How to Purchase Inventory For Your Ecommerce Business
Stock management and inventory buying are high priorities for a successful ecommerce business
Keep reading to learn all about purchasing inventory.
Table of Contents
When it comes to running a successful ecommerce business, there are a lot of plates to spin. From overseeing the acquisition and pricing of products through to fulfilment, shipping and returns, you’ll need to develop efficient processes for every aspect of the operation. One of the most important activities carried out by any ecommerce business owner is the purchase, shipping and storage of inventory.
Inventory buying and management requires significant time and financial investment, as well as a comprehensive understanding of your customers’ shopping habits and seasonal trends. While every online retailer is different, there are a few steps you can take to make sure you are maximising your potential and avoiding any common pitfalls regarding inventory buying.
To learn more about how to purchase inventory for your ecommerce business, keep reading this Rangewell guide or get in touch with our team of specialist advisors to discuss your inventory finance options.
Any ecommerce business owner requires a strong understanding of the market. The last couple of years has brought a period of uncertainty for all businesses, particularly those operating on the global stage. So, if you buy or sell products internationally then you will need to take the time to understand how world events could impact your business, and most importantly for this guide, how it could affect your inventory.
A period of economic uncertainty brought on by a combination of the coronavirus pandemic and Brexit resulted in significant supply chain issues for many industries. During 2021, shortages hit a number of materials including timber, cement and insulation, thus affecting businesses that require these to manufacture their products. For example, garden furniture was particularly scarce during the summer months as the UK population chose to stay home and materials to manufacture such products were few and far between.
Every corner of the market felt the impact of the economic downturn, as the nation’s favourite supermarkets reported fewer deliveries and poorer product selections due to a shortage of lorry drivers and Channel Tunnel delays.
So, how does this knowledge affect you and your inventory? Ecommerce is a highly competitive space and international shipping means that you aren’t just competing with other retailers in your country, but also those in countries like China who are able to provide the same products often for a cheaper price. As a result, it’s vital for you to maintain stock availability wherever possible or risk losing business to other, bigger retailers. Consider too, factors such as local traditions or cultural changes that can impact your supply chain - such as Chinese New Year, which typically forces many businesses into closure over its entirety.
By taking the time to understand the market and actively read trade news, you will be able to make smarter decisions about inventory buying. For example, if you purchase your products or raw materials from a supplier in a country that is suddenly affected by the conflict in Ukraine, then you will know to prioritise other suppliers who do not rely on travelling through these areas.
Of course, you can never foresee a significant global event like an international conflict or pandemic, however keeping your eyes on current events means you can make smart and efficient decisions in a proactive way and, ultimately, this will improve your inventory management and allow you to service your customers to the best of your ability.
Understanding your inventory
Now we’ve talked about your business on a global level, let’s take a closer look at the day-to-day operations and how you can better manage your inventory.
Current stock levels
Regular inventory checks and proper admin management will allow you to keep oversight of your current stock levels. It’s surprising how many businesses don’t have an accurate and up-to-date record of what is in their inventory. Remember: money is tied up in your inventory, so it’s important to take the time to understand its value - both wholesale and retail.
In addition, if you pay to store your inventory in a warehouse or another commercial space, this results in an additional cost for your business. Identify the top sellers and what is simply taking up space and make decisions about inventory buying based on this information.
COGS (Cost of Goods Sold)
Cost of Goods Sold, often shortened to COGS, is a metric used by retailers to determine the cost of creating or buying the products that you sell. This will vary depending on whether you purchase products to resell or buy raw materials to make goods yourself.
There are a couple of ways to calculate your COGS, depending on how you manage your inventory. If you use the FIFO (first-in first-out) method, then the oldest goods in your inventory will be used to calculate the COGS. While if you operate a LIFO (last in first out) process, then the most recent inventory purchases will inform the COGS.
Regardless of which method you choose, all you need to do to calculate COGs is to multiple the stock in question with the inventory sold. It’s worth noting that the LIFO method infers that the most recent items in the inventory are sold first. The methods depend on whether you hold your inventory for an extended period of time, you resell products or make your own, you are impacted by seasonal buyer behaviour, among a number of other factors.
COGS is a very important metric to understand as it shows you understand cost vs. profit. However, COGS is just a part of your financial accounts - other outgoings including staff wages, warehousing, fulfilment and domain fees will also need to be considered in order to determine your true profit figures.
As we touched upon in the last section, some online business ventures are affected by seasonal buying habits. For example, if you sell Christmas or Halloween products, then you will absolutely be aware of this. You will make the most of your money in the months leading up to the events, however, you’ll need the cash flow to ensure you can afford to buy the products for your inventory in advance.
