and payment dates to get your DPO. Analyze your payment gateway reports from Stripe, Shopify, and any BNPL providers to find your average DSO. Getting this baseline number, even if it is an estimate, is the most important first step.
2. Run Your ABC Inventory Analysis: Export your product sales data from Shopify for the last 90 days into a spreadsheet. Sort by revenue to identify your A, B, and C items. The goal is simple: create a plan to sell through your C-items, even at a discount, to free up cash. Stop reordering them and redirect that capital to your A-items.
3. Review and Prioritize Supplier Terms: List your top five suppliers by annual spend and note their current payment terms. Identify your most reliable, long-term partner and open a conversation about improving terms. Ask to move from upfront to Net 15, or from Net 30 to Net 45. A small change with one key supplier can significantly shorten your CCC.
4. Analyze Your Payment Mix: In your Shopify analytics, look at sales by payment type. Understand what percentage of your revenue comes from standard credit cards versus BNPL services. This is not about eliminating options that help customers buy, but about awareness. If BNPL is a large portion of your sales, you must account for its longer payout schedule in your cash flow forecast.

By systematically addressing each component of the Cash Conversion Cycle, you can build a more resilient and financially healthy e-commerce business, ready for sustainable growth. Continue at the working capital optimisation hub for broader techniques.

Frequently Asked Questions

Q: What is a good Cash Conversion Cycle for an e-commerce business?
A: While it varies by industry, a CCC under 60 days is generally considered healthy for an e-commerce brand. A cycle under 30 days is excellent and indicates strong operational efficiency. The most important goal is to consistently shorten your own CCC over time, freeing up more cash for growth.

Q: How can I reduce my Days Inventory Outstanding (DIO) without deep discounting?
A: Beyond sales, you can reduce DIO by improving demand forecasting to prevent over-ordering. Consider product bundling, pairing a slow-moving item with a bestseller. You can also negotiate lower Minimum Order Quantities (MOQs) with suppliers to reduce the amount of capital tied up in any single purchase.

Q: Is using Buy Now, Pay Later (BNPL) bad for my cash flow?
A: Not necessarily, but it requires careful management. BNPL can boost sales and average order value. However, its longer payout times (7-21 days) increase your Days Sales Outstanding (DSO). You must factor this delay into your cash flow forecasting to avoid unexpected shortfalls, especially after major sales events.

Q: My supplier will not negotiate payment terms. What are my options?
A: If direct negotiation fails, focus on the other levers. Aggressively manage your inventory to lower your DIO and sell products faster. You can also explore diversifying your supplier base to find partners offering more flexible terms. For some businesses, short-term working capital loans or financing can bridge gaps, but this should be considered carefully.