Cash is KING. This video will give you some insight into how Chinese supplier’s lead time and payment term will impact your cash flow.
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Full Transcript:
How are you, my friend? I hope your day is going well. It’s Yuping here. Thank you for checking in with me. Today is a video that you must watch. It’s one of the essential videos that you need to watch to run your business successfully because it has 100% to do with your money. Let’s get started.
Okay, my friend, once you kick start your business, especially after you start to sell your product so successfully, you will quickly realize that you will need a continued cash flow to sustain your sales. On one side, you will have the cash inflow coming either from Amazon or your own website. On the other side, you will have the cash outflow to pay out either the product or service providers. Since you decide how much you’re going to sell and I teach you the sourcing side of the business, I’ll explain the two most important factors that you need to understand how these two factors are going to determine your cash outflow.
On the sourcing side, the two most important factors in determining your cash outflow, one is the lead time, another is the payment term. These two are a pair. Lead time and the payment term. We cannot talk about cash outflow without talking about the lead time and payment term together. Let’s elaborate a little bit.
Okay. Let’s talk about the lead time first. Lead time should be given with a nickname called dead time. Why is that? Because this lead time is the period of waiting time from the moment you place your purchase order here to the time where the product is available for you to sell and convert this product to cash. This period of time, nothing could happen, but wait. Literally, it’s a dead time, especially when you prepaid for your product. Nothing is happening to your cash. If you are in the Sourcing Warrior Mastermind, especially if you have watched the inventory planning module, this should be a no-brainer to you. You should really understand the killing effect of the long lead time.
Why I’m saying that the long lead time has the killing effect, it’s because not only you have all this cash tied up in this waiting period, there’s nothing you can do about it but wait. But also, the longer you have to wait, the more likely you’re going to be wrong with your inventory forecast. One is that during this long time of waiting, you run out of stock. Now you are panicked. You need to expedite your product either airfreight or you’re anxious, pushing your suppliers to finish the product, finish the production sooner. As soon as possible. I’m out of stock. My BSR is dropping. I need to backfill my product. Please, please rush the production. Help me finish the production sooner. That is the anxiety you have to go through because you are running out of stock and you have no choice but to wait for this long period of time. That’s one side of the risk of having a long lead time.
The other side of the risk of you being wrong is because you know you’re going to wait for a long period of time and you over predicted how many you’re going to sell. What ends up happening is once you receive the shipment finally, you’ll realize that you have too many in stock. Eventually, you may end up having to pay Amazon for a long-term storage fee or whatever warehouse you’re using. You see, the killing effect of the long lead time is not only you have all this cash tied up, but also the risk of running either out of stock or ordered too many. That is the lead time playing into how much cash you’re going to burn. Now you understand that the one factor lead time and how much it plays into your cash situation.
The second factor is the payment term. What does the payment term have anything to do with your cash? You guessed it, the exact opposite. The length of the payment term you can get from your suppliers, the more cash you can save because you can delay your payment. Let’s say if the supplier lead time is one day and the payment term is 30 days, now you can literally use other people’s money to run your business because they can produce it in one day. You can sell it in a day or two or a week and you don’t even have to pay this supplier in 30 days. All of a sudden it’s free money for you to run your business. The business reality for most Amazon sellers is this, lead time side, we’re talking about 75 to 90 days from the day you place your purchase order to the day where Amazon received your product. It takes at least 75 to 90 days.
Assuming you are ocean freight your product, not air freighting because it takes 30 days to produce, 30 days to ship, and a couple of weeks in between to handling your shipment to receiving your shipment. On the payment terms side, we’re normally talking about 30% down payment, 70% pay to the supplier when you would take your shipment. We’re talking about significantly cash down to carry this inventory from the time you place the order to the time where you can sell your product. The lead time and the payment term are the two most important factors in terms of your cash flow impact. I want you to understand the relationship between these two factors so you can focus on negotiating a better lead time, a better payment term, to improve the health of your business.
If you want to learn how to negotiate better payment terms and potentially reduce lead time so you can free up your cash, I suggest you sign up for my Sourcing training course. Those training videos are exclusive for those who are super serious about their business. If you are one of those people who are incredibly driven to be successful, I would be so delighted to have you in the elite sourcing warriors training group. I would share with you everything I know about sourcing to help you save money. All right, my friend, I hope you are enjoying this video. Until the next time, I’ll see you soon and you have a good day.
Check out the link, the Sourcing Warrior Mastermind link, undertake Sourcing Warrior’s quiz to find out your sourcing IQ. Make it fun, learn something, have a great day. I’ll see you in the next episode.
Video Version:
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