Your ecommerce store’s analytics provides a wealth of information that can help with inventory management. From here, you can get a better idea of consumer buying habits. For example, do you find customers purchase the same products together regularly (known as product affinity), or perhaps you spot certain products that are more popular than others.
If you sell across multiple ecommerce platforms, such as on online marketplaces, via your Amazon store and/or via your own Shopify website, you may notice different buying habits depending on the means of purchase.
What your customers buy and when is critical to your inventory management and this information informs your inventory buying, so always refer back to your analytics when acquiring new goods for your inventory.
Money is tied up in your inventory until you sell, meaning inventory management can impact cash flow. You may find that you have a significant investment in inventory, but run short of cash to cover necessary expenses.
To learn more about ecommerce cash flow and how to improve it, check out our comprehensive guide.
Types of inventory buying
Ecommerce is a large umbrella term that covers all kinds of online retailers. As a result, there are many different ways in which ecommerce businesses like yours buy inventory. We’ve already alluded to the difference between reselling products and buying materials to make your own, but let’s dig a little deeper into the types of inventory buying and what to consider when purchasing new stock.
Dropshopping is a relatively new addition to the ecommerce world as many sellers found it to be a beneficial way of cutting out one of the most time-consuming and expensive parts of selling products online - storing an inventory.
This method differs from traditional as you do not need to purchase the inventory before you sell. Instead, you position yourself as the middleman between the dropshipping suppliers (which are often based abroad) and the buyer.
Dropshipping can be cost-saving as you do not need to pay to store the excess inventory, and you can maintain strong cash flow. However, dropshipping means you do not see the products before they arrive with the buyer, yet you are still responsible for the quality. Retailers also experience longer delivery times, especially if products are coming from China - so make sure your buyer knows this before they purchase.
When you buy from wholesalers, you typically acquire a certain amount of inventory and then pay to store it in a warehouse or another commercial facility until it sells. This is much more like a traditional shop compared to dropshipping, as you must invest ahead of time and make buying decisions based on what you believe your customers will want.
Purchasing stock from wholesales requires significant upfront investment and, therefore, you will need the financial backing to acquire stock, as well as the funds to store the goods. You may also want to look into working with multiple wholesalers, as relying on just one supplier puts you in a precarious position should they not be able to source everything you need.
Buying another ecommerce business
You may identify the opportunity to acquire another business in your space, and therefore the stock that they have. If a retailer has decided to end operations, due to any number of reasons, this might be a good opportunity for you to acquire a significant amount of stock at a minimal cost.
Be sure to investigate the quality of the stock carefully and ensure any transfer of ownership is both legal and fully protected by your insurance.
How to finance inventory buying
In this guide, we’ve discussed everything from identifying what your customers want to how to navigate unforeseen circumstances and even the different types of inventory buying for ecommerce businesses. Now you may be thinking: “but how do I pay for all of this?”
The ideal situation is to reinvest profits from your retail venture into stock acquisition. However, there are many situations in which this may not be preferable or even possible. This is where ecommerce business finance can help.
At Rangewell, we work with a number of specialist lenders in the ecommerce space to provide the very best range of ecommerce finance for a wide variety of businesses. We don’t just help you secure finance, we support you with the application process and help to identify any risks or considerations that might impact a lender’s decision. Having helped many ecommerce businesses secure finance, we are well-placed to find and secure the funding that will allow you to grow your inventory, even when cash flow is poor.
With ecommerce finance, the lender typically offers funding based on a number of factors, including your existing business performance, sales projections, the strength of your business plan and your own entrepreneurial background. The terms of the finance will depend greatly on these factors, as well as the type of finance you secure.
For example, you may choose to secure funding against existing stock in your inventory, which works if your stock holds significant value and is slow-moving. This type of funding is usually calculated based on the value of the current stock, whether it’s raw materials or ready for sale. Remember, lenders are always looking to minimise their risks and secure their investment, so this might not be the right solution for you if you don’t have much high-value stock.
A more common approach for ecommerce businesses is to secure finance based on your previous business performance. No two online retailers are the same, and you may even have several different income streams, such as both retail and wholesale arms. All of this information is required for the lender to be able to offer finance, making it a complex process. To ensure the lender has everything they need to make the right decision and offer you the best possible terms, we highly recommend working with an experienced lender like Rangewell.
Inventory finance with Rangewell
There are many reasons why you may need finance to boost your inventory. From managing seasonal customer behaviour to navigating turbulent economic conditions, make sure you work with Rangewell to secure the finance you need.
At Rangewell, we have access to the whole of market, including a number of specialist ecommerce lenders who can provide finance that suits both your current circumstances and your future plans. Don’t wait until your inventory is empty, speak to Rangewell now about boosting funds and keeping your customers happy.