What are the main cash flow drivers and risks in online retail vs brick-and-mortar retail?

1 Inventory management

One of the biggest cash flow drivers and risks for retailers is inventory management. Online retailers typically have lower inventory costs than brick-and-mortar retailers, because they can source products from suppliers on demand, use drop-shipping or third-party fulfillment services, and avoid rent, utilities, and staff expenses for physical stores. However, online retailers also face higher inventory risks, such as stock-outs, returns, refunds, fraud, and shipping delays, which can hurt their sales and customer satisfaction. Online retailers need to optimize their inventory levels, track their demand and supply, and negotiate favorable terms with their suppliers and carriers.

2 Sales and marketing

Another major cash flow driver and risk for retailers is sales and marketing. Online retailers have the advantage of reaching a wider and more diverse customer base than brick-and-mortar retailers, who are limited by their location, store size, and foot traffic. Online retailers can also leverage digital channels, such as social media, email, SEO, and PPC, to attract and retain customers, and use data and analytics to personalize their offers and increase conversions. However, online retailers also face higher competition and lower margins than brick-and-mortar retailers, who can differentiate themselves with their brand, service, and experience. Online retailers need to invest in their sales and marketing strategies, measure their ROI, and balance their customer acquisition and retention costs.

3 Cash conversion cycle

A key metric that measures the cash flow efficiency of retailers is the cash conversion cycle (CCC), which is the time it takes for a business to convert its inventory into cash. The shorter the CCC, the better the cash flow. Online retailers generally have a shorter CCC than brick-and-mortar retailers, because they have faster inventory turnover, shorter payment terms, and lower receivables. However, online retailers also have a higher risk of cash flow volatility, because they are more exposed to seasonal fluctuations, customer preferences, and external factors, such as pandemics, regulations, and technology changes. Online retailers need to monitor their CCC, manage their working capital, and forecast their cash flow needs.

4 Financing options

Another important factor that influences the cash flow of retailers is the availability and cost of financing options. Online retailers usually have more access to alternative financing sources than brick-and-mortar retailers, because they can leverage their online presence, data, and growth potential to attract investors, lenders, and partners. Online retailers can also use crowdfunding, peer-to-peer lending, invoice financing, and equity financing to raise funds for their operations and expansion. However, online retailers also have to deal with higher interest rates, stricter terms, and more dilution than brick-and-mortar retailers, who can rely on traditional bank loans, trade credit, and retained earnings. Online retailers need to evaluate their financing options, compare their costs and benefits, and choose the ones that suit their cash flow goals.

5 Risk management

The final factor that affects the cash flow of retailers is risk management. Online and brick-and-mortar retailers face different types of risks, such as cyberattacks, data breaches, theft, vandalism, fire, natural disasters, lawsuits, and reputation damage. Online retailers have to invest more in their cybersecurity, data protection, and legal compliance than brick-and-mortar retailers, who have to spend more on their insurance, security, and maintenance. Both types of retailers need to identify their potential risks, assess their impact and likelihood, and implement mitigation and contingency plans to protect their cash flow.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?